Only the Paranoid Survive

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When she turned 21, Barbara Hutton was worth $50 million (~$1 billion today). As heiress to the Woolworth fortune, she was one of the richest women in the world in 1933. Just as lottery winners and celebrities often end up cursed by their wealth, so too was Barbara.

Sudden wealth syndrome shaped her life of excess - spending frivolously on material goods. Whether it was rare paintings, precious jewels, Rolls-Royce’s, or mansions around the world, no expense was spared. Though her seven marriages might have been her most expensive indulgence, losing millions in divorce settlements.

Barbara’s opulent lifestyle led to her passing at the age of 66 with an astonishing $3,500 in her checking account.

The numbers may change but the stories of lifestyles that surpass riches are as old as time. To understand why, we start with two simple facts: Income is what you earn, and wealth is what you accumulate.

Income, no wealth

Acting rich isn’t hard. We make assumptions based on what we see. So we see someone driving a Lamborghini and think that person must be wealthy. Mission accomplished.

The appearance of wealth is further inflated by credit. All you need is a credit card and a decent income to take ski trips to Aspen and have a closet full of designer brands.

Maybe monthly income can support minimum credit card and car payments, but the buck stops there. That person might have zero wealth - the vehicle that provides independence and the ability to endure the unexpected.

Wealth, no income

More tragic is the complacency of sitting on success. We’ve all come across someone whose full-time job is spending money. Their trust fund has disincentivized earning an income and it’s easy to assume that will last forever. As we saw with Barbara, the pot of gold runs out. The saying goes, “shirtsleeves to shirtsleeves in three generations”.

After a windfall of money, people become too comfortable with their new circumstances. Lottery winners are more likely than the average American to declare bankruptcy within three to five years. And 60% of NBA players go bankrupt within five years of retirement.

Companies are vulnerable to the same fallacies. Andy Grove, Intel’s founder, said it like this in his book:

Bill Gates also thought about this in the early days of Microsoft, saying:

Grove and Gates’ mindset revolved around a refusal to rest on their laurels - instead preparing for inevitable changes in the industry landscape. Such changes can be hard to accept for founders married to their ideas. That’s why we often see companies transition to conventional Harvard MBA leadership as they mature.

In our cyclical economy, the only constant is change. Innovation brings about new technologies and makes others obsolete. The Dow Jones Industrial Average represents this ever-changing story of America.

Here’s the Dow 30 in 2020, the latest variation. How many of these companies do you recognize? Probably most of them.

How about in 1976? Probably less.

Here is the first Dow 30, in 1928.

Less than a hundred years back and our snapshot of the US economy is largely unrecognizable. Some of these companies were acquired, rebranded, or simply removed from the index. But for many, innovation caught up.

The same product that makes a business successful could be what leads to its demise later.

It’s why Adobe had to buy Figma. Figma is light years ahead and Adobe was losing market share as a result.

Corning went from producing Thomas Edison’s light bulbs to Pyrex glassware, to fiber optic cables driving internet adoption, to Gorilla Glass on nearly every smartphone in the world.

Best Buy pivoted from hardware to services and avoided the fate of other electronics retailers swallowed by Amazon.

Each could have looked at yesterday’s success and decided the company was just fine. Instead, a latent fear drove them to adapt to changing times.

It’s easier said than done.

For nearly two centuries, Macy’s was synonymous with pure Americana. The brand that once dominated retail is dying a slow death and management has done little to keep the company relevant.

Skype was once the de facto video call platform. It was even a verb. The company didn't prioritize call quality and has now lost all of its market share to Zoom.

We’re currently witnessing Mark Zuckerberg pour all of his company’s free cash flow into a project that may or may not be something. His paranoia has led to an entire company rebrand centered on the metaverse. Time will tell if his bet pays off.

The rise and fall of the Woolworth fortune shows us that acquiring wealth and sustaining wealth are two very different things. A billion dollars came and went within half a century. And brands once engrained in American identity succumb to the free market’s short memory.

Wealth cannot endure without reinvention. Or you’ll one day reach into the pot of gold and feel nothing. What worked yesterday may not work tomorrow. As they say in investing, past performance does not guarantee future results.

- Sam