He lost $700 million
How a founder lost $700 million after leaving his company
Last week I attended a private conference in Baltimore.
The founder of the group shared how he lost $700 million, yes, you read that right, Seven Hundred Million Dollars, I'll spell it out like what people write on those big checks.
It was a bit of a crazy story.
He founded the company, got kicked out (like what happened to Steve Jobs) of his own company.
Eventually he fought his way back to being the CEO again.
Only to resign in less than 2 years after returning.
I won't bore you with the details.
Just know that, he said he has personally lost $700 million dollars.
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I wanted to share this story with you to illustrate how liquidity works.
This newsletter is focused on real estate.
Specifically Alberta Real Estate.
Real estate is not very liquid.
If you want to sell your home tomorrow, if the market is good, you might get multiple offers in 2-3 days.
You pick the offer that you like the most, usually people pick the highest offer with the shortest closing time.
You sign the dotted line on the Purchase Agreement.
Then you wait.
You wait for a month or sometimes 2 months to close the property.
Cash gets deposited into your account from your lawyer.
Happy day.
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Now, if the market is slow, like after the previous crash in Alberta real estate market, it may take 6 months or even longer to sell.
This is what is called an "illiquid market".
An illiquid market takes time to convert an asset into cash.
The founder who lost $700 million?
That was his asset in stocks.
Stocks are considered liquid.
Because it's easy to hit a button and sell the stocks at anytime when the stock market is trading.
This is also why you'll see stocks go up and down a lot.
The nature of the asset being more liquid makes the price more dynamic.
We don't see real estate go up by $5,000 today or down $5,000 tomorrow.
Because real estate moves much more slowly.
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What does this mean to you as an investor?
Understanding liquidity will help you understand how to increase your wealth.
The more liquid the asset is, the more you'll see the price of the asset going up and down.
In the financial world, this is called "price discovery" (Click on the link to learn more)
The price of an asset is determined by the market.
In a market, there's sellers and buyers creating supply and demand.
We all know that the more supply there is of X, the lower price X will be, if the demand is the same.
Or if there's more demand of Y, the higher Y will be, if the supply is the same.
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This is why real estate prices move differently than stocks.
Because real estate is less liquid than stocks, it takes a bit longer for price discovery to settle during a down market.
Yet, because it takes years to increase supply (build more buildings), real estate prices can suddenly increase dramatically in a short term because of a severe shortage in supply.
Understanding this, one can see how real estate can be easier to navigate than stocks if one knows what data to look at.
Yes, no one can time the market because no one has a crystal ball.
That being said, real estate market is much easier to follow than a stock market.
The volatility is much lower, and it takes much longer for the real estate market to drop than stocks.
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Is it possible for someone in real estate to lose $700 Million?
Of course, anything is possible.
But keep in mind, this founder has lost MOST of his net worth from his company's stock.
With real estate, we are owning physical asset.
The beauty of physical asset is that they are always worth something.
The only way to lose in real estate is when someone overleverage themselves.
That's a VERY DIFFERENT situation than what happened to this founder.
One has complete control over how much leverage they are taking on.
Mr. founder here? It happened out of his control.
Because the liquid stock market suddenly decided that the stock is worth much less without him being the CEO.
I don't know about you, but I like having more control over my own wealth than letting the stock market decide for me.
Of course, the choice is yours.
Do you have a crazy stock market story to share?
Reply to this email and share with us
Eric Chang
Canmore, AB
October 1, 2024
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