Rick Guerin was smart enough to work with Warren Buffet and Charlie Munger as their third business partner. But these 3 mistakes led to his ultimate demise.

Have you ever wondered why some people seem to effortlessly accumulate wealth while others struggle to make ends meet?

Of course, luck and privilege play a role in financial success, but so do the effects of wise financial choices, avoiding common pitfalls, and behaving well with money. And as best-selling personal finance author Morgan Housel explains in his book, The Psychology of Money:

"...doing well with money has little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people. A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence."

But before we focus on what to do with money, it can be helpful to understand what not to do with money.

Mistake #1: Wanting To Get-Rich-Quick.

Most people have heard of the investing duo of Warren Buffet and Charlie Munger — but did you know they used to have a third partner?

His name is Rick Guerin, and his story is a perfect example of how being in a hurry to get rich can jeopardize your financial future. You see, Rick, Buffet, and Munger used to do a lot of investment deals together, including deals on See's Candies and Blue Chip Stamps. But, when asked what happened to Rick, Buffet recounted the rise and fall of his investing partner.

Warren Buffet said:

"Charlie and I always knew that (we) would become incredibly wealthy. ..we were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry. And so actually what happened -- some of this is public -- was that in the '73, '74 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, and so he got margin calls out the yin-yang, and he sold his Berkshire [Hathaway] (NYSE:BRK.A) (NYSE:BRK.B) stock to me. I bought Rick's Berkshire stock at under $40 apiece, and so Rick was forced to sell shares at ... $40 a piece because he was levered."

You see, Rick was just as smart as Buffet and Munger, but he was in a hurry to get rich.

And because he was in a hurry, he took on massive risk investing with leverage—taking on debt to invest even more in stocks. And the thing with leverage is that it's a sword that can cut both ways—it can pump your returns when the market is going up, and it can completely wipe you out when the market goes down.

It's the same thing that happened to many families in the housing market crash of 2008.

In the years leading up to 2008, countless people invested heavily in real estate with borrowed money, assuming that property prices would continue to rise indefinitely. But when the bubble burst, they were left with substantial debt and plummeting property values.

And it's the same thing that's happened to many crypto investors during the recent bull market of late 2021 and the bear market of 2022.

They were in a hurry, they took on leverage, and they got completely wiped out when the crypto market tanked. Like one investor shared on coinfessions, a Twitter profile for anonymous crypto confessions: "I turned 20k into 80k by being overleveraged only to get liquidated during a regular crash."

Here’s what Warren Buffet says about investing with leverage: 

"If you're smart you don't need it and if you're dumb you shouldn't be using it." 

But unfortunately, there are many more stories of investors in a hurry to get rich quick who take significant risks using leverage, only to get wiped out when markets fluctuate.

“Nowadays, you see so many people getting into the stock market utilizing leverage, or just taking the advice from people who are running pump and dump schemes, then eventually losing everything they have,” says Leonard Kim of AdvisorCheck. “Some people shouldn’t be managing their own investment portfolio. If you want to achieve success, you have to look at what the wealthy do. Surprisingly, many of the wealthiest people in the world have financial advisors by their side,” Leonard continued.  

If you want to build wealth, don't be in a hurry.

Given enough time and patience, the effects of compound interest — earning money on the money you've earned — can be staggering. And if you're patient, you won’t need to take unnecessary risks through leverage because, just like Buffett and Munger, you know you'll be wealthy one day as your money doubles, and doubles, and doubles again. 

All you have to do is give your investments the time to grow and compound while avoiding getting wiped out by unnecessary risks.

In the end, the story of Rick Guerin and the experiences of those affected by the housing market crash and crypto market fluctuations serve as cautionary tales about the dangers of being in a hurry to get rich and using leverage. They illustrate the potential pitfalls of taking on excessive risks and highlight the importance of patience and a long-term approach to wealth-building. By giving your investments time to grow and avoiding unnecessary risks, you can harness the power of compound interest and work steadily towards your financial goals.

Remember, building wealth is a marathon, not a sprint, and that’s where a trusted financial advisor with a long-term mindset can help. Find one today using our proprietary Advisor Search tool.

