Failure is a far better teacher than success because it’s much easier to duplicate failure than it is to replicate success. If we can study somebody’s shortcomings, we can take away tangible lessons and also realize that mistakes are just a part of the process. Some can be avoided, some we must learn for ourselves.
Ulysses S. Grant was an enormously successful General in the Civil War and he spent eight long years as President of a healing United States. But despite this heroic body of work, his financial life had plenty of room for improvement.
After a failed attempt at becoming a third-term President, the General settled into civilian life. He and his wife moved from St. Louis to New York City where, with the help of money raised for them, they bought a four-story brownstone for $98,000 ($2.1M in today’s dollars).
One of Grant’s sons, Buck, got into business with a young hotshot financier, Ferdinand Ward. Ward was referred to as the “Young Napoleon of finance” and some suggested he would one day become Secretary of the Treasury. The General had such confidence in Buck and his partner that he decided to kick in $50,000, most of the money he had, to help get the brokerage firm Grant & Ward up and running. This arrangement worked well for a few years. Grant & Ward paid him a monthly stipend and even kicked in some extra money from time to time.
Grant & Ward was did so well for its clients that there was a line of people waiting to throw money into the operation. In the epic biography Grant, Ron Chernow wrote, “One friend invested $50,000, disappeared for six months on a European vacation, then came home to a whopping $250,000 check. As others reaped 15 percent to 20 percent profits per month, a mania to invest with Grant & Ward overtook Wall Street.”
Today we recognize Grant & Ward as a classic ponzi scheme, but at the time, Grant was hopelessly naive. He said, “I think we have made more money during the past year than any other house in Wall Street.” He had no business making these claims because he had no idea what the operation actually did. Chernow wrote, “Grant’s complacency was shocking. He seemed to think it perfectly normal that gigantic sums of money should fall from the sky without any effort on his part.” Sums were indeed falling into his lap to the tune of $2,000 a month ($43,000 in today’s dollars).
As all ponzi schemes do, this one collapsed on itself after a few years. Once he found out about the scheme, he said, “When I went downtown this morning I thought I was worth a great deal of money, now I don’t know that I have a dollar.”
It’s hard to relate to a former President, but all of us have experienced our share of financial pain. Here are a few obvious lessons we should takeaway from Grant’s financial blunders.
Trust but verify. Grant placed far too much trust in his son and his partner. Chernow wrote, “The general who had impressed Abraham Lincoln and vanquished Robert E. Lee was powerless to defend himself before the infinite wiles of a shameless young trickster.” If you can’t explain something in 280 characters or less, you probably shouldn’t invest in it.
Diversify. Not only did he do no due diligence, but he put everything he had into the operation. Don’t put all your eggs in one basket is hardly a novel concept. He should have known better.
If something is too good to be true, it probably is. Nothing gets people’s adrenaline pumping faster than watching their friends make money fast, but large and quick returns should be an obvious red flag. If somebody promises to double your money in a year or less, take it with a mountain of salt.
Save for a rainy day. When the fraud went bust, Grant was left with just $80 to his name. He didn’t have any money in the bank because there was no reason to suspect the good times would end. We should all plan as if the good times will end. With crypto currencies rising 25% a day and stock markets around the world up double digits, its easy to eschew savings accounts paying a paltry 1%, but you never know when you’ll need the cash. Yes, dollars are a depreciating asset, but you can’t put a price on comfort.
Success in other areas of life does not translate into investing success. It’s difficult for people who have enjoyed professional success to admit that they need help with investing. If you can lead thousands of men in the battle field, surely you can weigh risks and rewards right? Wrong. This can be especially problematic with doctors and engineers and other professions that require precision. In investing, there is no such thing as an optimal portfolio and some people really don’t care to hear that.
Don’t overextend yourself. The Grants had no business living where they were.His wife Julia wrote, “It was a much larger and a more expensive house than we had intended (or had the means) to buy, but it was so new and sweet and large that this quite outweighed our more prudential scruples.” They tried to keep up with the Jones’s and when the fraud was exposed, they were forced to sign over the title of their house to William Vanderbilt (he allowed them to stay there until he died).
Thousands of books have been written about successful people and the path they took to get there, but few have showed all the bumps and detours along the way. Successful people fail all the time and one of the keys to their success was learning how to fail well. If we can learn from accomplished people’s failures, it can give us a better understanding of the journey we all have in front of us.