The Investment Scientist

Unbridled Optimism Can Be Bad for Personal Finance

Posted on: July 6, 2012

Leap of faith

Recently, I went to the monthly meeting of the Chicago Booth Entrepreneur Advisory Group. The group is made up primarily of University of Chicago alumni, and it provides a forum for entrepreneurs to share their issues.

I was blown away by one entrepreneur’s unbridled optimism. He invented a technology that makes changing TV channels on a PC feel as fast as on a real TV. He plans to challenge the cable companies by convincing all of us to watch TV on our PCs.

Yes, cable companies charge us an arm and a leg for their channels, many of which we don’t watch. And nobody loves their cable company. But they have been in business for years. How could a solo entrepreneur working in his bedroom take them on?

Matt, the founder of the advisory group, asked the key question: “How are you going to get programming to fill your TV channels?”

“Well, I am working on one deal now.” It turns out he was negotiating to license TV programming from Vietnam at a cost of $36,000 a year.

It is patently obvious that nobody is going cancel their cable subscription just so that they can watch Vietnamese programming on a PC; this, however, is lost on him.

I asked this intrepid entrepreneur where he will get the $36,000 a year. He answered: “for now, it will be from my children’s college fund and my retirement fund, but I plan to make it back…”

What makes someone an entrepreneur (necessarily but not sufficiently) is the audacity to charge ahead regardless the odds; however, that type of audacity is really bad for personal finance. No wonder there is a hidden cohort of past entrepreneurs who live in poverty.

Prudence, rather than unbridled optimism, is the best strategy to grow your personal wealth and ensure a secure retirement. If you don’t have that in you, have a prudent advisor by your side.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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