What to do When You’ve Hit the Jackpot
There’s Good News, Bad News—and Even Worse News
Congratulations!
You’ve just made a windfall profit―one of your stocks has just turned into a 10- or 20-bagger.
Or perhaps you’ve won first prize in a multi-million dollar lottery. Or a rich uncle you didn’t even know you had just died and left you his fortune.
Unlikely?
That’s the problem.
Come payday, you know how much you’re going to put in your wallet and you’ve got a pretty good idea of what you’re going to do with it.
Nothing to get really excited about.
An unexpected windfall―whether it’s $10,000 or $10 million―is a different story.
Suddenly, you feel like you’re swimming in enough money to make all your dreams come true.
Unless you missed it!
How can you tell when one of your investments has just hit the jackpot?
If you’ve won the lottery it’s easy: just cash in your ticket.
Otherwise: not necessarily so simple.
For example, many years ago a friend of mine, Vince, developed a backup battery to help cars start on cold mornings.
Car batteries were nowhere near as good back in the ’70s as they are now. Vince figured there’d be a great market in places like northern Europe, Canada, and the northern United States where freezing winters often meant cars were hard to start on cold mornings.
The giant battery maker Eveready agreed. They offered him $500,000 for the invention.
Did you ever hear of such a battery?
Of course not—because Vince turned down Eveready’s offer. Figured he’d make a lot more on his own . . . but he never got it off the ground.
A while later I introduced Jack, another friend of mine, to a stock promoter I knew in Vancouver. My friend had just started a business called Restaurant Express. It had one location in southern California, and he planned to franchise it nationwide.
Restaurant Express was unique at the time: “Uber Eats” thirty-odd years before anyone had thought of Uber.
The stock promoter thought it was such a great idea that after a mere fifteen minute conversation he offered Jack $5 million on the spot for 50% of the business—with no “due diligence” whatsoever!
An offer that, it seemed to me, was a clear winner . . . for Jack.
But to Jack this just confirmed the value of his idea. Positive he could make a lot more money than that, he decided to do it on his own.
Just a year later, Restaurant Express still had just one location—and was barely above breakeven.
At the height of the dot-com boom James, another businessman I knew, was offered $3 million for his company. Convinced it was worth a lot more, he—like my other two friends—turned the offer down.
These are examples of what I call “windfall profits.” A windfall profit is like winning the lottery. Something completely out of the ordinary happens to drive up the price of your investment—but quickly evaporates if you don’t grab it immediately.
The question is: Can you recognize a windfall when it happens?
My three friends couldn’t—and they’ve all regretted their decisions not to take the money many, many times since.
The trap is that you can interpret a sudden jump in the value of your investment as proof of all your expectations. After all, if your stock just doubled more or less overnight, surely this can only mean there’s more to come . . . ?
Maybe.
How can you be certain? After all, the last thing you want to do is to take a profit just because it’s there—and then see it double or triple again.
To make the distinction you need to figure out why your investment has zoomed up. If there’s been some dramatic improvement in the business—or if Wall Street has just recognized the value you saw in this company—then maybe there’s more to come.
But if the cause is some extraneous factor, then it’s probably time to take the money and run.
For example, during the late 1990s internet boom I owned shares in a Hong Kong company that rented out exhibition equipment . . . booths, signs, and all the other stuff you see at trade shows. I’d bought it because it was a solid, stable, and very boring business that was throwing off steady profits and dividends.
One day I checked the price and noticed that it had gone from a dollar to around $2.50 per share. Unfortunately, a few days earlier it had been over $3.
I quickly found out that the reason for this jump was that the company had been talking—just talking!—to an American outfit about putting its business on the internet.
How could putting up a website suddenly double or triple the number of exhibition booths this company could rent out?
Clearly, impossible.
All that had happened was that the suckers caught up in the “sex appeal” of the internet boom suddenly piled into this stock.
So I called my broker and immediately dumped all my shares. A few months later they were trading at less than I’d originally paid for them.
Thankfully, it was clearly obvious to me that this was a windfall profit.
Jack, Vince, and James weren’t so lucky.
When Jack turned down the stock promoter’s offer, Restaurant Express was close to break-even.
Unfortunately, Jack didn’t think it through.
Restaurant Express at the time was a one-man band—with several employees answering the phone and passing orders to the restaurants. Plus delivery guys.
Franchising nationwide would require capital. That $5 million Jack turned down would have given him the money to grow. And a listing on the Vancouver or NASDAQ stock market would have ensured even more capital in the future.
Plus: Jack would need help from experienced management staff to make that growth possible. Assistance he could afford to hire . . . only if he’d accepted the promoter’s offer.
Jack didn’t assess his own weaknesses: he was good at starting businesses; and running them when the only assistance he needed was for simple, repetitive jobs (like answering the phones and making deliveries).
As I outlined in How to Spot the Next Starbucks, Whole Foods, Walmart or McDonald’s—BEFORE its shares explode, one essential “ingredient” for a startup business to succeed and grow is two or three partners whose strengths compensate for the others’ weaknesses.
