Warren Buffet makes an incredibly interesting speech in Florida – a 1.5 hour video courtesy Harshit – . A snippet about his thought on Long Term Capital, a Hedge Fund that went bust in 1998, and required the Government to rescue it:
..To make money they didn’t have and didn’t need, they risked what they did have and did need. And that’s foolish. If you risk something that is important to you for something that is unimportant to you, it just doesn’t make any sense. I don’t care whether the odds are a 100 to 1 that you succeed or a 1000 to 1 that you succeed. If you hand me a gun with a thousand chambers, a million chambers in it, and there’s a bullet in one chamber and you said “Put it up your temple, how much do you want to be paid to pull it once?” I’m not going to pull it. You can name any sum you want. Because it doesn’t do anything for me on the upside, and I think the downside’s fairly clear.
Most people I know would choose to bet big with money they really need – having a loan to pay, or fees or other such stuff. The “skin-in-the-game” or “no pain no gain” argument makes people believe that unless they can feel the pain, they will not make big gains. So they risk what they shouldn’t – their retirement money, their pensions, their savings – to buy that elusive stock which will double in a month. And inevitably, it does not.
This is the equivalent of being told – here’s a gun with twenty four chambers of which twenty chambers have bullets, and I’ll give you double of your bet if you pull the trigger. Very sadly, people choose to pull the trigger for the sake of a little bit more.
Here’s the video, if you have the time: