Before this month very few people have ever heard the name Bill Hwang. Hwang began his career at Peregrine Securities as an equity salesperson. While there Hwang met legendary investor Julian Robertson, founder of Tiger Management and one of the greatest investors of all time. Hwang wound up working for Robertson for a time and when Robertson ultimately closed his fund, he seeded Hwang with $25 million of capital to start his own. Hwang took that capital and founded Tiger Asia Management which at its peak grew to having over $5 billion of capital. After some legal issues came up Hwang decided to wind down his fund and start a family office, Archegos Capital Management, where he invested his own wealth (roughly $10 billion) and stopped taking outside investor’s money. At this point Hwang had clearly “won the game,” how could you possibly need more than $10 billion? So, did Hwang invest conservatively and enjoy the fruits of his life’s work? Not at all.
If you are not following the financial press every day you may not have heard about the billionaire who went broke in two days earlier this month, that billionaire is Bill Hwang. All the details of how this happened are far beyond the scope of a blog post, but the major themes were extremely concentrated positions combined with a massive amount of leverage. This strategy worked well for Hwang for a period, but when they stopped working and moved against him his entire fortune was wiped out in 2 days!
So why are we writing about this? Aside from it being a fascinating story (links at the bottom for more reading) there are corollaries to average investors and decisions that they do or do not make. Sometimes it can be difficult to abandon an old strategy that created wealth for you for one that will keep you wealthy. Other times it can be difficult to stick to a strategy designed to keep you wealthy when all around you it seems like people are doubling or tripling their money investing it all in the latest digital currency or “meme stonk.” People’s emotions can sometimes get the best of them at points like this. Fear of missing out takes hold and hindsight is ALWAYS 20/20. These times are almost impossible to ignore, however it is important to keep in mind that these are precisely the point where past, realized, returns look the best while future returns are still extremely unknown.
Concentrated positions and leverage can absolutely create massive wealth. Bill Hwang is certainly not the only example as Jeff Bezos and Amazon, or Elon Musk and Tesla have done the same thing. However, these same concentrated positions can destroy wealth and do so very quickly. Warren Buffet once famously said “it is insane to risk something you have for something you don’t need.” We agree with this wholeheartedly. It makes a lot more sense to us to determine what your goals and needs are from your assets and then develop a strategy that takes the least amount of risk to achieve them rather than taking massive risks to achieve outsized returns when they are not required.
So, if you have developed a plan or strategy that is appropriate for you and you ever find yourself thinking about deviating from that strategy stop to think about why. Are you in fact risking something you have for something you don’t need? We’ll bet a nickel that Bill Hwang would love his billions back, even if it meant giving up the chance at doubling them again later down the road!
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