Personal Rules to Avoid Losing Your Wealth

[Rabby]

Preach Brother Rabby. This has kicked my butt for a lot of money. I was a fool.

Me too

 

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[Guest-5ty5s4]

@Rabby @WJK we are similar but I often wonder how bigger companies handle that.

You can’t keep growing past a certain size if you must sign every check yourself.

There must be some kind of checks and balances that can work. We do have a tad more delegation, but the primary boss oversees and checks everything. Perhaps even a large company’s CEO does this too?

 

[Rabby]

@Rabby @WJK we are similar but I often wonder how bigger companies handle that.

You can’t keep growing past a certain size if you must sign every check yourself.

There must be some kind of checks and balances that can work. We do have a tad more delegation, but the primary boss oversees and checks everything. Perhaps even a large company’s CEO does this too?

That's where vacations and separation of concerns come in. Between Wifey and I, we've caught our share of them for larger companies too... simply because first I, and then she, created the habit of putting patterns and practices in place that make it very hard to hide shenanigans.

* The person handling checks doesn't check the mail.
* Mandatory vacation... and cross-training of people who are unlikely to be co-conspirators.
* Separation of A/R and A/P.
* Separation of Audit.
* Personal inspection where possible, and no excuses about it.
* Extreme suspicion of sloppiness, especially consistent sloppiness about small details (a favorite screen for embezzlement).
* Regular analysis of costs, and figuring out if any are higher than they need to be (with the serendipitous effect that that embezzled money hiding in some innocuous sounding ledger item suddenly glows suspiciously).

And as a side benefit, you catch many non-theft errors, and people get the idea that it matters if they do their job right.

 

[WJK]

Same. There are things I delegate for practicality (accepting payments at a location, shipping products, etc.), but not without having 100% visibility and either me or my wife looking over the transactions and balancing everything. As soon as you get lazy about that, embezzlers will be sucked in like iron filings to a magnet.

The last property managers I hired (when my mom was dying) really cheated me. I knew they were stealing, but I had no idea how much until I came & took over the reins. Not only were they stealing rents and double billing me for their time -- but they were also running a handyman business on the side. They were billing all their building materials and parts for that side business to my merchant accounts.

They told my tenants not to listen to me when I gave up my career, retired, and moved here. They said I wouldn't last 2 weeks. I've been here for 19 years. They moved far away after I fired them.

Am I angry with those managers? At that time, I knew I couldn't be in two places at the same time. I was working my career in Los Angeles, about 6,000 miles away. My mom had major strokes and she needed my full attention. By having on-site managers here and adjusting my career in Los Angeles, I was able to take that "time-out" with mom. I was with her 24/7 during her last days. Yes, those managers cost me a lot of money. In exchange, I bought myself that precious time that is irreplaceable. I know that I can always make more money.
Sometimes one must put these experiences in perspective.

 

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[WJK]

@Rabby @WJK we are similar but I often wonder how bigger companies handle that.

You can’t keep growing past a certain size if you must sign every check yourself.

There must be some kind of checks and balances that can work. We do have a tad more delegation, but the primary boss oversees and checks everything. Perhaps even a large company’s CEO does this too?

They have a CEO and a CFO to manage these things. You can also hire an outside bookkeeper. We did that for the Senior Center when I was on Board.

 

[Rabby]

The last property managers I hired (when my mom was dying) really cheated me. I knew they were stealing, but I had no idea how much until I came & took over the reins. Not only were they stealing rents and double billing me for their time -- but they were also running a handyman business on the side. They were billing all their building materials and parts for that side business to my merchant accounts.

They told my tenants not to listen to me when I gave up my career, retired, and moved here. They said I wouldn't last 2 weeks. I've been here for 19 years. They moved far away after I fired them.

Am I angry with those managers? At that time, I knew I couldn't be in two places at the same time. I was working my career in Los Angeles, about 6,000 miles away. My mom had major strokes and she needed my full attention. By having on-site managers here and adjusting my career in Los Angeles, I was able to take that "time-out" with mom. I was with her 24/7 during her last days. Yes, those managers cost me a lot of money. In exchange, I bought myself that precious time that is irreplaceable. I know that I can always make more money.
Sometimes one must put these experiences in perspective.

I had a similar experience. My dad had delegated most of his company finance and operations to one person. While he was suffering from a life threatening wound in his old age (which he recovered from, after a time) she was taking out a 6 figure loan with a forged signature and paying herself bonuses... and running a private post office with his postage machine, and doubling his printing costs, and leasing office space with his money for her side business, and many other things to suck as much money out as she could.

