I'm working on a new book — the working title is New Money Mistakes: True Stories of the Biggest Mistakes People Make After Getting Rich.
For it, I've interviewed more than 30 people who came into serious money suddenly. A business sale. An inheritance. A stock payout that finally became real. For each one, I asked the same question: what's one big mistake you made after you became suddenly wealthy that you're willing to share anonymously, so somebody else doesn't make the same one?
What follows is one of those chapters. The book is a collection of stories just like it — real mistakes, real numbers, shared anonymously, because almost nobody warns you about this stuff before it happens to you.
I shared one of them a couple of days ago: a founder who sold his company, started angel investing, and watched $3 million go to zero because he never decided, up front, how much he was willing to lose.
Don't Let the Tail Wag the Dog
Never let a tax write-off talk you into an investment you wouldn't make without one.
Meet Rachel. She and her husband inherited several million dollars after her father-in-law's passing and, on the advice of their financial advisor, went looking for investments that could reduce their family's taxable income.
After we received the inheritance, we went looking for investments that could reduce our family's taxable income.
About a year in, we were pitched an investment in an oil and gas fund. The pitch: put in $100,000 and get almost $100,000 in tax deductions the first year.
To seal the deal, this wasn't a stranger cold-calling with a pitch. This was our trusted financial advisor. He told us he'd been in their previous fund himself for two years and was a "partner" on the new one. He said he'd vetted the operators, seen their books, seen their bank accounts. He'd even flown down and walked the operation. It's all real, he told us.
Beyond pumping gas into our cars, we knew nothing about oil and gas. But our trusted financial advisor was vouching for it, and it came with exactly the tax deduction we'd gone looking for. So we did no due diligence of our own.
We wrote the check. $100,000.
Four months later, our financial advisor contacted us with news. The entire operation was a Ponzi scheme, and the money we'd invested was gone.
For a long time we thought the lesson was about trust. It's really about letting the tail wag the dog. Our focus was on getting the tax deduction, with almost no attention on the actual underlying investment. Looking back, we should have put all our effort into finding a good, solid investment and treated the tax deduction as a bonus.
These days when we invest, the dog wags the tail. We evaluate the investment first, as if the deduction didn't exist. If it's still something we'd want to own without the tax benefit, the tax benefit is a bonus. If we wouldn't want it without the write-off, that's the answer. The write-off doesn't get a vote.
A tax deduction is not a return. It's a discount on the price of admission to an investment that still has to stand on its own. Nobody hands you a legitimate deduction for free. Somebody wants you in the deal badly enough to dangle it in front of you, and the size of the deduction is not evidence the investment is good. If anything, an unusually large write-off should make you slow down, not speed up.
So if a deal shows up with a big tax deduction attached, separate the two questions. Would you make this investment, at this price, with this operator, if there were no tax benefit at all? Answer that one first. Only after you have a real yes do you let the deduction sweeten the deal. If you can't get to yes without the write-off doing the convincing, you already have your answer.
Don't let the tail wag the dog.
What do you think? Would you want to see more of these? Tell me in the comments.
Come into sudden wealth yourself, or know someone who has? If there's a story in it that could help someone else avoid the same mistake, and you're willing to share it anonymously, get in touch.