WeWork Fallout Continues to Reveal the Human Reality about So-Called Investment Experts
6 Immediate Lessons from WeWork Saga for Ultra-High Net Worth Investors in the San Francisco Bay Area
No one likes to hear “I told you so,” probably because we don’t like having our mistakes pointed out by someone else. But – we told you so. And we will keep telling you so.
Ultra-high net worth investors who continue to put their trust (and their portfolios) in the hands of people perceived as experts and gurus in the investment world will continue to crash back down to reality when those experts disappoint them.
The WeWork fallout continues to overflow with lessons and revelations pointing to this persistent reality. Human judgment – when that is your primary basis for making investment decisions – eventually fails you. Therefore any investment approach that relies first on human judgment, no matter how many big wins that person might have in their quiver, will eventually let you down.
The latest development in this continuing saga of bad judgment finds the CEOs of JP Morgan Chase and Softbank – Jamie Dimon and Masayoshi Son – being forced to admit their mistakes and repair the damage that has been done by WeWork’s failure to land an IPO due to shaky revenue projections and too much debt. Billions of dollars are evaporating as they attempt to hold the leaky boat together, or throw up their hands and abandon ship.
First, you have Son, saying that “my investment judgment was poor in many ways and I am reflecting deeply on that.” This, as he redoubles his investment and sinks billions more into the sinking WeWork ship.
Who knows, maybe there will be some gold left when it hits the bottom of the ocean.
Then, you have Dimon, who appears to have realized the gravity of JP Morgan’s bad investment in WeWork, and refused to fund the former WeWork CEO’s huge exit package. But, they also tried to salvage the deal, trying to pull together a $5 billion debt package from more than 100 investors.
From these latest developments, we have identified six crisply specific investment planning lessons for high net worth and ultra-high net worth individuals and families.
1. Understand Why Your Financial Advisor Recommends Specific Investment Strategies
JP Morgan’s motivation for pursuing its investment in WeWork is startlingly clear.
As the article referenced above puts it, “the bank is losing out on big-time fees that would have come from the IPO.” So was JP Morgan pursuing this investment because of the interests of their own banking and investment customers, or because of the big fees they would collect?
Many financial advisors are compromised by deals they have made with various mutual funds, annuities, and other entities. These non-fiduciary advisors make investment recommendations to their clients in part because they get a bigger paycheck from it.
This is called a conflict of interest, and it clashes with the fiduciary standard to which Pillar Wealth Management strictly adheres.
You do not want a financial advisor making investment decisions based on how it benefits them. If it doesn’t benefit you, and only you, then it’s a questionable decision.
2. Question Perceived Expertise
With the WeWork freefall, it’s baffling that anyone would still want to risk their own capital to salvage the company. Yet, JP Morgan attempted to corral $5 billion in new funding for a debt package. They talked to over 100 investors, according to the article.
Are they venture capitalists? Private investors? Other banks? Mutual fund money managers?
Do you see where this is leading? Over 100 unnamed ‘investors’ were approached with the proposition of investing hundreds of millions in a debt rescue package for a flailing company that spent beyond its means, lost its IPO, lost its CEO, and had its valuation decimated by over 75%.
Sounds like a great deal!
Again – who are these 100 investors, and why would they possibly want to touch this deal? No doubt they are big players and luminaries in the financial industry.
The fact JP Morgan even approached them reveals the lesson for ultra-high net worth investors like you. JP Morgan still thought this was a good enough opportunity to offer to potential investors. And they believed these investors might agree.
This is how too many ‘expert’ financial advisors and money managers think – especially those at big banks like Chase. They make decisions with your money that they think are smart, because it’s not their money at stake.
This is also why people who take the venture capital and angel investor route often end up making little more – and often much, much less – than those who just use smart and effective investment planning strategies like the 100% customized approach used at Pillar Wealth Management. We take our human frailty as far out of the process as possible.
3. Pursue a Proven Strategy, Not a Risky Bet
The Softbank article reveals some highly disturbing investment performance data. According to them, the Vision Fund (Softbank’s fund devoted to startups, begun in 2016) has so far invested $70.7 billion in 88 companies. Today, that portfolio is now worth $77.6 billion.
Did you catch those numbers?
Think about the incredible amount of time it would take to forge 88 separate investment funding deals. All the meetings, the lawyers, the contracts, the planning, the monitoring, and of course, the hand-wringing.
And for 88 deals using over $70 billion in capital spread out over nearly four years, what they have to show for it so far is… 10% growth. Over four years!
Is that supposed to impress anyone?
That’s about 3% per year.
You would do better with a portfolio made 100% of bonds.
