Let me tell you the story of two investors, neither of whom knew each other, but whose paths crossed in an interesting way.
Grace Groner was orphaned at age 12. She never married. She never had kids. She never drove a car. She lived most of her life alone in a one-bedroom house and worked her whole career as a secretary. She was, by all accounts, a lovely lady. But she lived a humble and quiet life. That made the $7 million she left to charity after her death in 2010 at age 100 all the more confusing. People who knew her asked: Where did Grace get all that money?
But there was no secret. There was no inheritance. Grace took humble savings from a meagre salary and enjoyed eighty years of hands-off compounding in the stock market. That was it.
Weeks after Grace died, an unrelated investing story hit the news.
Richard Fuscone, former vice chairman of Merrill Lynch’s Latin America division, declared personal bankruptcy, fighting off foreclosure on two homes, one of which was nearly 20,000 square feet and had a $66,000 a month mortgage. Fuscone was the opposite of Grace Groner; educated at Harvard and University of Chicago, he became so successful in the investment industry that he retired in his 40s to “pursue personal and charitable interests.” But heavy borrowing and illiquid investments did him in. The same year Grace Goner left a veritable fortune to charity, Richard stood before a bankruptcy judge and declared: “I have been devastated by the financial crisis … The only source of liquidity is whatever my wife is able to sell in terms of personal furnishings.”
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All greed starts with an innocent idea: that you are right, deserve to be right, or are owed something for your efforts. It’s a reasonable feeling.
But economies have three superpowers: competition, adaptation, and social comparison.
Competition means life is hard. Business is hard. Investing is hard. Not everyone gets a prize, even if they think they’re right and deserving.
Adaptation means even those who get prizes get used to them quickly. So the bar of adequate rewards move perpetually higher.
Comparison means every prize is measured only relative to those earned by other people who appear to be trying as hard as you.
And economies crave productivity. Getting more for doing less. It’s a universal and relentless force.
The feeling that you deserve a prize, even when success is hard, content is fleeting, and rewards are measured relative to others, combined with an economy that constantly wants more prizes for doing less, is the early seed of greed. It fuels both the push for more (great) and the lack of satisfaction when you get more (potentially dangerous).
Once people get a taste of reward – especially an above-average one – delusion can creep in. Sometimes it’s luck misidentified as skill. Or an inflated sense of the value you produce. Or overconfidence in your ability to find another reward.
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Even with a time machine, a lot of people wouldn’t want to own the best-performing stocks.
Monster Beverage (NASDAQ: MNST) was the best-performing stock from 1995 to 2015. It increased 105,000%, turning $10,000 into more than $10 million.
But this isn’t a retrospective about how you should wish you owned Monster stock. It’s almost the opposite.
The truth is that Monster has been a gut-wrenching nightmare to own over the last 20 years. It traded below its previous all-time high on 94% of days during that period. On average, its stock was 26% below its high of the previous two years. It suffered four separate drops of 50% or more. It lost more than two-thirds of its value twice, and more than three-quarters once.
That’s how the stock market works.
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