I’m sure by now you’ve heard about the Archegos Capital meltdown. A family office that ran billions of dollars in personal investments, it was completely wiped out only days ago.
Bill Hwang, a former hedge fund manager, headed the firm and had, by all accounts, almost all of his personal wealth wrapped up in the family office. The firm reportedly managed $30 billion, thanks to leverage. And Bill Hwang’s personal fortune was rumored to be approximately $10 billion at its peak.
Well, that was then. And this is now.
After the meltdown, which was triggered by a margin call for the ages, the whole firm was wiped out and Bill Hwang’s $10 billion fortune is apparently gone.
Mike Novogratz, a former partner at Goldman Sachs, called it “one of the single greatest losses of personal wealth in history”.
So how does someone lose $10 billion overnight? And what lessons can we take away from this so that we don’t make the same mistakes with our money?
That’s what I’m talking about today. I’m not writing his article to criticize Bill Hwang or anyone else. Instead, I’m using what happened to Bill Hwang as an educational example of what not to do. I want to share with you three investing lessons to learn from the Archegos Capital meltdown. I think these lessons can help you to become a better investor, save yourself from unnecessary losses, and potentially even one day become richer than a guy who was only days ago worth billions of dollars.
Let’s dig in.
Lesson #1: Avoid Leverage
The first lesson is arguably the most important lesson of all. Avoid leverage. Let me repeat that. Avoid leverage.
Bill Hwang would be billions of dollars richer today had he simply not used leverage. The margin call that took him out was only possible because of leverage. You can’t get margin called if you don’t use margin.
When you’re investing in stocks, you have to remember that you’re investing in assets that are inherently volatile and risky. Amplifying that with leverage is beyond silly.
Furthermore, it’s totally unnecessary.
Stocks can, and almost certainly will, make you incredibly wealthy over time.
You don’t need leverage for this to happen.
I went from in debt at 27 years old to financially independent at 33.
And I didn’t use a single ounce of leverage to get there.
That’s after growing up incredibly poor in Detroit, using welfare to get by and living in a dilapidated house. I don’t have a college degree. Never had a fancy job. Yet here I am, fairly well off, in my 30s. Stocks made much of this progress possible.
The stock market is almost like a game that’s rigged in your favor.
Trying to accelerate and intensify this inevitability with leverage in the name of greed is unwise. Warren Buffett said it best: “It is insane to risk what you have and need in order to obtain what you don’t need.”
As someone who has financial freedom, I’d never risk it only for more money – which I don’t need. You only have to get rich once. Becoming greedy for more when you already have enough sets you up for a big fall.
Lesson #2: Manage Risk
The second lesson? Always properly manage your risk.
Risk is not a fun word to throw out there when you’d rather be talking about making money. But it’s so important to acknowledge that investing carries risk. And you have to always properly manage that risk for yourself.
There’s no “right” or “wrong” way to do this, per se. Every investor has a different risk tolerance. But the way Bill Hwang did it – by heavily concentrating his assets into a small handful of stocks and then leveraging them to the hilt – was incredibly risky. If there were a risk scale of 1-10, Bill Hwang was at an 11.
Always be thoughtful about things like diversification, stratification, cash, and your overall financial situation. I manage my finances and investments in a way that operates around a simple question: What could go wrong? And then I make sure that if things were to go wrong, I’d still be okay.
I have over 100 stocks in my portfolio, no margin, a healthy cash cushion, a bevy of online ventures I’m active in, and a very low monthly expense base. Even if multiple things were to go wrong simultaneously, I’d still be okay. I’m a realistic optimist. I have a positive attitude and hope for the best, but I’m honest about the potential for unfavorable outcomes and prepared for the worst.
Lesson #3: Invest in High-Quality Stocks
The third lesson is one you probably saw coming. Invest in high-quality stocks. Bill Hwang made big mistakes with leverage and concentration. And then he compounded those mistakes.
How? By investing in a bevy of lesser-quality stocks like GSX Techedu and RLX Technology. It was a recipe for disaster.
I make videos, write about, and personally invest in high-quality dividend growth stocks.
These are world-class businesses that pay reliable, rising dividends. They’re able to do so because they’re earning reliable, rising profits. And that’s because they’re providing the world with the products and/or services it demands.
Think amazing businesses like Apple (AAPL), Johnson & Johnson (JNJ), and Pepsi (PEP).
As far as stocks go, these are very low on that risk scale. The odds of Apple going bust are almost zero. Yet high-quality dividend growth stocks tend to outperform the broader market over the long run.
It’s greater performance with less risk.
And those reliable, rising dividends these stocks pay can provide an excellent foundation for financial independence. I earn five-figure passive dividend income from my stocks, which has made me financially independent. Waking up to fresh money you didn’t go to sleep with? It’s awesome. And seeing that passive income increase all by itself? Even more awesome.
Just be smart with your investments. Avoid leverage, manage your risk properly, and stick to investing in high-quality stocks.
Archegos Capital has come and gone, but these investing lessons are timeless. And if you follow them, you will almost certainly be a better and more successful investor. Who knows? You could potentially one day end up even richer than where Bill Hwang is now after his disastrous, multibillion-dollar wipeout.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Source: DividendsAndIncome.com
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