The Prospecting Professor

Billionaire on a Budget

In the latest "New Yorker," there's a funny cartoon. Actually, there are funny cartoons in ALL "New Yorkers", yet I am referring to one specifically.

Two executive-types are sitting next to each other. The setting appears to be some tony mens-club, and both men seem rather smug. One says to the other, "I have my pants put on...one leg at a time." Which is a lead-in to today's tale.

Larry Ellison is the co-founder and CEO of Oracle. He is also one of the world's richest men...with a net worth of around $17 Billion, most of it in Oracle stock.

He is also perennially over-extended.

In a series of emails, obtained by the San Francisco Chronicle, that were ordered unsealed by a judge in a shareholder lawsuit...a number of embarrassing details were revealed regarding Larry Ellison's personal finances.

In 2002, Philip Simon, Ellison's personal financial advisor wrote, "I'm worried, Larry. I think it's imperative that we start to budget and plan."

Why would Mr. Simon be concerned?

Larry Ellison appears to have runaway spending habits...and habitually taps out his $1 Billion+ line of credit. According to deposition testimony, Mr. Ellison's itemized expenditures included: interest accrual-$75 million annually, a villa in  Japan-$25 million, a new 244-foot motorized yacht-$194 million over three years, "lifestyle"-$20 million annually, etc.

Mr. Simon goes on to scold Mr. Ellison, "I know this e-mail may/will depress you. However, I believe it's my job to address issues you'd prefer not to confront. You told me years ago that it's OK to raise the 'diversification issue' with you quarterly...Well, I'm doing so. View this as a call to arms."

Simon goes on to say, "We have a freight train going down a track, hitting a debt wall."

Let me stop and say something. Kudos to Philip Simon for his candor in this situation. Not only is Larry Ellison one of the five richest persons in the world, yet he's also known to be the archetypal, hard-charging, 'Type A', CEO-type personality. It takes some chutzpah to speak to your Mr. Bigshot client like this.

In a famous exchange between F. Scott Fitzgerald and Ernest Hemingway, Fitzgerald was reputed to say, "The rich are different from you and me." Hemingway's glib response, "Yes, they have more money."

And if you are Larry Ellison...you also have $75 million in annual interest payments.

By the way, in the aforementioned shareholder lawsuit, Ellison agreed to settle by donating $100 million to charity and to pay $22 million to the lawyers, out of his own pocket.

If you are interested, Philip Simon works for Howson & Simon, a boutique CPA firm based in Walnut Creek, CA...if you want an accountant who's not afraid to lay it on the line.

"It's not easy being a billionaire."

Yesterday, Tamir Sapir, a former cab-driver who struck it rich in Russian oil, and used the proceeds to invest in Manhattan real estate...signed a contract to buy a Fifth Avenue mansion for $40 million.

Said Mr. Sapir on his purchase, "I don't know if it's a bargain or not, but it looks like a bargain."

Tamir Sapir has a past that is best described as "colorful." A former journalism student, Mr. Sapir left the Soviet republic of Georgia in 1973 with a tourist visa to Israel. After stops in Germany and Louisville, Kentucky, he settled in New York in 1976. His first job in New York City was driving a cab. Eventually, he saved enough to make a down payment on his own medallion (the process in NYC that enables one to purchase their own taxi)...and then borrowed against the medallion to open an electronics appliance store on Canal Street that catered to Soviet diplomats. Selling Zeniths and other American goods to product-starved Cold Warriors won him favor with the men who would later become the moguls and shakers in the former Soviet states.

These connections gave him entree into the business of shipping Soviet oil to American companies. Sapir expanded his wealth during the recession of the early '90s, when he bought  2 Broadway in lower Manhattan for $20 million in cash. At the time the property was considered "unrentable...then the dot-com revolution hit, commercial property rates soared, and 2 Broadway's value climbed to $300 million.

In 2001, Mr. Sapir was involved in a nasty divorce from his wife of 29 years, Bella.

In one incident, Mr. Sapir was ordered by a judge not to spend more than $100,000 at a time without notifying the court. However, Mr. Sapir did just that when he stopped at an Atlantic City casino while sailing his yacht to Florida from his 11-acre estate on Long Island. Lady Luck smiled on Mr. Sapir as he returned to his 160-ft yacht with $1.14 million in winnings. The judge determined that since Mr. Sapir had deposited his winnings in a joint account, he could not be held in contempt. No harm, no foul...so to speak.

The judge also refused to find Sapir in contempt for buying himself a new Bentley, because he also purchased one for Bella, the mother of his three adult children.

The price that Mr. Sapir paid for the 1901 Beaux-Arts mansion, on the corner of 82nd Street and Fifth Avenue, is the highest ever paid for a Manhattan town house...although it is less than the original asking price of $50 million. The building is the former residence of the late tobacco heiress, Doris Duke. It has 11 marble fireplaces, three elevators, gold-leaf trimmed fixtures, and a sweeping brass-and-wrought-iron staircase. Mr. Sapir plans to use the bottom five floors as a gallery to showcase his art collection. He is a collector of sculpture and European ivory. He is considering moving into the penthouse on the sixth and seventh floors with his companion, Elena Ponomareva, and their 2-year-old daughter.

"It's not easy being a billionaire," Tamir once said.