Mistake #2: Spending Beyond Their Means.

One of the key ingredients to building wealth and achieving financial success is your savings rate — the percentage of your income you can save and invest each month.

But, if you're spending all or more than you make each month, there's nothing left to save. This is how people go broke — they fail to save and invest for their future, instead choosing to buy things on credit with no plan to pay it back. When mounting debt becomes too much of a burden, declaring bankruptcy is the only option.

And while you might assume that this only happens to those at the lowest income level, the reality is that it can happen to anyone, even the rich and famous.

Consider the example of the Harvard-educated Merrill Lynch executive Richard Fuscone. 

"Fuscone had such a successful career in finance that he retired in his 40s to become a philanthropist." writes Morgan Housel in The Psychology of Money.

"Crain's business magazine once included him in a "40 under 40" list of successful business people. But then...everything fell apart. …Fuscone borrowed heavily to expand an 18,000-square foot home in Greenwich, Connecticut that had 11 bathrooms, two elevators, two pools, seven garages, and cost more than $90,000 a month to maintain." Housel writes.

"Then the 2008 financial crisis hit. The crisis hurt virtually everyone's finances. It apparently turned Fuscone's into dust. High debt and illiquid assets left him bankrupt." Housel continues.

In the end, "..his Palm Beach house was foreclosed. In 2014 it was the Greenwich mansion's turn."

His Greenwich mansion "was sold in a foreclosure auction for 75% less than an insurance company figured it was worth." Housel finishes.

Richard Fuscone had allowed his spending to outgrow his means — a recipe for financial disaster.

To avoid ending up like Fuscone, it's critical to spend below your means, creating a healthy gap between your income and your expenses. That gap can then be used to save and invest for the future as you work to secure a healthy retirement nest egg. It also puts some buffer between you and the inevitable ups and downs of life.

For example, if you spend everything you earn and have no savings, a sudden job loss or unexpected medical expense can put you right on the brink of financial ruin. But, if you only spend half of what you earn and have healthy savings set aside, you can weather a job loss or medical emergency with ease.

Remember, building wealth and achieving financial success requires maintaining a healthy savings rate, which means spending less than you earn and consistently saving and investing for the future. By avoiding excessive spending and prioritizing savings, you can create a financial buffer that protects you from unexpected challenges and paves the way for a secure and prosperous future.

Mistake #3: Failing To Diversify Their Investments.

Lastly, concentrating your investments in a single company, property, cryptocurrency, or other asset can be devastating to your financial situation.

When you invest in a single company or asset, you are taking on a huge amount of risk—if that company or asset fails, then your entire net worth is at risk. But by diversifying your investments across different companies and assets, you spread out the risk so that if one of them does fail, it won’t take down your entire portfolio.

It's the age-old truth — don't put all your eggs in one basket — because if you do, you could be risking your entire financial future.

Instead, focus on building a well-diversified and academically sound portfolio with an appropriate mix of stocks, bonds, real estate, and other assets. This will help you spread your risk among various assets and companies, effectively reducing your dependency on the success or failure of any single investment.

And if you don't know how to diversify your portfolio on your own, that's where it can be wise to hire a financial professional.

If you don’t have a financial advisor, we can help. Our experts have done the research for you, vetting and categorizing advisors, and our proprietary system will give you access to the most relevant information and resources you need to find the right financial advisor for your needs.

With your free membership, you will not only get the best financial resources possible to make sure you are on track, but you can also search for a CERTIFIED FINANCIAL PLANNER™ professional (CFP®) in your area who takes a holistic approach to personal finance with our database of over 1 million US Financial Advisors.

And in the end, with the right financial advisor, you can rest assured that your finances are in reliable hands and be confident that you’re making the best decisions for yourself, your family, and your future, all while avoiding some of the biggest and most common mistakes with your money.

Written by Anders Skagerberg, CFP®

Fact checked by Billy Quirk

Reviewed by KJ Kim

Disclosure

The information provided in this article was written by the research and analysis team at AdvisorCheck.com to help all consumers in their financial journeys, by providing the resources and the insights to help improve one’s financial health, make it through recessionary and inflationary periods of time, and save their earnings to use them towards building a secure financial future. 

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