when it comes to money and wealth, I've spent most of my life thinking about how to accumulate it. This must be true for most people, most of their lives. Apart from the occasional "this pro athlete had to declare bankruptcy", I don't remember many conversations about losing money or, better yet, how not to lose it.

Lately, however, I’ve fixated on the ways one can lose a fortune. I've witnessed a few dissolve into ether—one case with zero degrees of separation, and a couple of others with one.

What's scary is that overspending is the least efficient way to destroy wealth. We all have a built-in mechanism that puts a hard limit on consumption. Spending is a form of consumption, and just as with eating, there is a physical limit imposed by our bodies or the environment.

The real danger isn't consumption. It's abstraction.

how to lose (lots of) money quickly

Even a superficial read of any history book or the newspaper reveals that there are great external forces that can take away everything one has in one sweep. Wars, plagues, natural disasters.

Keeping these on the margin and assuming geopolitical stability and no asteroids hitting the earth anytime soon, here are other ways I've seen swift annihilation of wealth.

a. ruin by confiscation, large scale fraud/theft

Think of government-mandated redistribution of wealth due to social unrest (e.g., Peruvian Agrarian Reform), or the bank where you put all your cash going insolvent, or your stock broker running away with your investments. These are outside of one's control but happen from time to time.

b. ruin by fragmentation

I saw this way play out in front of me in the following manner. Two brothers, X and Y, found a furniture company. Shortly after, Y passes away and bequeaths his share of the company to his children (who are still young.) In the next 20 years, X grows the company to become the dominant player in the nation.

One day, X has a stroke and is unable to speak or move. X's three children take control of the company. At the same time, Y's children, who are now adults, want in on the business. They try, but there are too many cooks in this kitchen.

Arguments ensue. Then they decide to break the company in two smaller parts. They cannot agree on how to divide it. They hire lawyers. Lawsuits are filed.

One year later, the company goes bankrupt, dragging down with it most of the personal assets of the owners.

This is why primogeniture existed for centuries. The firstborn inherits the entire estate, the second son serves in the military or finds his crusade, and the third one becomes a priest. A (controversial but pragmatic) risk mitigation strategy.

c. ruin by abstraction (bad investments)

This one followed a different path. Also a family business but without any division or infighting. Generation 1 sets up a small retail store that sells clothes. Through bootstrapping, they are able to open a couple of additional stores. When Generation 2 takes charge of the business, they vertically integrate and become the dominant textile manufacturer of the country. They continue bootstrapping and investing in adjacent markets and technologies.

The company (now a group business) continues to grow.

Generation 3 has three members. Two business-savvy sisters, and the young adventurous Little Brother.

Little Brother wants to take on new enterprises to "diversify" and grow even more and, importantly, to prove that he can "make it" on his own. He has a dangerous combo of traits: he is a charming big idea man and a terrible operator.

Big ideas require big dollars, for which he convinces Generation 2 (i.e., mom) to fund the ventures with secured financing. This pledges assets of the existing group if Little Brother's initiatives do not succeed.

In addition, big ideas tend to be unrelated to the textile business, so there's no expertise on site to run these expensive experiments.

It took less than a decade for Little Brother's investments to bring down the entire group.

Bad investments are a very insidious way to lose a fortune because there's no intuition of squandering anything. It's just investing.

on scalability and friction

There is a sinister side to this abstraction called wealth (or its medium of exchange: money): because its nature is non physical, it can scale.

For example, going back to overeating and overspending. In a good day, after a good hour of squats, pull ups, and dips, I could consume 1,500 calories in one sitting. Pushing myself to (food) failure, I probably get to 3,000 calories.

That is a factor of 2x. Even if I double that and eat 6,000 calories, that would be a factor of 4x and I'd be dead.

Now onto overspending. This one is trickier because it is possible to come up with scenarios with unlimited scalability, but such scenarios are not realistic unless they're coupled with some degree of mental insanity (or a garage with infinite space).

If I want a second vehicle as my fun weekend car, I'm not buying a Toyota Camry (the most boring car in history) but a Toyota 4Runner TRD Off-Road for $75K or a Porsche 911 for $250K.

Compared to a Camry, the 4Runner is 2x and the Porsche is 7x. This is more scalable than my potential food intake but it still has a visible limit.

However, when we talk about money in the abstract, we see things like this:

Just like with high speed, there is no practical limit here and our evolved intuition is useless against it. That's why path c (ruin by abstraction/bad investments) is so terrifying. Loss exposure can scale by 10x, 100x, or 1,000x.

The physical world has friction. Gravity, biological limits, fatigue. The abstract world is frictionless. Without friction, there is no terminal velocity to lessen the crash.

leverage: TNT for bad, irresponsible, or unlucky moves

Back to case studies. A tale of two companies, A and B. Both founded in the 1960s, both in the same industry, both family businesses. Company A was run like a modern corporation. They hired professional managers for key roles, ran marketing campaigns, and used debt to fund growth. Company B had a serious "competitive disadvantage": the boss hated debt (with passion).

For a good 30 years, Company A was a lot larger and a lot more profitable than Company B. For Company B employees (and their children, yours truly included), it was a little discouraging: same industry, same products, same markets, yet different family vacation destinations due to one single and dumb philosophical difference.

At one point, though, financial leverage was not only being used to make larger bets (through capital investments mostly) but also to pay dividends to shareholders. In contrast, Company B would only invest or pay dividends out of its free cash flow.

You know where this is going. Company A no longer exists. Company B (knock-on-wood) is still operating under the same principles.

This happens all the time, in small and large businesses (think Bear Stearns and Lehman Brothers), and in today's world, very very concerningly, in retail investing through margin and options trading.

Leverage can turn ordinary mistakes into terminal events, thus offering its own form of Fate: ruin by leverage.

the architecture of survival

Our choice: to constantly chase the exponential returns promised by frictionless finance, or to impose our own limits and find ways to outsmart some of our natural tendencies (complacency, FOMO, maximizer nerd, optimizer MBA).

Think more about the Greeks and less about the efficient frontier. The Greeks viewed debt as slavery, a constraint on the soul that forces us to live in the future—beholden to the harvest or the trade—rather than in the present.

Guard the family unit. Guard your Thermopylae. Unity compounds, fragmentation dissolves. The goal is not to get rich, but to build a life that absorbs shocks and gives us the autonomy to own our time and get to Ithaka with our crew.

And if you find her poor, Ithaka won’t have fooled you.
Wise as you will have become, so full of experience,
you’ll have understood by then what these Ithakas mean.
(Kavafis, 1911)

Travel light.