Feb. 8, 2023

Financial Karma and the Fall of the FinTwit Bro Empire: Must-see Lessons about Constructive Paranoia

Financial Karma and the Fall of the FinTwit Bro Empire: Must-see Lessons about Constructive Paranoia

Lessons for climbing Net Worth Mountain.

From a controversial billionaire’s new title to lawsuits and arrests galore, 2021’s “Golden Age of Grift” (as dubbed by Jack Raines) officially transitioned to the Era of Financial Karma in 2022. 

In this week’s episode, we rattle off some of the most illustrative downfalls—those most emblematic of our new bearish economic environment. 

Do we indulge this walk down memory lane because we’re Schadenfreude junkies? No, not quite—there’s a lot to learn from this most recent 24-month hype cycle, including some “regular people” lessons about financial fragility.

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Transcripts can be found at podcast.moneywithkatie.com.

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Katie: Elon Musk, Andrew Tate, and Sam Bankman-Fried. If 2021 was the Golden Age of Grift, then 2022 was the year of financial karma. What can we learn from these very public downfalls about our own financial decisions? More than you'd think. Let's get into it. Welcome back to The Money with Katie Show, Rich Girls and Boys. I'm your host, Katie Gatti Tassin. And recently I've been thinking a lot about financial karma, and how things tend to revert to the mean. I know—girl, what? But even though it sounds lofty, a few current events and honestly, tweets that have trickled into my awareness have left me preoccupied and paranoid.

2021 was, as my friend Jack Raines dubbed it, the Golden Age of Grift. Robinhood was minting millionaires left and right on little more than a stimulus check and push notifications from the Reddit subreddit r/wallstreetbets. It felt for those 12 months like the game of Life glitched onto easy mode, and everyone who didn't have a controller had to sit in their virtual cubicles and watch 21-year-olds earn millions on GameStop. We are now, little by little, witnessing the unraveling of the sugar high. Kyla Scanlon, a writer who analyzes the economy and the Fed through a human-focused lens, has covered this idea in the past, that we may be slowly emerging from the era of the Silicon Valley elite. I invited her to weigh in today. 

Now, I should disclaim up front. I am a bit woo woo, so cue the meme “I'm not superstitious, I'm just a little stitious. For example, I still have the card from a 2019 goal-setting workshop framed on my office wall, where I declared I would “double my corporate income through meaningful purpose-driven work by 2021.” So suffice it to say, I'm a big believer in whatever superpowers accompany goal-setting. Whether you wanna call it manifestation, visualization, or something else, it is hard for me to deny that the woo woo “name and claim” thing works if you are also willing to work, and have other talented people at the helm—shout out Henah, Nicole, Christie, Sebastian, Nick, Kate, Kibriyaa, and the rest of Team Money with Katie

So disclaimer aside, I've been thinking about the ways in which scaling the financial mountain is a lot like climbing an actual mountain. You start at the base, looking up at this ridiculous feat ahead of you, thinking, “Holy shit, how am I ever going to make it to the top? This is gonna take forever.” Then, little by little, you make a series of good decisions. You expend blood, sweat, and tears, and before long you look down and you think, “Oh my god, I'm actually doing it. Look how far I've come.” It may be a series of professional achievements or a literal number in your bank account rising, but you suddenly have concrete proof of your ability to scale the metaphoric mountain. You have successfully sidestepped the rock slide of overspending. You've crossed a rushing river on a bridge of promotions and raises. And if you're anything like me, your brain's catastrophizing defense mechanisms immediately kick in. “What if I fall? What if I have to start all over again?” Today I wanna talk about how that's actually a healthy response. It might be the reason you don't end up falling. We'll be right back after a message from the sponsors of today's episode. 

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Katie: 2022 was the year of financial karma. There are plenty of reasons why someone might find themselves halfway or all the way up their financial mountain, then suddenly ricocheting back down to the base. A nasty divorce, a business that blows up, a bad lawsuit, placing a ginormous bet on a single stock, like the infamous Jason DeBolt, a software engineer who has a 100% Tesla portfolio, who, instead of cashing out at $12 million last year when his cost basis was around $300,000, last I read, he held on, and now his portfolio is, like the rest of Tesla, down 69%. Nice. Nobody's immune from financial ruin, and as we've discussed before on this show, that's a pretty good reason to never get too cocky about your own position. Last month, DeBolt was confidently tweeting that he's selling his home to buy more shares. The hubris is just outstanding, and it's kind of proof that some people could use a little bit more imposter syndrome. 

