Rich And Stupid

by Ed

We usually associate those that are are rich to be smart, but there is more than enough real stories that point to the opposite. In fact, if I have to call a spade a spade, quite a few are financially “stupid”.

Let’s see some examples. First off, there is the King of Pop, Michael Jackson. MJ earned millions of dollars and the adoration of fans in his heydays. But his empire slowly collapsed in 2003 and Neverland was in danger of foreclosure in 2008. Many items MJ accumulated went to the auction to pay debts. On a documentary, the spent $6 million in just a few hours.

There are many other rich and famous who got in trouble because they failed to remember the basic money rule of spending less than what you earn. Among them Elton John, who was reported to running up debts of more than $2 million a month and Burt Reynolds filed for bankruptcy in 1996 with more than $8 million in debt.

Professional athlete also succumb to make silly financial decision perhaps thinking they can earn it all back. Don’t they realize an injury can wipe out everything. Mike Tyson earned more than $300m in his career, had pet tigers, a lifestyle that cost over $400,000 a month and finally filed for bankruptcy.

Lastly, we look at Larry Ellison, founder of Oracle and one of the world’s richest men. While Ellison have extravagant spending and made mistakes like borrowing against stocks he owned in Oracle, nevertheless, he listened to his accountant Paul Simon (eventually) to diversify his investment.

Borrowing from banks against your stocks is a bad idea because when stocks markets are down, banks will call in the loans. You might be forced to sell when prices are low. A double whammy.

To give you an idea on Larry’s rough budget here are some figures

Life Style – annual $20m
Interest Accrual – annual $75m
Villa in Japan – $25m
New Yacht $194m – (over 3 yrs)
America’s Cup – $80m – (over 3 yrs)
UAD – $ 12m (over 3 yrs)

So you are betting on a lottery ticket to solve you financial troubles? Think again. Evelyn Adams won the New Jersey lottery twice for a total of $5.4 million. Today, the money is gone and he lives in a trailer. Another winner, Suzanne Mullins won $4.2 million in the Virginia lottery in 1993. Today, she’s deeply in debt to a company that lent her money using the winnings as collateral.

There are a few lessons here.