No one-man band has made it to the S&P 500. Let alone the Dow Jones 30.
Unfortunately, Jack was very good at starting businesses—but hopeless at developing and running them.
Vince’s and James’ businesses were virtually non-existent.
All Vince had was a deal with the inventor of the battery. He had no experience in the battery-making business. And to complicate matters, his target market was pretty much everywhere within three thousand miles south of the North Pole.
While he was based in Australia.
Hardly a surprise that his winning idea (confirmed by Eveready) went nowhere.
While all James’ company owned was an internet domain name. Plus a website that was in startup mode. Zero profits so far.
Basically, the buyer was willing to pay $3 million for an internet domain name plus website that had cost James less than $1,000 to set up.
So the potential buyer simply started a similar operation—with a different (but similar) domain name—which (backed by $3 million+) put James out of business.
These three (sad) stories have several things in common:
1. They confirmed (in spades!) the founders’ expectations; and,
2. Neither Jack, Vince, nor James “did the maths”: figure out what it takes to turn a startup into a potential Fortune 500 company.
3. Nor did they consider alternatives. Like: what else could you do with $500,000 or $3 million? At just 2-4%, $3 million in a bank would return $60,000 to $120,000 per year!
Had they “done the maths” they would have realized their only option was to take the money.
The saddest thing about windfall profits like these—potential or actual—is that they don’t happen very often. I wish I had more than one to talk about.
But I don’t.
As I said, it’s like winning the lottery. Chances are, if it ever happens to you it will be a once-in-a-lifetime event.
But I’m certainly ready to grab the next one that comes my way . . . if it ever does. And I hope you will be, too.
If you manage to avoid the mistake my three friends made, the first thing you need to know about banking a windfall is:
It May Never, Ever Happen to You Again
Maybe it will. But until that happens (if it ever does) you’d do better to treat this as the only chance you’ve got. The only chance you’ll ever get.
Will you make the most of it?
Or will you be like three out of four lottery winners who are bankrupt within 5 years.
That’s right.
About 65% of all people who win big money like you just have are poor in fifteen years or less.
Not just poor, but often worse off than they were before they won the lottery.
How can that be possible!?
I know. This is the last thing you want to think about right now.
Having just cashed in your windfall, I’ll bet you’re figuring on heading down to the pub tonight and buying all your mates a round or ten of drinks.
Hey, you could even buy the pub itself. (Probably a better idea!)
Or stop by the jewellers to pick up that diamond necklace or the latest Louis Vuitton bag you or your wife have been coveting ever since it appeared in the store window.
And tomorrow, maybe you’ll book that Caribbean cruise, round-world ticket (first class, of course), or try your luck in Monte Carlo, not to mention that Porsche, Bentley, or seaside weekender you’ve always lusted after.
Stop right there!
Because you’ve just answered the question of how people like you with sudden wealth end up bankrupt. Like you, the very first thing they did is blow a nice chunk of it.
Then they blow some more.
The problem for people who spend money like there’s no tomorrow is:
There’s always a tomorrow.
It all comes down to your “Money Personality”: are you a Spender, a Maker, or a Keeper?
Everybody knows how to spend money. None of us need lessons in how to do that.
Quite a few people make money.
But not everybody who knows how to make money knows how to keep it.
Michael Jackson: a Maker, not a Keeper
His lifetime earnings: over $500 million. But died with $400 million in unpaid debts
How? He spent $20 to $30 million a year more than he earned.
As the news of your windfall gets around, you’re going to be surrounded by sharks. Aside from relatives and friends you never knew you had who suddenly need your help, you’ll be hounded by financial advisers with spectacular schemes to double your money in no time at all.
When this happens, remember Will Rogers’ sage advice: “The best way to double your money is to fold it in half and put it back in your pocket.”
If you can’t resist such requests and offers, and keep a lid on your own desires for instant gratification, you’re a Spender.
Roger Griffiths won £2 million in Britain’s National Lottery in 2003
Ten years later had just £7 to his name. £2 million to just seven quid?
It’s easier than you think.
Roger Griffiths is not alone:
19 Lottery Winners Who Blew the LOT!
Become a Keeper and keep your name off this list!
I suggest that instead of heading down to the pub tonight, you go to the supermarket, buy a bottle of expensive champagne, and head for home. Then celebrate with your partner by thinking about how much better the rest of your life is going to be if you can:
1. Keep it, and
2. Make it grow.
“Die Rich” may seem like a crazy goal. Especially if you’re nowhere near retirement age. But if you make that your aim, over the years to come you’ll end up having MUCH more than your windfall to spend—though not all at once. And not today or even tomorrow.
If you’ve got this far in this book, then you’ve probably got a good idea of what I’m going to suggest you should do if you ever make a windfall profit.
By all means treat yourself. But only with a tiny portion of the money that’s just landed in your bank account.
Add the rest to your Money Tree.
Or if you haven’t managed to create one yet, this will probably be the best opportunity you’ll ever have.