The Psychology of Happiness

One year ago, James Montier, global equity strategist for Dresdner Kleinwort Wasserstein, made waves with his report, "The Psychology of Happiness". His ten recommendations were:

1. Don't equate happiness with money.
2. Exercise regularly.
3. Have sex...with someone you love.
4. Devote time and effort to close relationships.
5. Pause for reflection.
6. Seek work that engages your skills.
7. Give your body the sleep it needs.
8. Don't pursue happiness for its own sake. Enjoy the moment.
9. Take control of your life. Set achievable goals.
10. Remember to follow all of the rules.

This last week, he continued his 'happiness' theme with the following report to Dresdner Kleinwort Wasserstein clients. His central observation was to cite a mass of evidence that suggesting that spending resources on experiences, e.g. walking the Machu Picchu trail in Peru, seemed to make people happier than spending on material possessions.

"Materialistic pursuits are not a path to sustainable happiness. A mass of evidence shows people who have more materialistic goals are less happy than those who focus on intrinsic aims such as relationships or personal growth. Spending on experiences rather than possessions seems to make people happier."

Moreover, materialistic goals may even cause dissatisfaction with life and mental disorders, such as paranoia.

Some caveats to this observations. 1) Basic needs must be met, which require a certain threshold of assets and income. 2) Some of the experiences that he refers to require money, i.e. legal tender.

Still, it is nice to hear a prominent equity strategist dispense information that might be regarded as heretical...within the financial and investment world.

Counter-factual Happiness

Do you have clients who are, by any objective measure, very affluent and successful...yet who are simply not "happy?"

Some of this may be explained by the fact that academic psychologists and economists have observed that substantial increases in wealth are NOT accompanied by similar rises in well-being, and have explained this paradox by a human tendency to compare themselves asymmetrically. In other words, they focus on not where they've come from...but those who are still doing better than them.

This tendency has also been observed among athletes. Following the Barcelona Olympics, a team of psychologists led by Virginal Medvec of Northwestern University, discovered that bronze medalists appeared "happier" than silver medalists. The psychologists postulated that the silver medalists were plagued by thoughts of, "I almost won the gold," while the bronze medalists were happy that they medalled at all.

The emotional reactions of these athletes were fundamentally driven by comparisons with the most easily imagined outcome, and is referred to by psychologists as "counter-factual" thinking. Moreover, we are all susceptible to this during the course of our daily lives. This mental habit could be the determinant of how content we are with our lives.

Many studies on wealth and income find that is is who we compare ourselves with, rather than what we objectively have that determines our overall perceived financial well-being. It is our choice of reference group that becomes crucial in determining happiness.

There have been some intriguing exceptions to the "counter-factual" thinking hypothesis. In unstable economies, like Russia for example, individuals take the references point of the wealthy, not as a discontented comparison, but as an indicator of their possible future. In certain economies, individual observing richer people around them take this as a sign that their own income may increase.

You may, or may not, want to mention these points the next time that you get a call from one of your wealthy, yet gloomy, clients.

Have a great weekend! Ciao.

Are the "Rich" Different?

In a famous, oft-quoted exchange between F.Scott Fitzgerald and Earnest, Fitzgerald is purported to say, "The rich are different from us." Hemingway's response, "Yes...they have more money."

Recently, two authors have discussed the "affluent marketplace" in interesting ways, and I wanted to comment on both.

Matt Oechsli's new book, "The Art of Selling to the Affluent: How to Attract Service, and Retain Wealth Customers and Clients for Life", discusses the buying patterns and expectations of the wealthy. (link to publisher's page) Some of his observations:

• Most affluent individuals are self-made, work 60 hours per week, and make decisions based on careful evaluation.
• Many salespersons do not understand the affluent, try to sell them too hard, and come across as 'salespeople'.
• The affluent are very price-value conscious.
• To retain the affluent with repeat business, the two most critical ingredients are quick problem resolution, and high-level personalized service.

Bill Nicklin is the founder of Horsesmouth, and an advisor who manages hundreds of millions of dollars. In his column today entitled, "20 Ways to Convey Your Value Without Scaring Off HNW Investors", Nicklin outlines tested strategies for reinforcing an advisor's value and how to win over high-net worth investors before the "pitch" is made. Among Nicklin's suggestions:

• Invite to an annual shareholder meeting
• Invite to listen in on an earning's conference call of a company in an area of mutual interest.
• Send a book that reflects the advisor's outlook.
• Invite on a plant tour of a local company that is of interest, or to a tour-day event sponsored by a local chamber of commerce.

Oechsli and Nicklin have some differing perspectives on some important sales-related topics. Oechsli feels strongly that many salespeople end up selling affluent investors too aggressively and leave a distasteful 'salesy' impression. Nicklin is more of the old-school. He believes the word "salesperson" is not necessarily a pejorative, and that salespersons cannot exist as namby-pamby milquetoasts. In his view, every advisor must have the courage of their convictions, and the ability to forcefully communicate their world view to all investors (especially the affluent). In Nicklin's eyes, investors need to be sold on something about what the advisor brings to the table, otherwise where's the differentiating value?

In some ways, the perspectives of each of these authors may not be all that different from each other...more of a semantic split. I'm sure that Oechsli would agree that advisors must "sell" potential investors on the value that the advisor will bring to that relationship. Is this "selling"...even if the advisor is not selling a tangible product?

I think it is selling...and that's not a bad thing. When you get right down to it, we are all selling something...however, some of us just don't know it.