So everyone loves Gatsby, I get it. We're mesmerized by the over-the-top glamour, the trappings of wealth. Don't get me wrong, I love the story too although I've always felt Jay Gatsby was a financial disaster waiting to happen. No, seriously. I've always felt Gatsby suffered from several emotional and financial pitfalls. Hey, the super-wealthy are people too, old sport!!
They make mistakes.
How can you avoid what I call the Gatsby's Greatest Financial Gaffes?
Ideas and actions to take:
1). Gatsby lived too much in the past. Most likely, he held on to losing investments too long believing they would "come back" to the price he paid for them. It was obvious Gatsby was seeking to obtain something he lost long ago I call it the "Daisy Dilemma." He couldn't move on. As Nick wisely told Gatsby: "You can't bring back the past." "Why of course you can, old sport!" Consider selling losing investments and placing money into a better vehicle.
Action Step: Work with your financial partner for encouragement. Consult with a tax pro to create a plan to move away from the losers. Don't look back. The past is over!
2). Gatsby spent too much in (on) the present. He wildly overspent on parties. What was the return on these garish events? Not much. Most attendees didn't know him - they knew of him. It's always healthy to step back, live in the present and assess at the end of the day, how much cash you blew. Before you hit the check out line or expose the credit card, step back into reality, the NOW, ask yourself: Do I truly need this purchase? At the least, a brief pondering may take some of the excitement out of it all, cause you to delay gratification.
Action Step - Before you spend $25 on something you want, wait 24 hours. You may be surprised how the urge to splurge may pass. Then write down how you felt when you made the decision to walk away.
3). Gatsby lived a false future. He envisioned a life that was never going to happen. His income was, his investments were derived mainly from Prohibition which eventually was repealed. It was only a matter of time, at the rate Gatsby was spending, before financial disaster was imminent. He wouldn't have dodged this bullet, either. A smart Gatsby would have diversified his business or at least his investments. He was dangerously focused on the green light. His focus was ostensibly, deadly. Myopic.
Action Step: Incorporate realistic assumptions; manage risk, when it comes to preparing for the future. For example, you direct your career attention, devote your human capital to one industry and, in addition, focus your investment dollars toward same industry, there's a risk of danger.
We've seen in the past how a concentration of lives, investments, in one company destroyed employee nest eggs - Enron, Lehman Brothers, Stanford. Don't take the chance.
If more than 20% of your total investment portfolio resides in the path of the green light of the industry which employs you, then you're dangerously under diversified. Maybe everything will be fine. Are you so overconfident? Are you as eternally hopeful as Gatsby? He believed he possessed the girl long before he had the girl.
It's time to examine your overconcentration and begin a strategy to contain or minimize your heavy exposure. Team closely with a qualified tax professional and financial advisor well versed in liquidation strategies.
Action Step: Are you making pragmatic assumptions about your future? Are you beginning to work with an objective financial advisor to forge a clearer picture of retirement? What kind of investment return expectations is your financial partner estimating for your portfolio allocation? I've found most future return estimates are skewed to over optimism, not realism. To combat this, subtract 1% from the future return calculations provided by your advisor. Increase your savings rate by 1% to compensate.
4). Invest in what Gatsby couldn't. It's tougher to find undervalued situations these days and the investments Gatsby was involved in would get you arrested! Imagine if Gatsby had Xerox (NYSE:XRX) in his portfolio to streamline the business process. With revenues at close to $23bil Xerox is no longer a "copy maker." While its ongoing transition to primarily, a service model, from a document technology platform (even though some of us who are Gatsby-like still like working with paper documents), bears monitoring and operating margins have been pressured, XRX pays a dividend of 2.6%, trades at roughly 7X forward earnings and still holds a respectable TTM free cash flow of $2bil up from $1.5bil in 2011.
What's troubling is the company's long-term debt to shareholder equity which may drag on performance. TTM 2013 - Long-term debt to shareholder equity is currently at 65%. Ursula Burns, Chairman & CEO seems to understand the delicate dance of managing the transition of XRX from copying and printing to services, which now accounts for 52% of revenue (as of 2012).
XRX is able to generate such strong operating and ostensibly, free cash flows, from 84% of revenue which is "annuity based" or ongoing. In the face of the financials, it makes sense that Ms. Burns is willing to take on additional debt to continue the company's direction from document delivery to service contracts.
Unlike Gatsby, you can focus on the real green light: A more secure financial future.
Disclosure: I am long XRX.