Renowned investor and businessman Charlie Munger said that one of the best ways to learn how to achieve something is to turn it around and see what not to do. In that spirit, here are seven things you can do to destroy your wealth and ensure that you spend your life in far less abundance than you might enjoy.
1. Trade as often as possible
One of the surest ways to squander your wealth is to spend as much money as possible on commissions, fees, spreads, and other expenses. Every time you buy or sell shares, you incur some combination of these costs, and it doesn't take much to cause real damage. If you were to pay a $10 commission on buy and sell orders and buy and sell shares once a week, your commission would be $1,040. Even for a $100,000 portfolio, this would seriously degrade your results over time.
The damage is compounded if you hold assets through a broker, bank, trust, or wealth management department that charges you a fixed percentage of your assets, say 1% per year. Add to that the fees you pay on your mutual funds and don't know it, or the fees for selling funds that have loads, and you've succeeded in actually costing yourself money every year.
2. Build a portfolio of companies with a P/E ratio of at least 3 times that of the S&P 500
To really destroy your wealth, you need to overpay for everything. This means buying the most expensive stocks at the highest p/e prices possible, with no real hope of earning more than the long-term US government bond rate. It's not all bad though, because you'll get temporary pleasure from owning the incredibly "sexy" stocks that are constantly talked about on Wall Street and at cocktail parties.
3. Combine assets with tons of correlated risk
Another great way to hurt yourself and your hopes of financial independence is to build a collection of stocks and other assets that you have convinced yourself are diversified but actually have correlated risk. Imagine a person who has a portfolio of a dozen companies—McDonald's, Wendy's, Starbucks, IHOP, Yum, Sonic, Ruby Tuesday, Burger King, Panera Bread, California Pizza Kitchen, Chipotle Mexican Grill, and PF Chang. Then brag to all your friends that you own so many shares that not even the Great Depression could ruin you.
Obviously, in this case, the rise in the price of commodities by itself can destroy the profits from your shares. Another example would be a person who has a portfolio filled with stocks in banks and insurance companies - or just internet businesses.
4. Only buy stocks you don't understand
Who needs to listen to people like Warren Buffett when they constantly talk about the need to stay within their purview? If your broker or friends say the stock is up and you're ready to lose your proverbial short, buy it. After all, statistically they have a chance of being right one of the many times they roll the dice. It would be downright stupid to buy companies that make boring products like coffee, gaskets, and stationery when you can buy shares in military-grade satellite technology firms with factories in countries you honestly don't even know exist. suspect.
5. Buy stocks with high accruals and lots of stock options
When analysts talk about so-called earnings quality, they often recommend that investors buy stocks in companies that have cash flows that are close to their reported net income. In such companies, they reason, profits come in the form of cold, hard cash. Who needs it? For real wealth destruction, only buy companies where net income diverges wildly from the cash flow statement. Even better, look for disreputable executives who continually adjust depreciation rates or pension plan assumptions to drive reporting results. For the perfect icing on the cake, make sure they are compensated solely in the form of cheap stock options and own a very small stake in the company.
6. Pay the highest possible taxes and fines
Nothing will doom you to poverty faster than huge taxes and fines imposed by the state. The quickest way to bring them on is to get caught in a fiscal corner so you have to use your 401k or traditional IRA, paying income taxes that should have been paid in the first place, plus an additional 10% income tax penalty. . This method is especially effective for destroying wealth because you can destroy a portfolio of six or seven figures in a matter of seconds by simply allowing withdrawals.
7. Maximize non-deductible debt
The worst kind of debt - or if you're in the business of destroying wealth, you might say the best kind - is the one that is not tax deductible and has an extremely high interest rate. Chief among these is credit card debt, which can regularly reach 20-30%. If you really want to destroy your assets, there is no better way to do it than to top up your plastic card balance, especially when it comes to items that depreciate quickly, such as cheap furniture and electronics.
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