Parasites smell weakness and jump in to suck what blood they can. Of course I would not trade any of the time I had with my father, and there was a delay between suspicion, and confirmation. At the same time, I am fortunate that I had the opportunity to shine a light on the corruption, and ultimately end it. Beyond that, what can we do? There will always be leeches.

 

[WJK]

I had a similar experience. My dad had delegated most of his company finance and operations to one person. While he was suffering from a life threatening wound in his old age (which he recovered from, after a time) she was taking out a 6 figure loan with a forged signature and paying herself bonuses... and running a private post office with his postage machine, and doubling his printing costs, and leasing office space with his money for her side business, and many other things to suck as much money out as she could.

Parasites smell weakness and jump in to suck what blood they can. Of course I would not trade any of the time I had with my father, and there was a delay between suspicion, and confirmation. At the same time, I am fortunate that I had the opportunity to shine a light on the corruption, and ultimately end it. Beyond that, what can we do? There will always be leeches.

People like us come in a shine a light on this type of situation. I have known people who don't have our skills and insights. They really get taken when the leeches hit.

 

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[Rabby]

People like us come in a shine a light on this type of situation. I have known people who don't have our skills and insights. They really get taken when the leeches hit.

Sadly they do get taken

I have a close family member (spouse of a sibling) who lost most of the value of a 3rd generation business to embezzlement. Had to sell the business, and the family works for it under the new white knight owners. The "front desk person" took on more and more responsibilities (employee of the year!), to include the responsibility for spending an entire $1,000,000 line of credit on houses, cars, and luxurious vacations.

Separating mail and finances would have been all it took to prevent this. That and higher limits on the employee theft insurance.

A family and many employees suffered more consequences than the embezzler. (The embezzler was let out of jail on bond in a few days, got a NEW job for a contractor, and embezzled mid 5 figures from the new job in a few weeks.) The more leeches we throw back to the bog, the better. Bonus points if we can make it impossible for them to work in a position of trust ever again. And then, at least we can direct friends and allies away from the bog.

Also had a friend (and former student) call me after being appointed to the board of a nonprofit, a chamber of commerce. The previous President had somehow embezzled everything. Apparently nobody resisted when he used bluster and outrage to throw off any oversight. Local nonprofits don't make huge amounts of money, but if it all goes to one person, it's significant. Then there's the culpability of everyone else on the board, when they were supposed to be part of the organization's oversight (surely they have D&O coverage...right?). Never be afraid to ask questions, and demand answers. The leeches use our good natures against us.

 

[BizyDad]

And as a side benefit, you catch many non-theft errors, and people get the idea that it matters if they do their job right.

Also, people get the idea that it ain't easy to put their hand in your cookie jar.

I'm having flashbacks now.

Back in the day when I would talk to the business owner that had been ripped off, the common refrain was "I trusted this person" or "They've been with me X years".

Trust, but verify. Have multiple eyes watching what others do. Avoid anyone who creates black boxes.

I forget what guru I read that coined the phrase black boxes, but a black box is basically an employee who creates a process so convoluted that only that employee understands what the process even is.

They do this the make themselves feel essential to the process. But in practice they create bottlenecks, at best. At worst, they easily cover their tracks. Shine a light on any black box in your business. Shine several.

I like what you said about forcing vacations.

And I like what you said about creating systems that don't allow for teaming up to perpetrate a scam.

Another thing I'll say is that often these things start small. But it becomes a self-reinforcing loop if you don't catch it early. Or worse, you catch it and then let them off the hook, because I heard that story sometimes. Either way, the person becomes emboldened "knowing" there's no negative repercussions.

You can't change people's basic nature. If you sense you've got a liar on your team, a fraudster, trust your gut and cut bait.

 

[WJK]

Sadly they do get taken

I have a close family member (spouse of a sibling) who lost most of the value of a 3rd generation business to embezzlement. Had to sell the business, and the family works for it under the new white knight owners. The "front desk person" took on more and more responsibilities (employee of the year!), to include the responsibility for spending an entire $1,000,000 line of credit on houses, cars, and luxurious vacations.

Separating mail and finances would have been all it took to prevent this. That and higher limits on the employee theft insurance.

A family and many employees suffered more consequences than the embezzler. (The embezzler was let out of jail on bond in a few days, got a NEW job for a contractor, and embezzled mid 5 figures from the new job in a few weeks.) The more leeches we throw back to the bog, the better. Bonus points if we can make it impossible for them to work in a position of trust ever again. And then, at least we can direct friends and allies away from the bog.