And speaking of Tesla, its eccentric CEO, Elon Musk, got wrapped up in his own Shakespearean melodrama, thanks to his handling of his new acquisition, Twitter, calling into question his supposed genius after some bizarre managerial moves. In fact, Elon might be the biggest mean reversion story of the last year. A venerated businessman poking holes in his own mythos and going from the richest person on earth to the only person in history to ever lose $200 billion. Kyla had some thoughts about how this is emblematic of a larger trend. 

Kyla Scanlon: Yeah, I mean, I don't know, I think it's kind of silly to speculate on why Elon does what he does, but I think what he's doing is emblematic of a sort of a cultural shift that we're seeing, and like the quote unquote “culture war,” which I know is like a really touchy subject, but if you look at like how Marc Andreessen is tweeting like other Silicon Valley elites, it's all about like “wokeism,” and like, oh, they're trying, like “they,” this like [inaudible] “they,” is trying to get us. And I think that they're doing this, and Elon Musk is falling into that category just based on the stuff he's been tweeting, because people are gaining more power, like the general people are gaining more power, so workers are gaining more power. And so I think that’s sort of like an immediate response to make sure that they can maintain the status quo that has enabled them to buy Twitter for $44 billion or however much that ended up being, which was like, that's also questionable if he should have even been able to do that, right? So I think that's what I've noticed, is that it's super goofy. It's a waste of everybody's time to be tweeting about wokeism and to be tweeting about a cultural war. But it's a broader political movement, and Silicon Valley elite are in that subsegment of trying to protect an element of their own power, I think. 

Katie: You see this kind of stuff a lot, particularly in spaces that intersect with the financial realm. The violently misogynistic Andrew Tate posts pictures inside a private jet popping off about nonsense like “reading books makes you stupid,” so you should listen to him instead, naturally, and how everything in your life is your fault. In the interest of a timely update, Tate is currently being detained in Romania for alleged involvement in human trafficking. Last month scammers-turned-content creators who go by the moniker Atlas Trading were sued by the SEC for a ginormous pump and dump scam. They frequently made jokes about being apprehended by the SEC, perhaps best encapsulated by the reply to a comment about the illegality of their behavior that simply said “SEC deez nuts.” To quote writer Gia Tolentino, “I am overdosing on medical-grade Schadenfreude at their overdue punishment.” 

In example three, in just one name, Sam Bankman-Fried, the crypto world's altruistic golden boy, whose grand plan was to defraud investors at scale to become a benevolent crypto trillionaire…question mark? In December, he was arrested in the Bahamas for said fraud. Game over. 

And finally, in November, a New York Post article reported that a glut of G-Wagons had hit the market. This is the multi-six-figure Mercedes that probably first entered your consciousness as a child if you watched The Proud Family and you noticed the SUV driven by Penny's boyfriend, 15 Cent. I know, oddly specific callback. But anyway, this unofficial status symbol of the nouveau riche crypto bro was being offloaded at well below market value. Getting too comfortable, too cocky about your position on the mountain is an invitation for a big karmic gust of wind to sweep by and knock you down a few pegs. And it's not just the single-stock boiz and crypto bros feeling the heat. Even investors in supposedly safe asset classes, like index funds and real estate and storage units, are feeling the squeeze, and those who took on debt are nervously trying to avoid the financial mudslide of too much leverage. I asked Kyla what she thought about all these chickens seemingly coming home to roost en masse. 

Kyla Scanlon: So today is January 12. This morning JPMorgan is going to sue a startup founder that fabricated their numbers for their fintech startup. And so you're starting to see like, it's just the era of litigation, like a bunch of crypto companies are suing each other, getting sued by the SEC, getting sued by their clients. So crypto is going to maybe be sued into oblivion, but I think that in terms of like the golden age of grift it, it is an element of the bear market, because I think in the bull market there's an element of like, oh, we don't have to pay attention. Like everything is just gonna keep on going up and it'll be fine. But when things start going down, I think people sort of have to start paying attention, and like…so I think millennials have had it super tough. I'm a cusper, so Gen Z millennial, but millennials have really embraced like this golden age of grift. Like if you look at how they're, how some of them are selling courses online, like how you make a million dollars, like buy my course and I'll teach you how to do it. It really is the golden age of grift. So I'm not sure why everything is happening all at once, but it's not just SBF and Jason DeBolt and all those guys. It's like an era. So I think that it's going to take a while to unwind, and the bad practices that we've learned from this era are going to have to be unwound too. And I don't know what that looks like because it has been propped up by artificially low interest rates.

