Greed And How To Lose 100% Of Your Money

Authored by Lance Roberts via RealInvestmentAdvice.com,

In the movies, greed is a trait often exhibited by the rich and powerful as a means to an end. Of particular note is the famous quote from Michael Douglas in the 1987 movie classic “Wall Street:”

“The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.”

While greed is necessary to build wealth, excessive greed often has far more terrible consequences when investing.

Few stories are as staggering or cautionary as this one. An investor turned an $88,000 investment into a mind-boggling $415 million through Tesla stock, only to lose it all. It’s a story that captures extremes of financial success and failure. It is a story of greed and the false confidence that comes with exponential returns. However, a deeper examination of the circumstances that led to this loss clarifies that there were warning signs. Common-sense strategies and risk management tools to prevent financial catastrophes were abandoned.

In this post, we’ll examine what happened, how greed played a key role in the investor’s downfall, and the steps that could have been taken to mitigate the risks. Ultimately, the goal is to highlight valuable lessons to help you avoid the same fate and safeguard your wealth.

The Journey from $88K to $415M

The story begins with Christopher DeVocht making hundreds of millions from Tesla options with an initial investment of $88,000. This feat occurred during the speculation boom driven by massive Government interventions in 2020. As Tesla’s market value skyrocketed, Christopher’s position grew exponentially. The leverage provided through options and margin lending allowed him to continue to take on increasingly larger positions. As shown, in 2020, Tesla’s shares rose by 1700% as zero interest rates and massive monetary interventions led to the most speculative stock market run in recent history.

During that meteoric rise, Christopher’s portfolio value surged to an unbelievable peak of $415 million. However, Christopher chose to stay the course instead of cashing out or diversifying his holdings. Despite the risks of a highly concentrated portfolio, the allure of even greater returns was too hard to resist.

Unsurprisingly, just like staying too long at the Blackjack table in Las Vegas, the market eventually turned against him. In 2022, the market reversed course as the Federal Reserve began an aggressive rate-hiking campaign and stimulus checks ran out. During that year, Tesla’s stock value fell by nearly 70%. Of course, had Christopher just been long Tesla shares, his value would have still been roughly $100 million. However, Christopher’s problem was that he was using leveraged options and margin debt. The problem with margin loans is the borrower must liquidate shares to repay the loan. Additionally, options contracts expire worthless. The portfolio was wiped out with the forced liquidation of Tesla shares to repay margin loans and options expiring worthless.

Naturally, a lawsuit against his financial advisor followed, blaming them for not taking action to preserve his wealth.

I can almost assure you there were suggestions that he should take action to reduce his exposure. However, when greed is involved, that advice likely went unheeded. I can tell you from personal experience clients will not take advice to sell rising holdings during a market frenzy. One excuse is the “fear of missing out.“ The other is often unwillingness to pay taxes on gains.

This story should serve as a potent reminder that unchecked greed and poor risk management are often the architects of financial ruin.

Stocks Often Lose 100%

One of the most crucial elements of this story is greed’s role in amplifying the investor’s downfall. Greed can cloud judgment, leading individuals to chase ever-higher returns without regard for the growing risks. Here is an important statistic for you.

Hendrik Bessembinder examined the history of 29,000 stocks in the United States over the 90 years of good data available. He’s also examined about 64,000 stocks outside the U.S. on a slightly shorter time horizon because of available data. To understand the result, we must understand the difference between mean, median, and mode.

The mean is the average value among the sample. The median is the middle value. Importantly, the mode shows the most repeating value. 

What was the result?

The “mode” was (-100%.)

In other words, the most common outcome of buying a stock is losing all your money.

Here is a visual representation. If you picked 100 stocks, 70% would likely underperform the market.

Managing Risk

In this case, Christopher happened to latch onto one of the few companies that soared well above norms. Given the historical distribution of returns from single stocks, a cursory understanding of risk should have provided some caution. As such, Christopher had ample opportunity to lock in substantial profits or at least diversify a portion of his wealth. But, as is often the case when emotions dictate investment decisions, he opted to “ride the wave.”

For a deeper understanding of risk, read our previous post, “Howard Marks’ View Of Risk.“

Many investors fall into this trap, believing that the market will always move in their favor. What they fail to consider, however, is that markets are always cyclical, and what goes up eventually comes down. By not acknowledging this, he exposed himself to an unnecessary risk that ultimately cost him everything.

The loss of $415 million wasn’t inevitable—it was preventable. There were several options that Christopher could have taken to mitigate risk and safeguard his wealth. Here are three strategies that could have changed the outcome of this story:

1. Portfolio Diversification

When Christopher turned his initial $88,000 investment into $1 million, a simple strategy would have been to diversify. When betting on margin, the loan value is based on the collateral of the underlying account. Therefore, shifting some of his profits to Treasury bonds would have decreased the decline in 2022, requiring fewer liquidations. However, by keeping his entire wealth in Tesla stock, he was highly exposed to the volatility of a single company. In this instance, Christopher effectively bet “all in” on every hand at the blackjack table. Logic would dictate that, eventually, you would lose that bet.