Also had a friend (and former student) call me after being appointed to the board of a nonprofit, a chamber of commerce. The previous President had somehow embezzled everything. Apparently nobody resisted when he used bluster and outrage to throw off any oversight. Local nonprofits don't make huge amounts of money, but if it all goes to one person, it's significant. Then there's the culpability of everyone else on the board, when they were supposed to be part of the organization's oversight (surely they have D&O coverage...right?). Never be afraid to ask questions, and demand answers. The leeches use our good natures against us.

I have had two different non-profits around me have similar problems. One went under. The other one, we were able to save. But in the second case, there was only a couple of us who understood what was going on. The rest of the board was totally clueless. The other members were mad at the two of us who stopped the scam and saved the organization. They just couldn't believe that the cheater was really a bad guy (girl).

I agree with you. These grifters do it again and again. And most of their plans & patterns aren't all that brilliant. They just do the same old scams in serial. And that fact makes them stand out like a red convertible at police car convention. These cheaters think they are so smart and crafty that they can't be caught. That arrogance buries them in the end.

 

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[James_17]

Would you sell and take gains if the actual cash was in front of you? And not a number on a computer monitor? (See picture)

Hi MJ, after you took all the gains and reinvest your principal, what's your rule when buying stock?

 

[Ing]

Sadly they do get taken

I have a close family member (spouse of a sibling) who lost most of the value of a 3rd generation business to embezzlement. Had to sell the business, and the family works for it under the new white knight owners. The "front desk person" took on more and more responsibilities (employee of the year!), to include the responsibility for spending an entire $1,000,000 line of credit on houses, cars, and luxurious vacations.

Separating mail and finances would have been all it took to prevent this. That and higher limits on the employee theft insurance.

A family and many employees suffered more consequences than the embezzler. (The embezzler was let out of jail on bond in a few days, got a NEW job for a contractor, and embezzled mid 5 figures from the new job in a few weeks.) The more leeches we throw back to the bog, the better. Bonus points if we can make it impossible for them to work in a position of trust ever again. And then, at least we can direct friends and allies away from the bog.

Also had a friend (and former student) call me after being appointed to the board of a nonprofit, a chamber of commerce. The previous President had somehow embezzled everything. Apparently nobody resisted when he used bluster and outrage to throw off any oversight. Local nonprofits don't make huge amounts of money, but if it all goes to one person, it's significant. Then there's the culpability of everyone else on the board, when they were supposed to be part of the organization's oversight (surely they have D&O coverage...right?). Never be afraid to ask questions, and demand answers. The leeches use our good natures against us.

A friend lost his initial investment that way end of the 1980s.
But he got a good entrepreneur and recovered into the fastline after some years.

 

[Sage_B]

A question primarily for those who have amassed at least six figures in savings - do you have any personal rules to protect yourself from stupid decisions that will make you lose your wealth?

For example, here are a few basic rules I follow:

• I don't gamble or invest in anything resembling it (including very high risk investments). I may possibly (maaaaybe) consider investing 5-10% of my net worth in riskier projects in the future (like angel investing) but otherwise I'd never invest any considerable amount of money in anything where it's very likely to lose your entire investment (even if the upside can be 10x).
• I don't invest in companies/opportunities without a solid background. @MJ DeMarco talks about it in Unscripted (the apocalypse rule). I believe a lot of celebrities have lost a lot of money because they didn't follow this rule and invested in a Ponzi scheme.
• I educate myself and calculate risks before investing in anything. And if I can't understand it or can't calculate risks, I don't invest in it. Even if it's super hot and everyone talks about it (like crypto).
• I prioritize diversification over returns. So for example, I'd rather invest in three rental properties than one (I don't have any rental properties at the moment) to spread my risk over three locations. I do the same with P2P loans (secured by mortgage) where each loan is just a small percentage of the entire portfolio.
• I prefer income investing over capital gains investing. That's primarily because income is usually predictable and I prefer monthly cashflow (and live off it) to some unrealized uncertain capital gains. That's why I'd rather invest in a boring dividend stock or REIT than a "hot" new technology stock.
• I don't buy anything for status. That's actually because of my personality and not because I set it as a financial rule but it's still very important nonetheless. I'm very utilitarian and don't care about stuff that's primarily sold for personal image reasons (like expensive cars, designer clothes, jewelry, etc.). I think this is the most common reason why people lose their entire wealth, even if it's seven or eight figures (like pro athletes).

