Do you know what it feels like to lose 50% of your net worth? I lost close to that in 2008 when the stock market plummeted. The loss wasn’t realized because I didn’t sell my portfolio, and the market has since bounced back. But it surely didn’t feel good.
Now what about losing 99% of your net worth?
That might be hard to imagine, but that’s what happened to Eike Batista. Batista was a billionaire who, in early 2012, ranked as the seventh richest person in the world with a net worth of $30 billion. Not only that, but he also openly boasted that he would become the richest person in the world. Now, 18 months later, he has lost 99% of his net worth because of the bankruptcy of his companies.
The media calls the speed and scale of his downfall “stunning.” Losing 99% of your net worth is not a joke. Losing 99% of your income is bad enough, but losing 99% of your net worth is on a whole different level.
Hearing this story makes me stop and think about what lessons I can learn. Here are the life lessons I’ve learned:
1. Be optimistic but realistic.
Why did Batista fall? One reason is that he built his company based on unrealistic expectations. One economic columnist said that he built a “house of cards” by being overoptimistic about his companies’ prospects.
Being overoptimistic is dangerous. Yes, you should be an optimist, but don’t forget that you should also be realistic. Be aware of the real facts. Keep your feet on the ground.
2. Live below your means.
A big reason for Batista’s rapid downfall is the scale of his companies’ debt (more than $5 billion).
This reminds me of what Warren Buffett wrote in his 2010 annual letter to Berkshire shareholders:
Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains… But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices… History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.
Going into debt might give you what you want in the short term, but don’t forget that there is a big downside in the long term.
So live below your means. Don’t desire something you can’t afford just to look good in front of others.
3. Build your work on a strong foundation.
Building a strong foundation takes time. Many people aren’t patient enough for that. But building fast without a strong foundation is a recipe for disaster.
Whatever it is you are working on, build it slowly on a strong foundation. Others might get ahead of you in the meantime, but when bad times come, you will be the one who survives.
This is what happens to Warren Buffett’s Berkshire Hathaway. Instead of accumulating debt, Berkshire accumulates cash. As stated in their 2010 annual letter, their policy is to hold at least $10 billion in cash. In reality, they usually have at least $20 billion(!) on hand. In Warren Buffett’s own words, “That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008.”
While the others were panicking, Berkshire went on a buying spree.
Yes, building a strong foundation takes time. But it allows you to survive and even thrive in bad times.
4. Stay humble.
No matter how successful you are, don’t forget that things could go wrong. This is true even if you have applied the lessons above. So rather than boasting about your accomplishments, stay humble. A dose of humility can help you keep the right perspective on life.
Photo by Bigstock
As a Brazilian, and a little more knowledgeable of local history, I think I have a more accurate idea of Eike’s problem. When you have a father that is the minister responsible for energy research during the dictatorship, and you have free access to all privileged information and research of mines and energy that neither your government has used, and decide to open large companies in this area based on this privileged information, make sure you have the administrative capacity to follow what you know. And this is the untold story.
Thanks for sharing, Priscilla! That’s good to know.
Very good advice, Donald.
I think you included a fifth lesson in your first paragraph: learn from your mistakes.
I can’t imagine you ever letting yourself lose 50% of your net worth again!
Yes Jehangir, definitely. With the stock market that’s a bit tricky though; there is always an element of risk involved.
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