When Rich People Do Stupid Things

Published in Investing on 8 March 2011

If you're smart you'll learn from their mistakes.


That's the title of Vanguard founder John Bogle's fantastic book about measuring what counts in life.

The title, as Bogle explains, comes from a conversation between Kurt Vonnegut and novelist Joseph Heller, who are enjoying a party hosted by a billionaire hedge fund manager.

Vonnegut points out that their wealthy host had made more money in one day than Heller ever made from his novel Catch-22. Heller responds: "Yes, but I have something he will never have: enough."

I thought about this line over the past week after two business stories, neither of them new, re-entered the media's spotlight.

The first is news that former McKinsey boss Rajat Gupta is being charged with insider trading.

If you're unaware of Gupta's story, here's the background: He was born in Calcutta to a journalist father and school teacher mother, both of whom died in his teens. He received an engineering degree from India's exceedingly competitive IIT school, moved to America, scored an MBA from Harvard, and in 1973 joined the McKinsey Co., one of the world's most prestigious consulting firms. He was named McKinsey's managing director -- the equivalent of CEO -- in 1994, a position he held until 2003.

McKinsey isn't a public company, so we have no idea how much Gupta earned during his tenure. One has to assume, however, that he's worth, tens, probably hundreds, of millions of dollars.

He was successful. Rich. Respected. He had achieved more than most can dream of against incredible obstacles.

So what does he do in his golden years?

On the inside

After retiring from McKinsey, Gupta joined the board of directors of several US companies, including Goldman Sachs, Procter & Gamble, and American Airlines. Public filings show he made as much as $2 million annually for his board work, which usually entails attending a few meetings a year.

Fast-forward to September 2008. As the financial system teetered on collapse, Goldman's board was summoned for a conference call to discuss Berkshire Hathaway's potential $5 billion lifeline investment. This was intensely secret information. And you have to remember how insane this week was. People really didn't know whether banks, including Goldman, would make it to the next day. Berkshire's investment was huge for Goldman.

Anyway, according to the Securities and Exchange Commission, Gupta disconnected from the board's meeting and immediately called billionaire hedge fund manager Raj Rajaratnam from the same phone. Less than a minute later, Rajaratnam bought 175,000 Goldman shares. The SEC doesn't say what the two discussed on the call. You can guess. Rajaratnam netted nearly a $1 million profit the next day after the public learned of Berkshire's investment.

This is just one example of several. There were more meetings, more calls, more profits. The list goes on and on. The SEC claims Gupta's tips led to $17 million in gains for Rajaratnam. All of it insider trading, all of it very illegal.

Assuming the allegations are true (he denies the charges), Gupta could be in a heap of trouble. He'll probably be on the hook for millions in legal bills. His reputation is utterly shot. This from a guy who could have, and should have, spent retirement basking in his success while drinking a Corona on the beach.

Made off

The next story I've been thinking of comes from a recent New York Magazine interview with Bernie Madoff. You don't need an introduction. You know what he did.

What shocked me from the interview is the revelation that Madoff earned as much as $100 million a year from the legitimate part of his business -- market making -- before his Ponzi scheme ever began.

Think about that. Adjusted for inflation, Madoff was making the equivalent of $550,000 per day from legitimate sources. The guy was rolling. He had everything. Tons of money. Several homes. A family who adored him. Peers who idolized him -- the epitome of success.

Yet he apparently wanted more so badly that it was worth tearing the throats out of his friends and family, spending the rest of his life in prison, and even sparking the death of his son, who committed suicide in December. It's spectacularly confusing.

Explain it to me

To a certain extent, theft -- white collar or otherwise -- makes sense for those who are truly desperate. Warren Buffett once noted that, despite his commitment to ethics, he wouldn't rule out holding up a store if he were broke, had two sick kids at home, and an empty kitchen.

You do what you gotta do. It's why there's a correlation between poverty and crime.

But to quote Buffett again, who once ridiculed a different group of defunct financiers:

"To make money they didn't have and didn't need, they risked what they did have and did need. And that's foolish. It is just plain foolish. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense."

When people like Gupta and Madoff, who were already rich beyond belief, steal from others (indirectly or literally), you have to ask: What is the motive? Is it power? Maybe, but both already had layers of power before they misbehaved. Maybe they feel above the law? Could be, although Madoff mentioned before his arrest that, "In today's regulatory environment, it's virtually impossible to violate rules." Maybe they're just clinical sociopaths? Perhaps, but I'm not convinced it's that simple.