With some of these rules I'm probably more risk-averse than an average investor. But I'd rather earn less from my money than make a stupid decision. And if I want to make more money, instead of looking for a (dubious) 20% "passive" return from something high-risk, I'd rather just create a new income stream where my ROI will be 10-100x or higher.

What are your rules?

Hmm interesting thread! I'm much less risk adverse. In fact I thoroughly enjoy risk. And enjoy using it to speed up wealth acquisition. Although one must be careful.

So a rule I go by...
Utilize High Risk Assets with Diversified Risk

Personally I think it is a great idea to take on riskier investments. Just don't go all in on them. For example, one could have 20 - 30% invested in higher risk assets. These assets, such as certain cryptocurrencies, can often go up by 100-500X or even more in a year.

Let's say you placed your bets on 50 small crypto projects. Let's say 1 of them hits the 100x mark within 1 year (it's not hard to find legitimate projects that do this when you know how to look for them). Let's say the other 49 all completely fail over the same time period (ridiculously unlikely to happen, but just go with it).

If you invested equal amounts in all of them, you would still have doubled your investment within the year. And realistically, it is easy to achieve a much better hit rate than 1 in 50. Plus the others that don't sky rocket will very rarely lose all their value, and quite often will increase by 2-10 times.

In this case, the risk is greatly diversified as it is spread among 50 projects. One would not necessarily have to do 50, you could diversify less. The point is, it is not a good idea to put too much of your wealth into a single (or a small handful of) HIGH risk asset, as you will likely lose a large chunk of it. I've done this in the past. It is kinda painful! However, diversify the risk and you are very likely to make a lot of money.

Based on this knowledge and mentality, I think everyone aiming to build more wealth should at least consider higher risk assets. And consider putting between 10-40% of their wealth into it, depending on their taste for risk and what they deem as an acceptable loss. At the same time, in my opinion it's a good idea to protect a significant proportion of one's wealth by investing in less risky assets, such as rental properties or anything else that one might be interested in.

That's my 2 cents on this matter. Invest it how you will ;-)

 

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[Kevin88660]

I have known people who have spent themselves broke. And some had famous names. They got trapped into a lifestyle that they couldn't sustain. The collection of big houses, the cars, the army of household and security staff, the exotic vacations, the private schools for the kids, the club membership dues, and their persistent shopping habits brought them to their knees...
I have also seen people work for years and feel like they finally made it. They had reached their milestone. I used to watch as men traded in their wives, who helped them build the business, for the office bimbo. Another move was when they got a big boat or a plane. These changes are usually followed by a perpetual vacation. These once successful men went from being on top of the world to many times losing everything.
I agree with you that you must run through a worst-case scenario before you can make a decision.
One factor you didn't weigh into your analysis is the mix of your portfolio. Your investments do not stand alone. I found out the hard way during the Rodney King riots in Los Angeles. They burned down a few of our commercial buildings. Fire insurance doesn't work during "civil unrest" and the bank still wants their money for the mortgages. Another situation was owning multi-family residential properties when the market values in that whole sector tanked.

Typically I observe the group the spend too much tend to be high income earners who overestimate the sustainability of their paycheck.

These people are not rich in net worth but successful by social expectation are likely to fall into the trap and having large families liability.

Example: Single breadwinner, wife stays at home, children studying in prestigious oversea private school for music diploma..everything falls apart when industry changes results in the loss of job for the husband.

These are typical stories that I have witnessed a lot.

In comparison a business person with a low 7 figure exit are more likely to be conservative with money because they lived through years of lifestyle where unpredictability is a norm.

 

[WJK]

Typically I observe the group the spend too much tend to be high income earners who overestimate the sustainability of their paycheck.

These people are not rich in net worth but successful by social expectation are likely to fall into the trap and having large families liability.

Example: Single breadwinner, wife stays at home, children studying in prestigious oversea private school for music diploma..everything falls apart when industry changes results in the loss of job for the husband.

These are typical stories that I have witnessed a lot.

In comparison a business person with a low 7 figure exit are more likely to be conservative with money because they lived through years of lifestyle where unpredictability is a norm.

I worked in Los Angeles for 30 years. I've known a lot of high-earning people. Some made millions... and they spent millions on nothing sustainable.

It's not just men. I have known some high-earning women who support their spouses and families.

And here's the issue that struck me again and again. Many of these people are stuck there. They hate their jobs, but they must continue in order to support the lifestyle that they are living and provide for their families. Some of these people know that they have one foot on a patch of ice and the other on a banana peel. They could lose their footing at any moment. And they are terrified of failing and falling out of their self-declared social status.