Reality Catches Up

An asset you don’t deserve can quickly become a liability.

Maybe your portfolio surged during a bubble, your company hit a monster valuation, or you negotiated a salary that exceeds your ability. It feels great at the time. But reality eventually catches up, and demands repayment in equal proportion to your delusions – plus interest.

These debts are easy to ignore because they are often repaid in the form of self-doubt and crushed morale. But they are very real, and when you understand their power you become careful what you wish for.

Companies should want the valuation they deserve, and not a penny more.

Workers should want a salary that matches their skill, and nothing more.

Families should want a lifestyle they can sustain, and nothing higher.

None of those are about settling or giving up. It’s about avoiding a certain kind of psychological debt that comes due when reality catches up.

WeWork is currently worth $3.5 billion, which is a monster success for a 12-year-old company – it’s probably in the top 0.0001% of business successes. But of course no one feels that way. The company was worth $47 billion a few years ago, and it was trying to go public at a $100 billion valuation, which no one could justify but felt fun because those were the times we were living in. So by comparison today’s valuation feels like a corporate bellyflop – embarrassment, employees whose stock options expired worthless, and morale shattered as it laid off thousands of people. Every cent of valuation it didn’t deserve was a debt that came due without mercy. What should be a company celebrating its enormous success is instead a company whose head hangs low and whose former employees hold a grudge – that’s the debt coming due.

The same thing happens to people, who are hypersensitive to lifestyle reductions. Charlie Munger tells a story about his dog – “a lovely, harmless dog. The one way to get that dog to bite you was to try and take something out of its mouth after it was already there.”

I knew people during the housing bubble who went from earning $8 an hour delivering pizza to $250,000 a year selling subprime mortgages. Of course reality came due, and their income went back to normal. But not a single one of them considered their flash of money to be a lucky windfall – in every instance it became a number to anchor to, a source of bitterness and self-doubt when reality returned. And in every instance the money funded a lifestyle that eventually had to be surrendered, which became a point of social shame, particularly when a spouse and kids were involved. The money didn’t feel like a windfall because it wasn’t – it was a hidden form of lifestyle debt that abruptly came due.

It happens at work, too. A manager who can’t earn employees’ respect by leading often tries to force it through fear. That can feel great: Your employees say “Yes sir, right away sir!” But it’s unearned respect. Employees who fear you will hide the truth from you to avoid repercussions. So the manager flies blind, oblivious to problems large and small that won’t be apparent until it’s too late. Every bit of respect over what you deserve is a liability, a hidden form of debt.

The question is how do you define “deserve?” I don’t think there’s an easy formula, especially in a world driven by stories and feelings vs. cold calculations.

But Bill Gates had it right when he said success is a lousy teacher, because it makes you forget how the world works. That’s especially true when all you focus on is the “success” – the higher stock prices, the higher valuations, the more social media followers – and not the earned work that goes into building enduring success.

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