Katie: Let's talk about mean reversion in finance, aka the idea that things eventually revert to this average equilibrium state. We see this literally in the case of valuations. Tesla was certainly overvalued at its peak. It was trading at 1,100 times earnings at the end of 2020. For context, the S&P 500 is trading at around 18 times earnings right now. Now, Tesla is back to a still ridiculously high but still more reasonable PE ratio of 37. It's not that what goes up must come down; it's simply that hype around a person, a stock, or a business does not last forever.

The universe, or in the Tesla example, the stock market, eventually reinstates equilibrium. My friend and finance writer Nick Maggiulli recently covered this on Of Dollars and Data. So here's a good quote. “The world trends toward equilibrium. The world trends toward proof of work. It's rare for fortunes to be created so effortlessly. Therefore, if you see easy money being made, it's one of the strongest signals that something's not right. Of course, some people will hit the lottery or be born into wealth. They are the lucky ones, but most of us aren't. Most of us have to work for it. We have to show the proof. This explains why 70% of wealthy families lose their fortunes by the second generation, and 90% lose it by the third. They didn't have the proof. These future generations didn't know how to build or preserve wealth like their ancestors did. So they squandered it. The same thing happens during moments of financial excess. Those who got rich overnight don't understand how their wealth was actually generated. In other words, a bubble. So they keep doing the same things that got them rich in the first place, in an effort to further increase their fortunes. But once the bubble pops, the behavior that got them rich leads to their ruin. As they create, so they destroy. It's a double-edged sword all the way down.” End quote. 

The idea is twofold. There are no shortcuts. And if your good fortune is not justly earned, it can be erased with relative ease. But I’d take this one step further. Sometimes fortunes that are justly earned can be threatened, too. See also the divorce example, the lawsuit example, and more, which is why one of my biggest lessons from watching the Golden Age of Grift slowly unravel is that humility is your friend. Sequoia Capital, an American venture capital firm founded in 1972 by Don Valentine, has a notorious take on this, especially in light of recent events. He says, “One of my jobs as a board member has been to counsel management to avoid distraction and to execute with constructive paranoia.” End quote. It is interesting that this take comes from Sequoia, as the company was one of the most entrenched VC firms in the FTX meltdown, losing $150 million. Kyla has written a lot about her disappointment in venture capital in the past. And while this episode is not explicitly about VC, I do think it's a worthwhile inclusion as a sign of the times. 

Kyla Scanlon: It sort of boils down to, constructive paranoia is really good. And I think that them doing a little bit more due diligence, especially with things like FTX, is really important. But I think also, like the underlying business model of VC, it was supposed to be like taking bets on companies that would change the world, but now, and this is just incentives, but it's become about making a bunch of money and returning capital to investors. And if you think about the future, like they are the funders of the future. For whatever reason, they have been the deciders on what grows, to a certain degree. And so if you think about how they allocate capital, it is really important and it does impact companies that end up going public, right? And that does impact how we live our day-to-day lives. So I think that's like the frustrating part to me. So I guess it is like the complacency in their bets, but it's also just the complacency in the underlying business model that they have. Some would argue like, oh, it's not complacency to make a bunch of money, but I think that like when you have a world like we do, where the FAA recently…you know the NOTAM, which is like a way for airline pilots to talk to each other so they can go fly planes, the whole system broke, and it's like an ancient piece of technology, but it's so important. It's critical infrastructure, ancient technology, and things like that have to have an element of funding. And of course you could say, well, you know, take the FAA private or whatever. But I think it's like that, and then you contrast that against like OpenAI ChatGPT, which is potentially going to get, you know, $10 billion from Microsoft. A $30 billion evaluation, essentially. It's kind of like, what should we really be focusing on? Like we can talk about AI until the end of the world, but if our airlines are not functioning properly, if we're not able to have proper access to healthcare, like none of that matters, you know? And so that's like what I'm sort of worried about, is that VCs…and there's more VC firms that are coming up and like focusing on hard tech, whatever, but I think that they're sort of missing the mark for what actually matters for a functioning world. And I think that will get more and more prevalent moving forward. 

Katie: We'll be right back after a message from the sponsors of today's episode. 

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Katie: Although when employed correctly, we can leverage constructive paranoia to fortify our climbing positions on Net Worth Mountain, watching the empire crumble in real time has been a fascinating lesson in the power of constructive paranoia on your climb up Net Worth Mountain. And I have three takeaways, both personally and professionally, that I wanna share. Number one is, live beneath your means, lest you find yourself selling your G-Wagon on the aftermarket for less than it's worth. For the love of all that is holy, live beneath your means. Whether you earn $50,000 per year or $500,000 per year, nothing feels like a karmic invitation for financial pain quite like ripping it right up to the edge.

