.Should You Always “Protect The Principal?”
Should You Always “Protect The Principal?”
By Khe Hy the creator of RadReads
Elon Musk was nearly broke in 2008, borrowing money from his homies to cover his rent. “About four months ago, I ran out of cash,” he stated during his divorce proceedings. His brother Kimball confirmed his precarious position, “Oh yeah. [He’s] in debt. More than broke.”
And then-girlfriend, Talulah Riley remarked on his physical condition: “I remember thinking this guy would have a heart attack and die. He seemed like a man on the brink.”
Yet six years earlier, Musk had personally pocketed a whopping $220 million when eBay bought Paypal. How on earth could he possibly end up in such dire straights? Why didn’t he protect the principal?
We all grows up with aphorisms that define our relationship with money. You’ve all heard folksy phrases like “Money doesn’t matter” or “If you have to ask the price, you can’t afford it?” And when it comes to protecting your baseline, even farmers know that you shouldn’t “eat your seed corn.”
Yet despite having hundreds of millions in the bank, Musk chose to put the principal at risk – every ** penny – because he didn’t want to pick a favorite between Tesla and SpaceX. He told Bloomberg’s Ashlee Vance:
“If I split the money, maybe both of them would die. If I gave the money to just one company, the probability of it surviving was greater, but then it would mean certain death for the other company.”
Putting all the principal on the line has paid off famously for Musk. But would that work if you had a smaller amounts of assets in the bank? Yes, protecting the principal seems like prudent strategy. But it can also be a self-limiting strategy when it comes to changing careers, becoming an entrepreneur and investing.
We should all lose our brokerage account passwords
In my money coaching practice, I ask my clients “If I stole 15% from your investment accounts, would you notice?” There’s the rare “Hellz yeah” from the penny-tracker whose multi-tabbed spreadsheet monitors the movement of every Latté. However, most clients wouldn’t notice this larceny for a handful of reasons.
Some know that the monthly and quarterly movements don’t matter (and that the best investors are those who forget that they even have an account).
Others (especially those with kids) may have lumpier expenses (i.e. tuition, life insurance, summer vacations) that obfuscate any linearity of cash flows. And finally, there’s also the avoiders, who explicitly choose not to know.
If you’re investing, your assets bounce around (sometimes a lot)
So if we accept that one’s net worth will bounce around, why is it that when faced with a life transition, our anchoring bias kicks in. In the same way we anchor to our “buy” price in refusing to sell a stock or home that’s lost some value, when we change careers we anchor to an imaginary red line. We protect the principal.
The longer I’ve been an entrepreneur, the less I care about protecting the principal. And it’s not because I’ve made more money (in fact, I haven’t.) I recently received an email from a concerned and puzzled RadReader about my decision to stay in the red — to fund RadReads out of my savings. Having been in similar shoes, he wrote:
How do you reconcile the values of independence and duty to family with not breaking even for so long. I believe that I owe it to my family to run my business at a cash profit every year, even though I could afford not to turn a profit for a while.
As he continued, I could relate to the tension between my own fulfillment and the sense of duty I have (particularly as the sole breadwinner) to my family:
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