There's something else. For some reason, these people don't feel like they have enough. Many, many of us don't, even when we should. Why, I don't know. I'll ask for your help in a second.

Here's what we do know. In the field of positive psychology, the study of what motivates people and makes us happy, researchers are mostly in agreement: Money isn't the key to happiness. What really gives people meaning and happiness is a combination of four things: Control over what they're doing, progress in what they're pursuing, being connected with others, and being part of something they enjoy that's bigger than themselves.

Keep that in mind, and I want to ask you: What is enough? How much is enough money? How much is enough success? There's no right answer; everyone's different.

Just share your thoughts in the comment section below.

Three more investing articles:

This article was originally written for our sister site Fool.com in the US.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

BarrenFluffit 08 Mar 2011 , 3:34pm

Excellent article.

robbinsbox 08 Mar 2011 , 3:44pm

Thoughtful and alternative piece. Who wrote it?

tru2me 08 Mar 2011 , 4:17pm

Enjoyed this.
Different and tragic.

AleisterCrowley 08 Mar 2011 , 4:18pm

Buffet didn't stop whan he had 'enough', although he was never particularly motivated by money anyway, other than as a way of 'keeping score'

TMFFlaneur 08 Mar 2011 , 4:36pm

@Robbinsbox - Morgan Housel, an excellent writer at Fool.com (our US sister site).

Snodgrasse 08 Mar 2011 , 5:33pm

If you read Anthony Trollope's "The Way We Live Now" (very readable btw), you'll see that nothing changes. The 19th century financier, brought to ruin through greed, is no different to his 21st century clone. Financial avarice is very similar to gluttony.

equitybore 08 Mar 2011 , 5:45pm

Great article - reminds of one of my favourite Irish stories (am Irish so call tell it) about the rich financier and the Iabourer standing at a gate looking across the countryside. The financier berates the workman who should, in his estimation be working all day and all night so that he can retire in comfort. The workman is of the view that he has already retired in comfort, so why bother with the bit in the middle? I am now off for another glass of wine.

kalkanite 08 Mar 2011 , 9:32pm

Great article - I see many people like this all around, while they may not share quite the riches as above, enough is indeed never enough for these people

starenterprise1 09 Mar 2011 , 1:00pm

Interesting and to the point, hilarious and loosely worded. But, so so true. I think it appeals to both the rich and poor. Money is important but not the be all and end all. Its dangerous but enjoyable to spend. The root of all evil if your name is Gupta or off your rocker Madoff!

castiron2 09 Mar 2011 , 1:01pm

enough usually means a little bit more.

LordKitchener 09 Mar 2011 , 1:39pm

Why do rich people do stupid things?

The answer is that money becomes an end in itself instead of a means to an end.

It bears out the truthfulness of the often misquoted statement in the Bible "The love of money is a root of all sorts of injurious things"


elbowjames 09 Mar 2011 , 1:40pm

You answered your own question:

"What really gives people meaning and happiness is a combination of four things: Control over what they're doing, progress in what they're pursuing, being connected with others, and being part of something they enjoy that's bigger than themselves"

That is exactly what motivated Gupta and Madoff, not money. Sitting on the beach with a beer does not provide that.

Wheeling and dealing (Control over what they're doing), growing an empire (progress in what they're pursuing), using exploiting their high level social networks (being connected with others), taking risks/winning (being part of something they enjoy).

Like sharks, they have to keep moving forward, or else they die.


piecan 09 Mar 2011 , 1:54pm

Money isn't the root of all evil - the "love" of money is. This leads to a gradual and, often unnoticed, lowering of standards as love turns to worship and money becomes the only standard. If enough people adopt this view then ruthlessness and the "greed is good" ethic take over and we are all in deep trouble - aren't we?

mcturra2000 09 Mar 2011 , 1:56pm

J. D. Rockefeller's answered the question "how much money is enough?" with "just a little bit more"

JCJE100 09 Mar 2011 , 1:57pm

To amplify on Equitebore's point, isn't this all summed up by the classic tale of the Mexican Boatman? - see http://www.thoughtoftheweek.co.uk/archive/070722_themexicanboatman.html

That philosophy has changed lives - just a pity it didn't work for Gupta and Madoff!

piecan 09 Mar 2011 , 2:01pm

Sufficient is enough.

obylegend 09 Mar 2011 , 2:02pm

I totally agree with elbow James, at the level which these guys have got to, money could not have been a motivation, its more of the desire to CONTROL, the thrill of high level risks and the desire to WIN WIN WIN- even if they end up giving all of it away.

