Greed is NOT good when it comes to investing – lessons from Canary Wharf

I am sure many of you reading a site called ‘Dividend Tycoon’ may also have seen the film ‘Wall Street’. The film tells the story of Bud Fox (Charlie Sheen), a young stockbroker who becomes involved with Gordon Gekko (Michael Douglas), a wealthy, unscrupulous corporate raider. The most well known phrase from the film was when Gordon Gekko uttered the phrase “Greed is good”.

However, this post is not a rant about Wall Street or greed in the financial services industry, or Wells Fargo.. It is more about us as investors and why greed may trip us up or derail our chance of financial independence. Wall Street and others will always push the boundaries and banks will fail or cheat, but we can at least control our own mistakes, and one way to fail on the journey to financial independence is by being greedy.

What initially made me interested in this topic was a book I have just finished reading for a second time, which if you will allow me I will give a bit of background to, as it has some personal significance as well as being quite a fascinating story. The book is ‘Towers of Debt: The rise and fall of the Reichmanns’ by Peter Foster (published in 1993).

Towers of Debt: The rise and fall of the Reichmanns

Canary Wharf
Canary Wharf

I first traveled to London in 1992 with my father, who was there to conduct some business. We stayed with my aunt Alex, and one of the things I distinctly remember was that she took us for a drive and we went through the newly completed Canary Wharf, the mega development in the east end of London on formerly derelict land. Coming from South Africa I was quite impressed with the scale of the place. I still to this day find it interesting that you can see the main building from so far away in various parts of London. Today it is absolutely huge and an amazing success, property there is very sought after. However, at that time it had all collapsed for the developers, the Reichmann family.

I did not know this at the time, but when I saw this book in my local library more than 10 years later, with a picture of Canary Wharf on the front cover, I immediately picked it up.

The Reichmann’s were a family who fled Europe and the Nazi’s, starting in Tangier (Morocco) and ending up in Toronto, Canada. They started in the tile business in Canada, then built their own warehouses for the tile business, then moved onto bigger building projects, culminating in the construction of Canada’s tallest building (72 stories), First Canadian Place. The three brothers, Paul, Albert and Ralph were seen as quite mysterious figures, with their strict adherence to Orthodox Jewish beliefs. They shunned publicity and lived very privately. Paul Reichmann was however exceptionally ambitious, and no doubt a genius at business.

In 1977, they concluded what is still considered one of the best business deals of all time. New York was going through a terrible financial time, businesses were leaving due to excessive taxes, and New York got very close to bankruptcy. This uncertainty and fear led to the sale of 9 large buildings known as the ‘Uris package’ to the Reichmann’s for $320m, it included two giant towers on Park Avenue, today $320m would not get you one of those buildings. It was an absolute bargain, although everybody else at the time thought they were crazy.

The Reichmann’s continued to buy more property and got involved in many public companies and takeovers, not all welcomed by those being acquired. It was the Reichmann’s legendary business acumen and almost mystic status that led the banks to lend them ever more money, often without even properly looking at their financial statements.

Fast forward to 1987 and the Reichmann’s became involved with Canary Wharf and became the developer for this massive project. There is a lot to the story, and I cannot easily summarize a whole book, suffice to say that eventually the Reichmann’s had bitten off too much. In fairness this was also partly due to a severe recession at the time, and problems in the transport infrastructure which would make Canary Wharf more accessible to Londoners. However, the main culprit was far too much debt, the banks had not known the extent to which other banks had also lent money to the Reichmann’s. The Reichmann’s could also have issued equity earlier instead of using debt, but did not want to dilute their ownership.

It is not my intention to bash the Reichmann’s as they achieved amazing things in their lives, Canary Wharf today is a massive success, the quality of their buildings was seen as excellent. What fascinates me though is that even before they moved out of Canada, they were fabulously wealthy. The New York buildings would have been giving them hundreds of millions in cash flow a year. But they risked it all, quite recklessly it turned out. And lost it all.

Get rich, but not too quickly

One of the reasons I have started on this journey of becoming a Dividend Tycoon is that it is a fairly safe way to build wealth. Being greedy though will not help, whereas patience will. It is not get rich quick, but get rich slow. You do not need to borrow money, you do not need to take massive risks. You do need to put in time and effort, and prevent greed manifesting itself in excessive portfolio churning and buying/selling at the wrong time due to fear and greed.

I wrote last week about the fact that I have a very concentrated portfolio. This is admittedly fairly high risk, but for me it is a risk worth taking because I know these companies very well, but the point is it cannot destroy my whole portfolio and put me back to square one. If one stock has a mishap, there will not be creditors lining up to take the others.

Greed could come in many forms with stocks : Buying on margin, buying ‘hot’ IPO’s, dotcom mania, excessive trading. However, if you stick to the principles of investors like Warren Buffett, you will become financially independent over time. See your stocks as part ownership of good businesses that pay you dividends and increase those dividends each year. You will perhaps be able to write a book one day called ‘Towers of Dividends – their rise and rise’.

Further reading:

Note: Caption below is from Amazon and clearest I could find, but look around as you can get book elsewhere for less.

Towers of Debt: The rise and fall of the Reichmanns