All the fanfare and headlines, and these guys are earning less growth that the most conservative of investment portfolios.
Do you want optimized investment performance? You won’t get it using venture capital and risky bets.
4. Balance Risk with Investment Performance
Ultimately, performance is all about risk – how much are you willing to put up with to get the investment growth you need to fund your lifestyle and your long term plans and dreams?
The Vision Fund so far has lost $8.9 billion from the WeWork saga. As the article puts it, this “shows the risks of Son’s strategy.” That’s the understatement of the year. Picture this cocktail party conversation:
“How’s your portfolio doing?”
“Not too bad. We lost $8.9 billion this year.”
“Yeah, we’re pretty confident going forward.”
Consider this deeper dive into the numbers:
From July to September in 2018, the Vision Fund gained 706 billion yen. In the same period in 2019, it lost 704 billion yen. So, it gained nothing in that quarter over two years – and this is during a worldwide period of economic prosperity. We’re not in anything resembling a recession.
If your financial advisor pursues an investment strategy overladen with high risk, you too could earn zero growth while other high net worth investors are happily earning 7%, 9%, 11%, and 15% growth because they’re using strategies that minimize undue risk.
High risk carries with it the chance of high return, but with it the chance of getting nothing, or losing big. $8.9 billion? Most people would call that a big loss. From an investment standpoint, it represents the epitome of overly high risk for a lousy return.
And if you believe your high risk bets will somehow avoid this fate, you’re in denial of the fact that you’re basically just gambling. The headlines even call Softbank and JP Morgan’s actions ‘bets.’ Because that’s exactly what they are.
If your high risk strategy earns you 20% growth for five straight years, but then loses 100% of that in year six, you’ve made nothing over six years. What was the point? Many high net worth investors found themselves in this situation after the 2000 dotcom crash and in the 2008 Great Recession.
Don’t let it happen to you. Avoid undue risk.
5. Don’t Trust in An Advisor’s Judgment
To his credit, Son admitted his mistake. Very admirable and something we need to see more often – especially in the financial industry. In his own words, he said, “My investment judgment was poor in many ways and I am reflecting deeply on that.”
This is a man who founded a $100 billion venture capital fund, the Vision Fund. And he used poor investment judgment. What’s the lesson?
Any financial advisor, self-declared expert, or guru, who puts himself or herself in a position where they are making the judgment calls with your money is not someone a smart ultra-high net worth investor would work with.
Your financial plan and portfolio performance should not be placed in the hands of people who base their investment strategies on Wall Street’s methods or industry norms. Industry norms fail every time there’s a crisis. And as Son has experienced, they fail in good times as well. Humans make bad judgments. Even the very best of us.
You need an investment planning approach that doesn’t rely primarily on human judgment.
Pillar Wealth Management’s process is data-driven, not judgment-driven. We don’t sit in our back room staring at stock market data with bloodshot eyes at two in the morning, looking for that imminent sign of a great buy that no one else sees that will make our clients filthy rich.
We don’t do that because… it doesn’t work.
To find out what does work, schedule a quick chat with one of our experts.
We have spent over 30 years watching and learning and developing a process that does work. And we have data that backs it up. To learn more, click the link above. You’ll discover a process vastly different from what almost any other wealth manager uses.
Is that worth a short phone call?
6. Don’t Repeat Your Mistakes
Remember that 10% growth figure? Over nearly four years? Well guess what? They’re going to do it again! Vision Fund founder Masayoshi Son has already planned a second Vision Fund. Details are still forthcoming, but he is actively raising the capital to launch a second round of funding for unproven startup gambles, mostly in the tech sphere.
Now, if Son is drawn to the idea of helping new companies launch, and is more interested in that than just raw performance, that’s fine. If that’s his motivation, he’s free to pursue it.
But is that what you want from your financial advisor or wealth manager?
Do you want a manager who lost 50% of his clients’ money in the Great Recession, but is still using the same strategies today as he was then? Sure, the clients who had the time to wait eventually made it back. But wouldn’t it have been better not to lose so much in the first place? How much farther ahead would they be?
And to be clear, not everyone has the time to wait. If you’re close to retirement, or have just started retirement, you might not have time to weather another huge financial crisis at this point in your life.
So, be careful about using a financial advisor who says things like “everyone lost money in the Great Recession; nothing we could do about it.”
Actually, there is something you can do about it.
You can use a groundbreaking, vastly different investment planning approach that optimizes performance, manages risk, and doesn’t rely on human judgment or perceived cleverness where little actually exists.
Nothing in this business is guaranteed. But a lot more financial serenity is possible than you might realize.