One of Warren Buffett and Charlie Munger’s “mental models” is called “Circle of Competence”. A Circle of Competence is basically the stuff that a person knows really well, something that they’re an expert in. The problem is that most people think their Circle of Competence is much larger than it really is. They think they know way more about way more things than they really do. This is what got me into so much trouble.
My $60k Boneheaded Mistake
A lot of people know that I used to flip old muscle cars before I flipped apartment complexes and houses. I got pretty good at it in Orange County, California back in the day. I’d sell to “rich” folks back east that couldn’t get their hands on rust-free cars. Most of these cars were purchased for $2k-$10k, I’d do minor work on them and sell them for $25k or so.
Fast forward 15 years later and I thought to myself, well, let’s do this again! I bought a 1969 Camaro SS clone for $40k. I planned to put a new 6 speed manual transmission and an Air Conditioning system in it for about $20k combined, but actually ended doing way more and spent about $80k in upgrades. Now that I’m into the car for around $120k, it looks like I’ll be selling it for about $60k.
What I failed to realize is that the methods that I had learned a decade before, on cars a fraction of the price didn’t apply whatsoever to today’s higher end market. I thought I knew what I was doing on “muscle car flips” but I didn’t have a friggin clue.
$100k flushed on Supercars
In my lust for buying cool cars, I burnt through approximately $100k. This included a Corvette Singray, SRT Viper, Bentley Continental GT Speed, Lamborghini Huracan 610-4 AND a 580-2, Ferrari 458 Italia, and a brand new $350k+ Mclaren 720S. (that Mclaren was a pile of shit). I mean, the losses on these cars might have even been worth it, i don’t know. It was a lot of fun. But it was definitely stupid from a financial standpoint, and the money just evaporated.
Where I ran into trouble was breaking my own rules. I knew that I should buy what the market wanted, not what I personally wanted. I overbet on certain options bringing a premium when they actually did not, and overvalued the exclusive nature of that Mclaren when there were only a few of them on American Roads. I thought i knew what I didn’t.
A Rehab Gone South
I used to be something of a house flipping expert. I got my start in RE flipping houses and knew my game quite well. Turns out I knew a lot about 1,500 sq/ft 1960’s homes, and not so much about 7,000 sq/ft recently built homes.
I moved into my personal dream house with the idea to improve the home and recapture the dollars when I sold later on. Many things had me believing this was possible. Nice comps from around the neighborhood showing my $/SQ/FT was low and could support big ticket improvements on the Kitchen etc. I dumped around $200k on a brand new kitchen, family room, living room, guest bath, and windows. I left for Asia and Europe while the work was being completed and returned to a gorgeous, brand new feeling home.
Turns out my Circle of Competence is much, much smaller than my big ego had led me to believe. Sub Zero and Viking can help sell a place, but the flow of floorplan, fickle and ever changing architectural design styles, and financial market headwinds matter much more to buyers on million-dollar-plus homes than they do on my little starter flip homes.
That transaction left me about $200k lighter than before I bought. Am I learning anything yet?
$600k Given Away to Somebody. Not Quite Sure Who.
I used to be an SEC Registered Stock Broker and Investment Advisor Representative. I worked for Fidelity and for TD Ameritrade. I spent a lot of time dealing with both stocks and options while there. During my career in this field I started to get delusions of grandeur that I knew what I was doing.
Then December 2018 happened. I had pushed several million dollars into an covered call options strategy (one of the very most conservative strategies a person can use). It seemed like each time I went to sleep I would wake up with losses of about $25k- $50k. $50K GONE IN A SINGLE NIGHT. In the space of a single month I had destroyed about $750k of account value, with a slight uptick at the end for a net loss of $600k. I hope I made somebody’s Christmas extra special. It was probably somebody who didn’t really need the extra cash though…
There are many asterisks and side notes that need to be mentioned about this stock market story, like how I’m still in it and still making good money doing it, but without any doubt, I overplayed my knowledge by a long shot. I got cocky and exposed too much of my account to risks that I didn’t fully understand.
Besides paying better attention to the concept of Circle of Competency in an attempt to keep my ass out of trouble, I’ve developed a new heuristic approach for myself: Buy super expensive assets, and rent cheap liabilities. I had already known this concept in theory, but there’s something about burning through a million dollars on pointless junk that will permanently ingrain these lessons into one’s mind.