Success is a addictive drug

billyboy121 09 Mar 2011 , 2:54pm

When you think about it, Gupta and Buffett have something in common here - AleisterCrowley already mentioned that to Buffett the money was only a way of keeping score.

I suspect that to Gupta it's the same idea. It's not about having enough to feed and clothe himself, have a nice house, buy toys or whatever - it's about playing the game.

I guess the difference here is that Buffett plays the game within the law and Gupta does not.

Perhaps also after such an impressive career,
Gupta just thought he couldn't lose, even with such a crass piece of insider trading as he did eventually get caught doing.

AlysonThomson 09 Mar 2011 , 3:02pm

Buffett apparently still lives in the house he bought for a pittance donkey's years ago.

soothman 09 Mar 2011 , 3:46pm

I'm touched and humbled by the above article. I hereby resolve to make as much money as I can but release as much as I can to the needy. To feed the orphans and save lives. to use money as a powerful tool to fight poverty in the world and derive satisfaction when I die that I made a big difference to those less fortunate than me. So to that end there will never be enough for me as long as poverty still exists in the world.

LeeJG 09 Mar 2011 , 4:58pm

It's the perks that come with money that are the greatest asset and having the sense to use it well.

fargues 09 Mar 2011 , 6:05pm

Love the Mexican boatman story.
I am retired, not rich but comfortable. I still deal in shares every day,with the object of making money. Why? Because it's fun! Not that it's fun when I lose money, but that only spurs me on to think or research a little harder.
It's a game.
I suppose at the elevated levels these people operate on it's the same. It's not about the money per se, just winning.
Have I cheated in my life? Yes I have. I am human. Not to say that I am happy with the idea of cheating, but sometimes the "game" drives you to go that extra yard.
It's your perspective at the time that makes the excuses you need to do what you do.
If you do, tough luck.

Clottedcream 09 Mar 2011 , 7:14pm

You can never have enough of what you don't really want. The soul craves love and spritual fulfillment, and there is a big empty hole if this is not filled. People don't understand, and try to fill it with money, power and so on. They get more and more, but it never can be enough, because it is not what they want at all. Whereas spiritual happiness fills a person to the brim, so they need nothing more.

glencar44 09 Mar 2011 , 8:55pm

What is the motive indeed? In this example a millionaire politician continues to steal from his own people in a land where corruption is rife, the rich are very rich and the poor are very poor. He and his family risk losing all but must get a thrill from pursuing their lust for power...


coolwil 09 Mar 2011 , 10:09pm

One of the best articles that has been on the Fool of late. Keep it up Morgan I could return to being a Christian!

XYSTUS 09 Mar 2011 , 10:21pm

The article is about money and I like the first comment from Robbinsbox. Unfortunately, wherever you look you find corruption not always with money..but also power, influence.
Blair was corrupted by power. Hence 5 wars in his dozen years of power. (Sierra Leone,Desert Storm, Kosovo, Afganistan 1, Iraq)
Perhaps 75% of the World is run by corrupt government using the resources to enrich personalities.To keep the thing going they murder the inhabitants. A shocking rercord.
Even Westminster proved to be corrupt. All Parties involved.
Failure to address this problem puts us all in danger. 2008 will seem like a picnic.

abrahamisaacs 10 Mar 2011 , 3:48am

Wonderful article and I hope to read more from Morgan. Thinking about it, Buffett has set a remarkable example of integrity over many decades. Perhaps it is partly because he has positioned himself away from New York and runs his empire from a modest office in Omaha.

