I had a friend who was a fairly big-time commodities trader on Wall Street. He made many millions over the years, and I figured he still had most of it, especially because of the way he talked and how he and his wife spent money. We often talked trading and he would make fun of my positions (not terribly small, considering they were never leveraged) while showing me his very large positions and puffing his chest out. Always thought that was all his money. I always deferred to everything he said because he was an old-timer on Wall Street and had held powerful positions there.
Long story short, we ended up in a situation where they owed us money (just a few thousand, but still…), and we are now entering our second year in our collection efforts. They are flat broke, and I mean really, really broke. Apparently, all of those large positions were leveraged to the hilt. Because of his Wall Street connections, he was able to leverage far more than most people ever could, and his positions turned against him. Because of his age, he will never, ever be able to recover from this.[/quote]
CA Renter,
This ties in with that other thread we were all discussing how you never really know one’s true net worth. Your example you gave is a good one and there are LOTS of stories like that out there.
The ironic thing is many times it’s these so called financial gurus on Wall Street that end up flat broke. I also know some Wall Street types that totally got crushed during the Great Recession. It’s hard for me to fathom a guy making a few million dollars a year or tens of millions in his lifetime and having NO net worth or worse yet NEGATIVE net worth but there are lots of those guys out there.
When times are great they spend it all thinking it will always be there. Or they leverage it and lose it or they leverage it, make more money, leverage THAT and keep going but the thing with those types is they always think they can leverage and keep winning and sometimes it doesn’t turn out that way.
Wall Street is akin to a Casino in many respects. Look at Pattern Day traders and how they get 4 X buying power of whatever funds they have in their account.
I’m not saying leverage can’t be used wisely. Because it certainly can. But if we are going to discuss the merits of leverage and HELOCS you have to also discuss the potential pitfalls as well.
[quote=spdrun]
Why? So your 401k starts looking like a 201k…
Because I had no 401k or 201k or whatever, just a decent freelance gig and a non-trivial bank account. (And no interest in investing prior to the 2008 crash, but that changed in the ensuing months and years.)[/quote]
Congrats for entering the market at a good time. Hopefully a financial crash like the one we experienced is a once in a lifetime type event. You entered at a great time but it just comes down to good timing (i.e. luck) that you didn’t yet have a 401k. It’s very difficult to time the market. Just when you slap yourself on the back telling yourself how smart you are…… the market can whack the heck out of you fairly quickly.
[quote=spdrun]Yeah, but you’d have had to have been Stevie Wonder not to see the 2008 crash and foreclosuremageddon as some sort of business opportunity.[/quote]
Well, yes there were lots of opportunities but almost always in these kinds of events there are a lot of Monday Morning Quarterbacks. Don’t underestimate the power of fear. There were a lot of people that were scared and already tried catching a falling knife.
It’s great that you took advantage of things and it worked out for you. I also came out of the crises even better, but I’m not devoid to the fact that it was a very scary time for many.
I remember during that difficult time. I had a very close friend who works on Wall Street. He is a Partner at one of the big financial firms in NYC. He was old school and very wise. I remember him telling me about walking away from a $300,000 deposit that he put down on an apartment he was buying (investment property). He was just totally frightened because the whole financial world felt like it was going to collapse. spdrun, most people don’t realize how close we came to a systemic meltdown.
It’s easy to say now that you would have had to have been blind not to do/see X. But the reality is things could have really gone the other way…..
Also, with leverage you can have a guy that is on the right side of trades for 20+ years…. but then leverages it all on one “sure thing” and loses it all. I’ve also seen that. It doesn’t really matter your track record over the span of a long time….ultimately it just comes to the end of the day you still having everything you made and some people leverage one time too many…
