The man who once made cotton the most traded commodity on Earth didn’t make any money off of it. Eli Whitney, the creator of the cotton gin, got a little too greedy. After building a device that could extract cotton while leaving behind the seeds, Whitney went into a partnership with Phineas Miller, a plantation manager, to sell his machine across the southern United States. However, when the men went to sell their prized possession, they asked for a bit too much. In At Home: A Short History of Private Life, Bill Bryson explains what went wrong:
For the use of their machine, they demanded a one-third share of any harvest—a proportion that plantation owners and southern legislators alike saw as frankly rapacious.
They stubbornly refused to modify their demands, convinced that southern growers could not hold out in the face of such a transforming piece of technology. They were right about the irresistibility, but they failed to note that the gin was also easily pirated.
With a 33% royalty, southern farmers refused to pay and decided to counterfeit the cotton gin instead.
In response, Whitney spent most of his time fighting legal battles against those that stole his design. Ultimately, he made $90,000 for his efforts, which was just enough to cover his costs. If Whitney and Miller had sold their device at a reasonable price, they may have received the fortunes they so desired. Ironically, later in life Whitney was awarded a hefty sum in a government contract for producing interchangeable guns, but spent nearly all of the money he received fighting legal battles for his cotton gin. Some people never learn.
And so it goes with investing. Any short tour of financial history will provide plenty examples of men (historically, it has almost always been men) who let greed get the better of them.
You could start with Jacob Little, who is reported to have made and lost a fortune somewhere between 3 and 9 times before dying penniless in 1865. Or you could use the likes of Sir Isaac Newton, one of the smartest men who ever lived, yet still lost a small fortune (~33% of his assets) in the South Sea Bubble of 1720. Newton had originally sold his shares for a handsome profit, but couldn’t resist buying back in as prices kept rising. You could also consider the most famous trader in history, Jesse Livermore, who won and lost his fortune on four occasions before committing suicide in 1940. Thankfully, Livermore had the sense to buy his family annuities before his final foray into bankruptcy.
Why is greed so pervasive in finance? You could argue that it’s about money (and it is for some people), but if you dig deeper you will realize that money isn’t the answer. How else could you explain someone with tens of millions (or billions) of dollars going broke? Once you have such levels of wealth, all you have to do is diversify and it is unlikely you or your descendants will ever know poverty again.
The irony is that this is a money game and money is the way we keep score. But the real object of the Game is not money, it is the playing of the Game itself. For the true players, you could take all the trophies away and substitute plastic beads or whale’s teeth; as long as there is a way to keep score, they will play.
As Jordan Peterson highlights in 12 Rules for Life, status-seeking has been in the animal kingdom for millions of years. Lobsters do it, wrens do it, and humans do it too. There is nothing new about this and it won’t change in the next millennia. This is particularly true for investors who have an easy way to quantify status—money.
So when prices start to rocket upward for a particular stock or a particular asset class, it’s not the money that draws people in, it is the perceived change of their place in the status hierarchy. As Warren Buffett said in a 2018 interview with Andrew Ross Sorkin:
People start being interested in something because it’s going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren’t.
Just imagine the feeling. You are being surpassed by people that you know are less accomplished, less intelligent, and less “worthy” of such status. This is why headlines like “Everyone is Getting Hilariously Rich and You’re Not” are so effective at triggering your greed. You don’t want to be left behind, so you think about getting in. But, before you do, you should answer one question…
Burn Out or Fade Away?
I’ll never forget one of the most chilling lines in Kurt Cobain’s suicide note:
It’s better to burn out than to fade away
The line comes from a Neil Young song, but gets at one of the biggest tradeoffs we all make in life. Should you go for something big and possibly fail (burn out) or play it safe (fade away)? Before you do something that could be considered greedy, ask yourself:
Is it better to burn out or fade away?
This question gets at whether you want a high variance or a low variance in your life outcomes. Cobain, Whitney, and Livermore all made their choice early on in their lives, and they all paid a price in some way or another. However, for every failure there is a success story of someone who took incredible risk and won.
I am not trying to convince you that there is a right answer to this question. There isn’t. The question is whether you are willing to pay the price of greed. Whether you would give up the safe route to take a more dangerous path. Because the price of greed isn’t about the money you lost…it’s about the life you could have had.
I don’t know if it is better to burn out or fade away, but, while I figure it out, thank you for reading!
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This is post 106. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data