Now the obvious caveat here is that wage stagnation and the inflated cost of living is a hellacious cocktail that makes this incredibly difficult for some people earning below the median income, and even some earning above it, depending on your situation. You may live beyond your means simply to afford food and shelter, not because you're whipping the G-Wagon that you bought off a desperate crypto bro. When I'm talking about the directive to live beneath your means, I'm mostly speaking to those who are reasonably able to do so. A headline circulated earlier last year that claims that one-third of Americans earning $250,000 were living paycheck to paycheck. And while I find the claim itself a little dubious because I'm pretty sure it was self-reported, and people were counting their contributions to investment accounts as “expenses,” this is the type of situation I'm referring to. The practical reason for keeping your expenses moderate is that it is far more painful to go from living the metaphoric “good life” to not living the good life than it is to have never lived the good life at all. As I've said before, this absolutely is not to say that you cannot enjoy your money, but enjoying it to the extent that you are one job loss away from blowing up your entire life is rightfully scary, and ultimately just not worth it. 

So how does this impact me personally? This is something that I am focusing on in 2023, because I really let lifestyle creep get the best of me in 2022. I got complacent, and a few big, unexpected expenses threw me totally off course, which made me feel like, “Ehh, who cares? We're already over our budget—might as well get takeout again.” So our goal in 2023 is to get our spending low enough such that we are living on one salary, our lower salary, and the peace of mind that that's gonna give me, it's hard to put into words, and it's even harder to put a dollar value on. 

Number two is to bolster your financial weaknesses, whether it be an under-weighted asset class or a single point of failure income. This new cycle of karma and mean reversion has been a reminder for me to shore up financial weaknesses. For some this might simply mean making sure that your insurance across the board is up to date. So think car, home, renter's, umbrella, term life, pet, et cetera. For others it might mean a prenuptial or postnuptial agreement that outlines the financial worst-case scenario outcomes that are fair to both parties. It might mean identifying other sources of income; it might be examining your net worth for weaknesses, like having too much exposure to risk assets in general. So how this impacts me personally? For me, I've identified a few areas of weakness in my financial picture. First and foremost, a single source of personal income. I went from being the picture of side hustler, with four jobs at a time, to one source of income: Money with Katie. And between you and me, listener, I have been feeling the imposter syndrome hard recently, and I've had an itch to spin up something new on the side, almost solely to prove to myself that my current venture was not a complete fluke. A hobby with monetization potential, a second business, maybe buying a business, I don't know.

Another soft spot in our financial picture is that we are in nearly 100% stocks. We own no real estate; we own very little bonds. And while that's not necessarily a bad thing, I think I would feel better if we had some skin in the real estate game, if the price were right. So #goals, looking ahead in 2023, I wanna see, can I make lightning strike twice entrepreneurially? I would love to close out 2023 as the owner of a second business, a second source of income. And while I'm not sure what it'll be yet, I am putting it out there. And then, depending on what the real estate market does, I'm also hoping to buy a property in 2023. But it is worth stating that prices would have to soften a lot and the opportunity would have to be excellent. All the numbers would have to make sense. So on that one, I'm not really holding my breath or in a rush. Fortunately, though, we are moving in 2023, which gives us a fresh opportunity to consider the rent versus buy equation anew, and potentially enter into a house-hacking arrangement. 

Number three is more of a conceptual mindset shift. This last one, theoretical. It's not tactical, but I do think it's a worthwhile inclusion, if only so it serves as a reminder to me. I have embraced a new mantra this year that has served as a grounding force in the world of conflicting opinions, strong voices, and economic uncertainty. “Be brave enough to take decisive action, but humble enough to know that you don't know it all.” It's both a testament to humility as well as a lesson in nonattachment to any one idea or identity. Nonattachment is really hard and somewhat counterintuitive, especially to institute in your financial and professional life, because let's admit it, these two things are often so closely intertwined as to be inseparable. It flies in the face of the foundational principle of wealth accumulation, which is, at its core, basically hoarding behavior. But once we have fortified our climbing positions financially, using the two aforementioned tactics, there's still the mental challenge to contend with when you're working hard toward a goal and climbing that metaphoric mountain. When, at the end of the day, not everything is under your control. And that's accepting and making peace with the idea that you may never summit. You may have to start over. That your current identity, if it is closely tied to work or money, is flimsy and flammable and ultimately impermanent. And still, holding this truth in our hearts, we must forge ahead. We must keep climbing. And that's why the mantra is about being brave enough to take action while reserving the right to backtrack, to deal with obstacles…and maybe even start over.

All right, y'all, that is all for this week. I will see you next week, same time, same place, on The Money with Katie Show. Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content officer, and additional fact checking comes from Kate Brandt.