The costliest mistakes are the same ones billionaires and everyday people both make: trusting a sweet talker, skipping due diligence, chasing sunk costs, ignoring your instincts and red flags, and putting too much weight on other people. The video starts from a simple idea: billionaires are just like you, one successful venture from winning big, and one big mistake from losing everything. The bigger the bank account, the harder the fall.
It also notes that mistakes leave a stain on the brain, but we tend to focus on guilt and embarrassment more than on the missing pieces. Without a strategy for learning from them, you will not learn. Here are 15 examples worth studying before they happen to you.
Watch the full video here, or skip to the breakdown below.
The 15 mistakes at a glance
- Getting sweet-talked into a sour deal (1:47)
- Not having enough time to do your due diligence (2:54)
- Falling victim to the sunk cost fallacy (3:59)
- Nickel and diming over the big picture (4:54)
- Ignoring your instincts (6:01)
- Not filing your taxes properly (7:05)
- Signing a contract you have not read (8:08)
- Not knowing your why in buying and investing (8:49)
- Violating the terms of an insurance contract (9:44)
- A one-night stand with no protection (10:21)
- Not understanding how important attention to detail is (11:57)
- Playing Russian roulette with addiction (14:26)
- Disregarding red flags instead of turning around (15:39)
- Choosing cash over equity (16:57)
- Depending too much on other people (18:19)
1. Getting sweet-talked into a sour deal
Nobody thinks they would fall for the story of a rich long-lost relative, but the script says more than 50% of people exposed to scams fall for them. It might be a guaranteed 20% return on stocks in a few months, or a deal nobody else knows about.
It describes how investors in Theranos thought they were backing faster, cheaper and more accessible healthcare. The company was valued at $9 billion and they poured in $700 million. The technology never worked, and when the truth came out, investors lost everything. Rupert Murdoch alone lost $125 million.
2. Not having enough time to do your due diligence
If you were offered a 30% raise at another company on the condition that you start immediately, most people would take it. But what if the company goes under six months later and you are out of work with no severance?
That is the shape of what happened to billionaire investor Masayoshi Son, who lost $11.5 billion and his credibility when he rushed into WeWork. A closer look at its financials would have shown a company drowning. After its IPO failed, valuation fell from $47 billion to less than $8 billion.
Double-check the important details before any big decision.
3. Falling victim to the sunk cost fallacy
Imagine finishing your first semester of college and realizing you hate the course. You have already put in months and money, so you push on. Four years and about $108,000 later, you find the jobs you qualify for will not even cover your student loans.
Rupert Murdoch had his chance to turn back after buying MySpace in 2005 for $580 million. As it declined, he kept investing more, then sold it six years later for $35 million, a loss of $545 million.
Warren Buffett is quoted: when you find yourself in a hole, the best thing you can do is stop digging.
4. Nickel and diming over the big picture
Would you trade $230,000 to save $1,000? It happens like this: you negotiate a $300,000 house down to $295,000, then haggle over $1,000 of minor repairs. The seller gets frustrated and walks. Ten years later the house is worth $400,000, and after another ten it is $530,000.
Richard Branson has described a time when he fought over small amounts, like travel budgets and office furniture, and lost sight of the big picture. Competitors invested in stores and marketing and outpaced Virgin in retail music.
5. Ignoring your instincts
Consider what marrying the wrong person can cost. A wedding and a standard divorce come to about $50,000, legal battles can push it to $100,000 or more, and then there may be child support, alimony and half your pension. You also lose time, energy and self-esteem. And you knew. You had the gut feeling and ignored it.
Businessman Tony Hsieh has talked about losing $350 million after ignoring his gut. He wanted to revamp downtown Las Vegas as a tech hub, but problems showed from the start. Businesses came and went and the vision never took off.
Idealism is fine, as long as it is balanced with being practical.
6. Not filing your taxes properly
According to the script, the IRS loses about $496 billion because people do not file at all, on time or correctly. Every time, you face fines, penalties, back taxes and interest. You also need these reports for a mortgage, business loans and immigration documents.
Actor Wesley Snipes learned it the hard way. He is not a billionaire, but he had to pay more than $23 million in back taxes and went to prison for three years. By his account, his accountants had advised him that due to a complex legal theory he did not have to pay federal income tax.
If it is in your name, you pay the price.
7. Signing a contract you have not read
After accepting so many online agreements, reading a 20-page contract in legal jargon seems silly, so you sign. You have done it for years and lost nothing, so what is the big deal?
Until you want out of a gym or cell phone contract and the cancellation fee is $300. Or you buy a $20,000 timeshare and then owe thousands extra in yearly maintenance fees.
At some point, not reading the contract costs more than the time it would have taken to read it.
8. Not knowing your why in buying and investing
Buy $5,000 of Nvidia shares in early 2016 and sell a few months later and you would have made about $16,000. Held until today, the shares would be worth more than $65,000. Put $5,000 in Snapchat in 2017 and it would have grown to $8,000 within months, but held until today it would be worth $3,000.
So how do you know when to sell? Mark Cuban says he makes sure he knows why he is buying a stock and holds until he learns that something has changed. If the logic that made him buy still stands, he does not sell, whatever the price does.
9. Violating the terms of an insurance contract
Insurance is a long-haul commitment. Once you start paying, you are committed, and defaulting just once can erase everything you put in.
