October 21, 2014

Lessons from a Castle in the Clouds

While on our vacation to the Northeast seeking out beautiful fall leaves, quaint bed and breakfasts, and scrumptious cider doughnuts, my wife and I also paid a visit to Thomas and Olive Plant’s mountaintop estate, Lucknow. The old residence was impressive, but the views were truly breathtaking; hence the more commonly heard name, Castle in the Clouds.

As we learned from our tour guide, Thomas Plant’s story was initially a fairy tale. Thomas did more than achieve the American Dream as he rose from a relatively poor immigrant to a millionaire shoe manufacturer with a castle in the clouds, literally. Unfortunately, though, there was not a happily ever after. Thomas Plant committed three very common financial mistakes that would consume his hard-earned wealth and leave him at the mercy of his creditors on his deathbed.
  1. Lack of Diversification – I cannot reiterate how important it is to not have all of your eggs in one basket. For whatever reason, as a fifty-one-year-old retiree with more money than he could have ever imagined, Thomas Plant decided to put a lot of his money into one thing, Russian bonds. His timing could not have been worse. In 1917, the Russian Revolution would forever change the fabric of Russia, and also cost Thomas Plant most of his investments.
  2. Losing at Poker Mentality – You know how when you are already losing at poker you often find yourself betting more aggressively in hopes that you will recoup your losses? Well some of that typical behavior seems to carry over into the investment world. Thomas Plant was probably more than a little miffed about his Bolshevik bond returns (or the lack thereof), so he decided to double down by investing a lot of the money he still had in sugar futures. Don’t understand sugar futures? Don’t feel bad; neither did Thomas Plant! He had already lost a considerable amount of money, so he decided to invest even more aggressively with the hope of making his money back. That doesn’t usually end well.
  3. Too Much Real Estate – I may have some dissenters on this one, but I think it’s important to realize that real estate is not exactly an investment. Real estate is land, a house, or a building. Historically, it often goes up in value over a long enough period of time, but not always. Real estate is not as liquid as cash or stocks and bonds, so someone cutting it too closely financially with too much invested in real estate could very well find themselves trying to sell at an inopportune time or when they don’t want to.  Real estate can also require debt, upkeep, insurance, and property taxes. Even if you are renting your real estate to someone, these expenses can be a hole in your financial bucket, slowly draining away your wealth. Believe me when I tell you that Thomas Plant’s house was awesome. It had a pool table, a knight in shining armor, a long driveway, and even a secret passage, but it also chewed up a considerable portion of his net worth to build and maintain. After his bond debacle and failed “all in” with sugar futures, Thomas Plant didn’t have much more than his house. Try as he did, he couldn’t sell his house when he needed to (as the Great Depression was in full swing), and Lucknow was eventually auctioned off. His creditors happened to be friends, so they were kind enough to let him live in his Castle in the Clouds until he died, but according to our tour guide, the bank actually changed the locks before Olive Plant got home from the hospital the day her husband died!
Thomas Plant seemed like a nice enough guy. He did a lot of things right, but he also did a few things wrong that cost him dearly. Please don’t let any of the mistakes Thomas Plant made cost you your castle, wherever it may be.

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