Graham’s Newsletter

Three Money Ideas – Smart people can be bad investors

Published about 1 month ago • 4 min read

Hi guys, I'm trying something new this week to give you three bite-sized ideas about money to change the way you think about things and make you a better investor. Let me know what you think!

If you're new here, you can check out all previous issues here and I'll send you a free PDF on getting the perfect credit score when you sign up.

Are smart people bad at investing?

You’ve probably heard this quote before from Einstein: “Compounding is the eighth wonder of the world.” While that can get you motivated to start investing, here’s the bad news: Einstein was a terrible investor himself. He invested a big part of his Nobel Prize winnings into the stock market before the Great Depression, and he lost most of it. He didn’t take his own advice about waiting for them to compound. He wasn’t the only one. Isaac Newton also lost a big chunk of money in the stock market.

In the 1970s, a team at the Ohio State University studied over 7,000 people to answer: Do you have to be smart to be rich? Turns out, every IQ point raises your income by $234 to $616. But it says nothing about your wealth.

In fact, higher IQ actually increases the chances of being in financial difficulty, like:

  • Problems with paying bills
  • Going bankrupt
  • Reaching credit card limits

Wealth isn’t about smarts alone. It’s about financial habits – how much you save, how much you invest, and how well you understand your own pitfalls.

In "The Curse of Intelligence," Ben Carlson writes about how the smartest people both inside and outside the world of finance can be terrible investors – because they don’t see the blind spots in their own arguments and are convinced of their narrative.

The smarter you are, the better you are at constructing a narrative that supports your beliefs, rationalizing and framing the data to fit your argument or point of view.
– Annie Duke

Building wealth has a lot more to do with emotional intelligence than financial intelligence. Patience, realistic expectations, and consistent action play a much bigger role in keeping your money and growing it rather than a moment of epiphany. So if you’re smarter than average, make sure that your smarts work for you rather than against you.

If you liked this story, you can like and share it on LinkedIn here, and on X here.

Why do sportspersons go broke?

Athletes are some of the highest-paid people in America.
Yet, a surprising number of them go bankrupt.
Here’s what I found and what you can do differently:

In 2009, Sports Illustrated estimated that about 60% of NBA players are broke within 5 years of retirement. 78% of NFL players file for bankruptcy just 2 years after they retire. Is this because they don’t know how to handle the money and fame they haven’t received all their lives? Or is it because athletes have extremely short careers compared to the average person who could work till they retire at 60? There’s a bit of both, but there’s a bigger reason.

It’s what Morgan Housel calls “Social Debt”: Sometimes when you’re massively successful, it doesn’t feel like that success is yours – it belongs to everyone who is connected to you, even remotely. Shaq earned $20M on his first paycheck. He bought a car worth $250k. But then his dad asked for a similar car, his mom asked for one, he thought that buying a $7M house was a good idea, he bought gifts for his friends, and by the time he got the call from his accountant that $20M is less than $10M after taxes in CA, he had blown more than $8M.

This could also be why so many lottery winners tend to blow their winnings.

What’s the solution? Forget your friends when you win big?
Not at all.
Your life is rich because of the relationships you maintain, and beyond a point, more money isn’t going to fulfill the search for meaning.
But don’t cave to social pressure either.

Someone who upgrades their lifestyle and tries to lift everyone along with them just cannot sustain it.
A millionaire living like a multi-millionaire and someone making minimum wage trying to live like a millionaire are going to end up the same way – broke.

Instead, live a frugal lifestyle, allow yourself to enjoy good things, and focus on building financial stability.
Help others grow while being clear about your boundaries.
ou can’t help others if you aren’t in a good place yourself.

Maybe this is why Shaq tells his kids “We ain’t rich. I’m rich”. 🤣

This isn’t just good advice for athletes or lottery winners though – Anyone looking to build wealth and trying to hold off on peer pressure can benefit from this approach.

How do you think you would handle a sudden lifestyle upgrade?

If you liked this story, you can like and share it on LinkedIn here.

Why do people play the lottery knowing they have near-zero chances of winning?

The odds of winning the Powerball are 1 in 292 million.
Yet, over 54% of Americans play the Powerball every year.

People think the lottery levels the playing field.
But actually, the worse off you are, the worse it gets. People earning:

  • $75,000 a year spend $105 on lottery tickets.
  • $30,000 a year spend $412 a year.
  • $12,400 or less spend $620 – 5% of their income!

This might seem strange – why would anyone throw away their income on a near-zero chance? But you have to understand how this works.
Powerball tickets start from $2. “Who cares about so little”, right?
If you win the lottery, you could win millions and “change your life”.

Here’s the thing:
If you buy a ton of tickets, the odds of winning remain NEAR ZERO.
But the dollars you spend would pile up into the hundreds.
It’s easier to see the shining promise of a lottery but difficult to imagine how those dollars could compound to create wealth.

The lottery is the most relatable example.
But speculation of any kind can have the same effect, like picking the “winning stock” instead of indexing, or trying to time the market.
If you think your hobby is harmless, ask yourself:
How does it add up over the years?​

If you liked this story, you can like and share it on LinkedIn here.

That's it for this week. I hope you enjoyed this article. Let me know your thoughts about this new format by responding to this email - I read every single comment :)

Stay safe, stay invested and I will see you next week – Graham Stephan.

113 Cherry St #92768, Seattle, WA 98104-2205
Unsubscribe · Preferences

Graham’s Newsletter

by Graham Stephan

A 33 year old real estate agent and investor with over $120M in residential real estate sales. This is my way of sharing actionable ideas that will make you a smarter and wealthier investor.

Share this page