A storm damages your roof and repairs cost $15,000. If your insurance was up to date, you would only pay a $500 deductible. Even the richest people stumble on this sometimes.
10. A one-night stand with no protection
What should one night of fun cost? Costs it lists include a lifetime commitment, $200,000 in child support or half a million to a million as a single parent. One careless decision without a safety net can derail financial goals and the rest of your life. You think you are letting loose, but you are merging with someone you do not really know.
A billion-dollar deal is not a fair comparison, but the video makes it anyway. In 2000, AOL and Time Warner merged in a deal valued at $165 billion. AOL had internet dominance and Time Warner had vast media holdings. The deal was rushed, both sides saw dollar signs instead of warning signs, and the dot-com bubble burst. AOL’s value plummeted. It is still considered one of the worst mergers in corporate history, with around $200 billion in losses over time.
11. Not understanding how important attention to detail is
In some jobs one missed detail costs thousands, so people check everything twice. In jobs that do not touch the bottom line directly, people grow complacent. Yet any position with responsibility can produce expensive mistakes that cost the company thousands and you your job.
Examples given include a payroll integration that paid everyone a full annual salary at once instead of their monthly pay, a construction worker who dropped a $10,000 marble countertop on brand-new floors, and an order with one or two extra zeros.
Billionaires have more freedom here because experts are paid solely to watch the small things for them. Mistakes cost money, so pay attention to the details.
12. Playing Russian roulette with addiction
The warning that drugs will destroy your life is not true for everyone, since some people come out okay. The problem is that it is like Russian roulette: you do not know if you will be the one who gets addicted, and then sobriety is a long, hard road. The script says millions of people still struggle with addiction despite the warnings, and the odds are not worth it.
People are drawn to dopamine hits. For some it is food, social media, video games or shopping. None of these is good in excess, but they cost less than addiction to drugs, alcohol, gambling and smoking. Most billionaires, it says, are addicted to money and power, which is expensive but at least pays them back.
The lesson on offer is to choose your addiction wisely and control it as much as you can.
13. Disregarding red flags instead of turning around
Ignoring your gut means an uneasy feeling you cannot pin down. Ignoring red flags means they are waving at you and you wave back. They are someone’s actions showing you that you are making a mistake. It is easy to think that things will change or not be that bad, but usually they go from bad to worse.
The video says hedge fund manager Bill Ackman ignored red flags when investing in Valeant Pharmaceuticals. He knew its revenue growth came mostly from buying other drug companies and raising prices, but he pushed on. When journalists began looking into its business practices, the stock plummeted and lawsuits followed. He sold at a loss of about $4 billion.
Those red flags are not a friendly hello. Heed the warning and turn around.
14. Choosing cash over equity
Picture being one of the first employees at a startup with little cash. You can take a $5,000 annual raise or stock options worth 1% of the company. You take the cash. A few years later the company is valued at $50 million and your stake would have been worth half a million, while you made $25,000 over five years.
That is the choice street artist David Choe may think about most. Facebook’s first president, Sean Parker, hired him to paint murals at its first office and offered $60,000 in cash or stock options. Choe thought Facebook was silly and would not succeed, yet he took the stock. When Facebook went public in 2012, his share was worth $200 million.
The takeaway given: always take the equity.
15. Depending too much on other people
Most of us rely on parents, partners and colleagues, and that is healthy. But we often cross a threshold without noticing, usually through financial or emotional support. If that relationship ends, the rug is pulled out from under you and you lose whatever they were giving you, and some of your belief that you can do things alone.
Travis Kalanick, co-founder and former CEO of Uber, relied heavily on his early investors and did not secure his position against being pushed out. He assumed their support would last. When scandals hit and the company’s reputation tanked, the board removed him. He had put all his eggs in one basket.
Ask yourself whether you would be okay if their support disappeared. If not, put safeguards in place.
One mistake does not doom you
No one is immune from mistakes, however rich and successful. The video’s closing point is that one mistake does not mean you are doomed forever, and that what matters is having a method for learning from it.
The question it leaves you with is worth answering: what mistake cost you far more than you expected?
FAQ
What are the costliest mistakes billionaires make?
The video lists 15, including getting sweet-talked into bad deals, skipping due diligence, the sunk cost fallacy, ignoring instincts and red flags, not filing taxes properly, choosing cash over equity and depending too much on other people.
What is the sunk cost fallacy?
It is continuing to invest in something because of what you have already spent. The video uses a college course you dislike and Rupert Murdoch’s MySpace purchase, bought for $580 million and sold for $35 million.
Why should you always take equity over cash?
The script argues equity in a company that takes off can be worth far more than a modest cash raise. Its example is David Choe, who took Facebook stock instead of $60,000 and saw it worth $200 million at the 2012 IPO.
How do you know when to sell an investment?
The video quotes Mark Cuban, who says to know why you bought it and hold until something changes. If the logic behind the purchase still holds, price swings alone are not a reason to sell.
What is the difference between ignoring your gut and ignoring red flags?
The gut is an uneasy feeling you cannot pinpoint, while red flags are visible actions showing you are making a mistake. The script says ignoring red flags usually only makes things go from bad to worse.
Keep reading
- 15 Mistakes Rich People Make That Make Them Miserable
- 15 Industries That Make Billionaires
- 15 Most Expensive Mistakes You Can Make in Life