Given that diversification spreads risk across various asset classes, stocks, bonds, real estate, and other investment vehicles, such moves early in the cycle would have significantly reduced the impact of Tesla’s eventual downturn on his overall wealth.

2. Setting a Stop-Loss or Trailing Stop Order

The problem with diversification, however, is that it would have limited Christopher’s significant upside. Therefore, to remain aggressive in the position, Christopher could have taken several strategies to reduce his risk significantly. Since Christopher was already using call options to bet on Tesla, he could have bought “put” options to hedge his downside risk. While the cost of the options would slightly reduce his overall return, the “insurance” would have saved him millions in 2022.

Another effective risk management tool is setting stop-loss or trailing stop orders on investments. A stop-loss order allows an investor to automatically sell a stock once it hits a predetermined price, limiting potential losses. A trailing stop-loss, on the other hand, adjusts with the stock’s price as it rises, locking in gains while protecting against large downturns.

In Christopher’s case, setting a trailing stop-loss would have allowed him to capture most of Tesla’s extraordinary rise while preventing catastrophic losses when the stock eventually declined. This safeguard ensures that you are not solely reliant on timing the market, which, as we all know, is nearly impossible to do consistently.

3. Profit-Taking

It’s often said that “bull markets make geniuses out of everyone.” When stocks soar, it’s easy to get complacent. However, a process for regularly taking profits would have been an easy solution for Christopher.

For example, when Christopher turned $88,000 into $1 million, a prudent exercise would have been to put $500,000 into cash or Treasury bonds. Then, repeat that process at regular intervals, $5, $10, $25, $50, $100 million, and so on. Regular profit-taking and storing those gains in the safety of Treasury bonds would have yielded a massive amount of protected wealth. In the end, while Christopher may have still lost a lot of money on his aggressive betting on Tesla, he would have still had $100 million or so in Treasury bonds.

This is not an uncommon issue that I always see with clients and prospects. Greed comes in three destructive forms: 1) the need to make more, 2) the lack of knowing when “enough is enough,” and 2) the unwillingness to pay taxes.

Christopher lost all his wealth. I am sure he now realizes the error of excess greed and hopes a lawsuit will return some of his gains. (Such will likely be the case as the brokerage firm’s insurance company will likely settle the case in arbitration for $100 million or so rather than going to court.)

The good news, however, is that Christopher didn’t have to pay any taxes.

In hindsight, those taxes would have been a cheap price to pay.

What the Advisor Could Have Done

While Christopher is responsible for his decisions, the financial advisor must protect the client’s wealth. An advisor’s job is to execute trades and provide sound guidance that aligns with a client’s risk tolerance and long-term objectives. In this case, the advisor could have done several things differently:

Proactively encouraged diversification: A responsible advisor would have emphasized the importance of not putting all the investor’s wealth into one stock, no matter how well it had performed.
Insisted on setting up risk management tools: The advisor should have suggested stop-losses, rebalancing strategies, or profit-taking checkpoints, giving the investor automatic mechanisms to reduce risk.
Maintained clear communication: Regular discussions about the portfolio’s risk exposure and the potential dangers of an overly concentrated position could have kept emotions in check and led to more rational decision-making.

As I said, the advisor likely discussed these options with Christopher, who assured the advisor he understood the risk. However, if Christopher failed to heed the advice, the advisor should have taken another precaution: fire the client.

Yes, the advisor should have fired the client in clear written communication, stating that the client was not heeding the advisor’s advice. More than once in my career, I have fired clients or not taken on prospects for the same reasons. Unrealistic expectations, greed, excessively risky positions taken, etc., are all good reasons not to take on a client, regardless of how big the account is. When things inevitably go wrong, the advisor is always the first to get sued.

We take our portfolio management and advisory services very seriously, primarily focusing on preserving wealth through a disciplined and conservative process. Therefore, we work to ensure that clients and prospects align with that philosophy to minimize the risk of something going wrong, as in Christopher’s case.

The Bottom Line

This case is a sobering reminder of how greed, unchecked by rational decision-making and proper risk management, can turn a once-in-a-lifetime financial windfall into a crushing loss. As investors, it’s crucial to understand that market gains are never guaranteed and that the risks of overexposure can be devastating.

If you are in a similar situation, riding the wave of massive market gains, ask yourself: Is now the time to take some chips off the table? Are your investments aligned with your long-term goals and risk tolerance?

At RIA Advisors, we specialize in helping investors navigate these complex decisions with sound financial planning and proven risk management strategies. Don’t wait until it’s too late—schedule an appointment with one of our experienced advisors today. Together, we can help you protect and grow your wealth responsibly.