macdonat 10 Mar 2011 , 10:03am
LARFIELD 10 Mar 2011 , 10:58am

First a general point: "...Assuming the allegations are true (he denies the charges), Gupta could be in a heap of trouble..."
I am not sure we are, or should place ourselves, in the position of assuming friend Gupta is guilty. Lets hope there is some purpose to his trial - which is likely to run for several months -other than fixing the penalty(ies)!
Second & on the wider issue, one can make a number of points about the fundamental aspects of greed as a motivating force (particularly for males) but I am more inclined to the view that the need to control others is usually the driving force behind those of us who appear to lack a strong moral compass. For these people it is an inexhaustible urge &, like a drug addict, provides only limited fulfilment until one's next 'fix'. For this reason it is naive to question why they continue to be motivated irrespective of power/wealth. There is always someone new to boss (- failing which just pick on a past victim).
This concept is as old as mankind. If you want to contain it - place your subject on a deserted island; but beware the subsequent introduction of another human. The first thing Mr Crusoe does after saving Man Friday's life is to turn him not into his friend but his slave....

timgee100 10 Mar 2011 , 11:01am

A great article followed by some valuable comments.

I wouldn't care about Gupta or his avaricious kind, except that the kind of behaviour he exhibited - the unthinking addiction to "gain" beyond any reasonable measure - is responsible for the economic mess we are now trying to sort out. What we are told to call "investment banking" is mostly neither investment or banking - it is a betting shop for the already rich, driven by already super-wealthy players, with no regard for the consequences of the enormous risks they ran.

Of course, what Gupta may have done (I realise it's all a bit early for judgment - he has yet to go to trial, of course) could well be criminal, and what the banks, hedge funds et al have done isn't criminal.... the moral basis of their actions seems rather similar, though, doesn't it?

elbowjames 10 Mar 2011 , 2:32pm

Re: Mexican Boatman
By coincidence, just after that encounter, the fisherman's boat sprung a small leak. He was repairing it when he accidently hit his hand with the hammer, and broke some bones. He could not fish for some time, which meant he had to sell his boat to pay for food. When the money ran out, they had to move into worse accomodation, where his wife became ill. His daughter had to become a prositute to try and contibute to family income. She got involved with drugs, and died in a shooting incident. His wife later died of the illness, and the fisherman was last seen homeless, living off scraps in the gutter.

Moral: Stuff happens

Florise 10 Mar 2011 , 6:33pm

A great article and how true. I am retired and have just enough to live and to do what I like doing. Sometimes it is fun to have not quite enough and save up for a special holiday or treat with my loved one and some things cannot be paid for with money.

supersol42 11 Mar 2011 , 1:57pm

After some years as a professional IFA, I came to realise that capital is useless to the owner. This is because, in my experience, they never spent it; instead, it went to a nursing home, tax, or their dissolute heirs and successors.

It is good to have insurance and a smallish pot of about £10K for uninsured losses. It is also good to have cash available if you have real plans for it, like a deposit on a house, a holiday or a new car. Beyond this, capital really is useless to the owner. Having said that, many people do like the idea of leaving money to their family; but in most cases, the money would have been more use to the family before the death of the deceased.

No, Micawber had it right. What everyone needs is income, and indeed enough income, throughout life. This is what people should be seeking to achieve. Pensions, non-compulsory purchased annuities, and SHIPs can all be very useful. However, if you have too much income, you start to accumulate capital...

hc0 12 Mar 2011 , 11:08pm

Excellent article - never seen so many responses.

How much is enough? - just enough so that I don't need to trust God......

Probably has to do with insecurity at the root, competing with peers etc. That stuff about "Its not just important to succeed in life - its also important that certain others fail" - can't remember who wrote that - but it can drive behaviour. No matter what level we rise to, as soon as we compare ourselves to others we can secretly feel inadequate and unhappy and driven even though we try not to let our ego run our life like that. Sometimes we beat the ego - it doesn't care. It knows that at 3:00am sooner or later it will win again....

trackers2478 13 Mar 2011 , 9:43am

I read all the comments with great interest . I'm an African who lives & trades on African bourses .I have seen the happiest people here ,who also happen to be the poorest -owning a small piece of land from which they grow enough to live on and a handful of tools -a few pieces of clothing .
When the same poor and happy get into the Corporate World things change , suddenly they want more and more of more ..I sometimes think we need to examine Gupta's background and we will find all the answers to our questions .

I'm 33 now and have lived off investment income since I was 18 and know that thrill is in playing the game and winning is all that makes your day .And being respected & feared by those you licked -thats the entire motivation .Maybe, we are all Guptas to some extent ..

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