Losing money is par for the course with experienced investors
A few weeks ago, my crypto friend (everyone has one) told me that he was “about £70,000 down”. He is what passes for middle class in London, and can presumably afford to lose £70,000, as he made it all from crypto over the past few years. Having unburdened himself of his losses, he started talking about buying the dip, which suggests he hasn’t totally lost the faith.
Of course, set against the recent losses, he’s a minnow. It’s not just crypto, either. Mark Zuckerberg and Bernard Arnault have lost more than $40bn apiece so far this year, largely as a result of falling shares — a loss equivalent to the GDP of Serbia or Azerbaijan. The $22bn wealth of Forrest Li, Singapore’s richest man, fell 80 per cent in May, for similar reasons. That knocked him out of the world 500 rich list, as calculated by data group Bloomberg.
How do people cope with such losses? Those who have been around money for a long time often deal with it better, says Brad Klontz, a clinical psychologist who specialises in wealth. They will have diversified portfolios, which means it’s unlikely all their wealth will have been wiped out in one go, and will be happy to sit out the fall and pick up assets on the cheap. Nearly all of the biggest losers, incurred by people in various wealth rankings, fall into this category — paper losses that will eventually be offset by paper gains.
But, for those who have made millions very quickly, it may be a different story. Especially if they had used debt to magnify their gains — the process works in reverse when asset prices tumble, making the fallout much worse. They can become depressed, angry, even suicidal. “It depends on how much of their ego and self-worth is wrapped up in their net worth,” says Klontz.
A complicating factor, he adds, is that those who have made their wealth this way will often have done so by ignoring conventional wisdom: “You’ve learned the wrong lesson but it’s one that has worked incredibly well for you.”
Studies suggest that people often attribute success that is mainly luck to their own talent, with men likelier to do this than women. The trouble is, if you believe that your own maverick genius made you the millions, it’s very difficult to then shrug and say, “them’s the breaks” when you lose 90 per cent of it. What makes someone a successful businessperson can lead some to believe they are good at everything, especially investment.
If this sounds like a grey area between investment and gambling, it is. Tony Marini, a psychotherapist in Scotland whose areas of specialisation include gambling and financially addictive behaviour, says he sees a lot of people who started out trading before crossing into addiction. They are often men aged 25-40, who seal themselves off from the wider world in online bubbles where they reinforce each other’s behaviour and beliefs.
Marini saw one man who, having lost £1mn of his own money on crypto, then spent £1.5mn of his company’s money trying to get it back. Another gambler-investor turned a £180mn family fortune into £20mn before he finally stopped.
Particularly in areas such as crypto and day trading, he says, “you often see people start out sensibly but cross the line into addictive behaviour”. Marini, who lost £2mn himself before he went into recovery, says he often sees cross-addiction — where people are up all night watching the graph, drinking and taking cocaine (which, like gambling, brings highs and lows).
Another issue is that the losses and pain can ripple out. Those who feel they have found a shortcut to untold riches will often recommend them to friends and family. So, when it all goes wrong, along with their own failure, they have to deal with the guilt of having “lost” their relatives’ hard-earned money, as well as their own.
So what should you do? If it’s addiction — defined as not having control over something you do to the extent that it is harmful — you need to seek help and support. And if it’s simply a huge and traumatic loss, you need to work through it, come to terms with what has happened, and find a way of moving on. Either way, you need to re-engage with real life and the people who are important to you.
The solutions are well-known, if not easy. Gerald Ratner, a British businessman who lost almost everything over an ill-judged joke, once told me that what you should not do is get stuck on antidepressants and spend your life in bed watching daytime TV. Eventually, after being read the riot act by his wife, Ratner took up cycling which helped him out of the rut he was in.
Yet another lesson is not to shun all risk, says Klontz. “I met someone a few years ago, who was so traumatised by the losses she’d made on the dot.com bubble, that she stopped investing in shares altogether,” he says. “She sat on the sidelines for 15 years and missed out on the biggest bull run in history.”
Rhymer is reading . . .
How High We Go in the Dark by Sequoia Nagamatsu. It starts off as a fairly conventional plague thriller. But then — via a series of linked short stories — goes to unexpected places ranging from euthanasia theme parks and death hotels to alien star systems 6,000 years in the future.
Follow Rhymer on Twitter @rhymerrigby
This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment