A character trait that Americans tend to admire is the notion of the second chance, learning from a failure and then modifying the actions of your future self so that mistake does not happen all over again. Oftentimes, it’s hard to see: Take someone like Donald Trump. He is often criticized for his history of bankruptcies. That is a fair criticism. But a complete analysis would taken into account how he has modified his behavior: He now runs everything through dozens of holding companies, has over $350 million in cash against $264 million in debt, and could sustain a 75% drop in revenue at his golf courses before the secured property payments would exceed what he is bringing in. To go bankrupt before he dies, Donald Trump would have to drastically alter his current financial arrangements.
An important example of someone who has turned his financial life around is former NBA All-Star Charles Barkley. The outspoken commentator and former basketball star was raised by his single grandmother in Leeds, Alabama. What he possessed in basketball talent he lacked in financial literacy. He famously said, in hindsight after his $100,000 jewelry spree and purchase of five cars in a single day, “After you grow up and you’re poor, I don’t think there’s anything like when you go to the NBA and have all of this money. It’s a culture shock. You can go broke in a hurry.”
Barkley hired a lawyer from San Antonio named Lance Jay Luchnick to manage the proceeds of his eight-year/$12 million contract signed in 1986. Luchnick gave Barkley a $10,000 per month allowance and spent the rest of the money on bankrupt hotels, car dealerships in New Jersey, and $900,000 in land off a San Antonio Highway that Luchnick told Barkley “would double in a year, guaranteed.” Two years later, after Kareem Abdul-Jabbar warned Barkley that Luchnick was a fraud, Barkley fired Luchnick and sold the property for $600,000.
Barkley later turned to Glenn Guthrie, an investment banker from Birmingham, to help him rebuild his financial life. Barkley knew that $10,000 monthly allowance was in jeopardy based on Luchnick’s mismanagement of what should have been the Barkley fortune. As Guthrie combed through the speculative assets, he shifted Barkley to tax-free bonds and the common mutual funds offerings that are typical in American 401(k)s. But there is one asset he kept from Barkley’s earlier days: Leviathan Gas Pipelines Partners. It was a $750,000 investment that paid out a dividend yield of 8.5% (these were the good old days of 1995 when U.S. Treasury bonds paid 6.3%). This investment in Leviathan gave Guthrie $63,750 in annual income from which Barkley could rebuild his portfolio.
Quarter after quarter, Guthrie took the Leviathan funds and put them into U.S. tax-free bonds that yielded 6%. This singular action alone added $3,700+ immediately to Barkley’s annual income. Meanwhile, Leviathan continued to grow and grow, raising its distribution payout. In 1999, Leviathan changed to a name you might now recognize: El Paso Pipeline.
Eventually, El Paso got consumed into the Kinder Morgan empire. Neither Barkley nor his representatives have disclosed whether he stuck with the investment since Kinder Morgan took El Paso over, but the initial $750,000 Leviathan investment would be 308,000 shares of Kinder Morgan today paying out over $600,000 in current dividends per year. Merely sticking with Leviathan, and doing nothing else with his life, would have covered Barkley’s $10,000 per month allowance, and given Barkley $480,000 per year to reinvest (though you’d have to take into account the expected dividend taxes which would likely make the reinvestment around $364,000 absent some shrewd tax planning strategy).
Barkley’s move into broadcasting, and lucrative advertising deals with the likes of Taco Bell, have more than restored the lost wealth from the mid 1980s. But it is still worth noting how one lucrative asset, which gave Barkley cash on a regular basis, played a disproportionate role in advancing his financial recovery.
Sometimes people get this idea in their head that every stock or investment needs to pull the same weight, compounding nicely and having roughly equal amounts. But that is not the nature of the universe; everything seems more akin to model the Pareto Principle, where 20% of your efforts generate 80% of the rewards. Finding an early Nike, Visa, McDonald’s, or Disney changes people’s lives in a way that diversifying into Campbell Soup does not. There is a point where a single investment can take up too much of your net worth, but I think too many people inadvertently follow Peter Lynch’s admonition that we should not cut the flowers to water the weeds.
The other lesson is that cash flow is king. During this same period, people were going nuts about Enron’s 65% annual revenue growth between 1995 and 1999, despite it having no earnings to show for it. Leviathan’s revenues grew in the mid-single digits, but it had the cash flow to support the strong dividend. I guarantee you there are athletes and entertainers out there who could improve their financial situation considerably by purchasing 35,000 shares of Exxon and living off the $102,200 in dividends that arrive each year. Every long-term investment ultimately reverts back to one common principle: Does it generate cash, and can that cash be put to work well within the company or is it being returned to you?