9/26/2023: How to Be Broke as a Billionaire

It’s easy. Say you started with $1B worth of concentrated stock positions in 2021. You feel so rich. You bought a $25M estate in Atherton. You decided you don’t want to pay the astronomical amount of capital taxes. Instead, you bought the property with a margin loan against your $1B stock at a 0.75% interest rate. Property taxes, utilities, cleaning, maintenance and upgrades will run about $1M a year but it’s nbd. As a billionaire, in addition to the Atherton estate, you have to get a beach house in a fancy place like Malibu for another $20M and another million of costs. I understand you are not a yacht person so we can leave that. But you are a billionaire. Time is money and privacy is very important so let’s get that Gulfstream G650 for $65M, which costs another $3M a year to operate. 

Now, with two giant houses and a fancy plane, you need to establish a family office to help with your daily life. You need at least two assistants, a CFO, a bookkeeper/tax accountants, an army of investment professionals to help manage your vast fortune, a philanthropic team to help launch the climate initiative you have always wanted to do. Let’s make the operation efficient and just spend 50 basis points a year or $5M a year on the family office. With the infrastructure set up, let’s not forget the day-to-day personal expenses such as meals, hotels, cars, entertainment, shopping, etc. But those are relatively cheap. Plus, you are a naturally frugal person. Uniqlo is as good as Loro Piana.  Let’s budget $1M a year for day-to-day expenses. Overall, the basic billionaire lifestyle cost $11M a year plus interest expenses.

Life was good until the value of the concentrated positions crashed. Relatively speaking it was not that bad, the portfolio only crashed 70%. The pile is now worth $300M instead of $1B. But there’s $120M worth of loan against it and the loan balances are growing $20M a year as the margin loan interest rate is now 6.X% and inflation drove up the holding costs of the houses and the plane. The bank will probably let the loan balance run up to ~$200M if the stock price doesn’t go down further. But let’s be honest. The billionaire lifestyle as-is is no longer sustainable. If nothing is done, the stock could be liquidated and the portfolio could be zeroed out. The silver lining here is that you didn’t make any substantial investments into illiquid tech startups during the 2021/2022 bull run. Otherwise, the hole could have been deeper. It’s also fortunate that the climate initiative is still in the research phase so the $100M donation you mentally budgeted can be put on hold for now.

Is it too late to diversify? If you were not so fixated on billionaire status and sold the stock when it was worth $1B, after taxes and the giant purchases, you still have a $500M pile that you can put into a well diversified portfolio. With no debt, your $11M a year lifestyle is totally affordable. But now, you have to make some hard choices.

Let’s say you liquidate your $300M pile now. ~$100M goes to taxes so you have $200M left to live with. With 4% withdrawal rates, that’s $8M a year, which is barely enough to cover the interest expenses and there’s still $11M of annual expenses to cover. Your principal could be drained in 10-20 years. Damn, you are now broke! You have to adjust your lifestyle to make it work.

So what to do now? If I were you, I would pay off all the margin loans first. That would leave me with $80M of cash and peace of mind. I would then sell that Gulfstream at a loss (say $40M) and I would just charter going forward. This would reduce the flight cost to $1M a year without jeopardizing the private flight experience. With a $120M pile, a full-fledged family office seems excessive. This is a very hard decision but I would layoff everyone except for the two assistants and the tax accountant/bookkeeper. This would reduce the family office expense to $1M a year. With this adjustment, the annual burn is now $5M a year. With the $120M pile, it’s pretty close to the 4% withdrawal rate. But because the annual burn is so close to the 4% rate, the money needs to be invested conservatively and prudently, i.e. treasury bills and index funds. Forget about investing in illiquid alternative investments unless you are so passionate about it that you would sell that Malibu beach house to do it. One of your fellow billionaires overdid the illiquid startup investments during the boom and is now trying to liquidate his bag at a deep deep discount. I do think it makes a lot of sense to sell that Malibu beach house you barely use to fund the climate initiative. You kill two birds with one stone by reducing your personal carbon emissions and investing in removing CO2 from the atmosphere.

Wait, what? You want to sell both houses and move back to your 2400-sqft house in Mountain View. Why? What’s wrong with the Atherton estate? It looks nice but it’s too big and cold and inconvenient and too many random people going in and out the house all the time. OK. I hear you. I am glad you learned more about what you really want in life. Rid all the possessions that weigh you down and start over.

You could have done better. But perfection is the enemy of progress. I am sure you grow older and wiser after the roller coaster. Maybe next time don’t use the margin loans and don’t buy the plane. You made it to the top 0.01%! and you are in a much better mental space now.

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This story is completely made up. Thanks for reading.