In 1982, Forbes Magazine published its first list of the wealthiest people in the world (The Forbes 400). Thirty years later, in 2012, more than 70% of that inaugural class no longer made the cut. Getting rich is hard. Staying rich is harder. The skill set to create wealth is very different from the skill set to keep wealth. Creating wealth often requires assuming measures of concentrated risk-taking coupled with a healthy dose of luck (don’t underestimate the role of luck). Maintaining wealth requires dialing down the risk and adopting a bit of humility when it comes to your confidence regarding future investment outcomes.

Here is what is critical for those who have created family wealth and would like to keep it. Understanding the risks in future investment ventures entails not only understanding the probabilities of success, but understanding the consequences of failure. In Russian Roulette, the probabilities of success are pretty good – 83% (5/6). But the consequences of failure are catastrophic.

So that’s one way that wealth is lost. Not understanding the consequences of failure. The poster child for this reality is the Long-Term Capital Management hedge fund.

This investment fund was created in 1994 by John Meriwether, former head of Solomon Brothers bond trading department. It represented the crème de la crème of investment acumen and skill.

Roger Lowenstein chronicled the rise and fall of LTCM in his classic book “When Genius Failed”.

“Meriwether gathered his former trading staff and a group of supereconomists from academia (including two Nobel Laureates) and created an investing hedge partnership unlike anything that Wall Street had ever seen.

And they were wildly successful. So certain were the traders of LTCM in their investing acumen that they began using more and more borrowed money to juice their returns.

Their strategies worked – until they didn’t. In 1998, Russia defaulted on their sovereign debt, and global markets moved in ways unanticipated by LTCM’s computers. The hedge fund literally imploded (and, oh by the way, nearly took down the entire global financial system). In literally five weeks, the principles of LTCM went from billionaires to bankrupt.”

Why do very bright people risk losing something that’s very important to them to gain something that’s totally unimportant? The added money has no utility whatsoever – and the money that was lost had enormous utility…” – Warren Buffett

It’s important to know when to stop swinging for the fence. Understanding risk, knowing where the boundary line is between thoughtful and overly-risky investment endeavors underlies everything that we do here at BCM. If you are not sure your investment affairs are properly in order, let’s talk.

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About the Author

Joseph “Bo” Billeaud is the founder of Billeaud Capital Management. After earning a BS in Chemical Engineering (University of Louisiana, 1979) and while working in industry for seventeen years, Bo developed the market risk-control models and investment philosophy that undergirds all BCM portfolios. Since effecting a formal career change in 1996, Bo has helped BCM grow into a respected asset management and financial planning firm currently overseeing $400+ million dollars for individual, corporate, trust, retirement and 401(k) accounts…. Read more.