Category Archives: Lessons

My Friends Who Won the Lottery

Lately I’ve been thinking about some friends who won the lottery quite a few years ago. We’re talking twenty-ish years, give or take.

Yes, I have personal friends who were big lottery winners. At the time they won, they were already friends of some close family members, and through a certain set of circumstances, they became good personal friends of myself and my wife not long after.

They were good enough friends that we went to visit and stayed in their home, and they came to visit and stayed in ours.

For the sake of keeping their identity private, I’m being vague about some of their details. I will say, though, that in today’s dollars (that is, adjusted for inflation) their win was in the $35 to $40 million range. And that’s after taxes.

At least, that’s what they had when the husband talked to me about their finances. At that time, their net worth had likely increased through their business dealings after winning the lottery.

Back then, I had nothing to do with lotteries at all. And while it may sound odd to some to say it, I was more interested in what they were doing with their wealth than in the wealth itself.

Because they were doing some really good things. They had become heavily involved in philanthropy, and that interested me. It was a topic that I was pretty heavily into at the time.

In addition to the philanthropy, and their business interests — which were quite considerable — they had purchased a big home for themselves. My wife and I went and visited them a time or two, and stayed for several days when we did. We were given not just a bedroom, but a suite of rooms to stay in. The whole thing was fun, of course. But it wasn’t just staying in such a big place. The fun was largely because our friends were genuinely really good people

We didn’t spend all of our time in the big house. We went out and did things with our friends. But oddly, other than the fact that it involved eating, I don’t really remember that much about what we did.

The most vivid memory I have is of my friend showing me some of his investing online. This was back in the early days of online trading, but my friend was very up-to-date.

I remember staring at his portfolio — which accounting for inflation would be worth about $5 million today — and feeling uncomfortable. A little bit of the discomfort was due simply to looking at the finances of someone who had a whole lot more money than I did. But most of the discomfort came from a thought that I have never forgotten:

“If I had that much money to invest, I think I would invest it differently.”

Or, to put it another way: His investing style worried me.

I didn’t tell him this. Maybe I should have. But I know in my heart that even if I had, it wouldn’t have made any difference. He would not have listened. Because I simply didn’t have the authority to command his attention on the issue.

He was the big businessman, and I wasn’t. And in fact, by the time of this incident he had been in business for several years, and his business interests were still doing really well.

Two or three years later we learned that our friends were going through some difficulties. There was a lawsuit involved.

Now our friends had the great majority of their money in a single business. Probably about everything except for the mansion and the investment portfolio I’d looked at was in their one business. So the business was worth maybe $30 to $35 million in today’s dollars.

And this business had previously been doing fine, but now things had turned sour. There was at least one lawsuit involved. And it had nothing to with anything that was my friends’ fault.

In fact, they were the plaintiffs, against a business partner.

The lawsuit dragged on for several years, with the other side (who had even more cash than my friends did) using every trick they could pull to make it last forever.

Somewhere along the way, our friends pretty much ran out of cash, and he took a blue-collar job to help make ends meet.

When it was finally over, our friends had won. But it wasn’t much of a victory. The legal fees had piled up, the company itself was pretty much worthless, and our friends were — if not entirely broke — at least fairly close.

It goes without saying that they lost the mansion.

And no, they didn’t end up quite penniless. But they certainly moved from being mega-wealthy to being those-folks-down-the-street-who-used-to-be-really-rich.

So why am I sharing all this? I don’t know. Just because I’ve been thinking about it a lot lately.

It’s a personal experience — at least, as personal as it might be given that I wasn’t the one who lost the fortune — that says once again that wealth, and especially wealth achieved suddenly, is not necessarily a lifelong condition.

Are there things our friends could’ve done to avoid going broke? Yes. In this case, they might have been helped by better planning, avoiding putting so many of their eggs in one basket, and above all — not thinking they were immune from losing what they had.

Lessons From Kevyn Ogawa’s Story

When It Comes to Advisors, the Magic Isn't in the Suit.

When It Comes to Advisors, the Magic Isn’t in the Suit.

In 2009, Kevyn Ogawa, a grocery store worker, collected $70 million from the lottery (after taxes).

Ogawa was a young man, 32 years of age. He had no wife, no siblings, and only one living parent.

So Kevyn did what everyone tells you to do: He went out and got a financial advisor. Two of them, in fact.

Even better, it seems that both of his financial advisors — Clinton Hodges and Kyle Dunphy — were attorneys. Well, there you go. Two birds with one stone.

Actually, three birds: They were insurance agents, as well.

There was just one problem. Things did not go well. Mr. Ogawa is currently suing his former financial advisors for multiple millions of dollars. The lawsuit alleges that these guys, contrary to their specific duties under the law, acted in such a way as to benefit themselves rather than their client.

The first thing they did, was to sell Kevyn some life insurance. A lot of life insurance.

$100 million worth of life insurance.

Now there may be a few instances in which someone buying $100 million worth of life insurance is appropriate. But… for a single guy who’s not a big businessman, who has $70 million and only one close living relative?

The details are scant, but this must’ve been some kind of “cash-value” policy, in which it appears that Hodges & Dunphy encouraged Mr. Ogawa to place some large amount of his winnings.

They reportedly told him these insurance polices “would earn [him] $50 million by the time he was 50 years old.”

I’m not sure what the current effective interest rate is on these kinds of policies, but if we assume it’s around 5% over 18 years, then it would be possible to get there with about $35 million. If it’s 4%, then it would take $50 million, and if it’s around 3-1/2%, it would take $60 million.

Hodges and Dunphy “made about $1 million in commission on the sale of the insurance.” If that’s a 2% commission, then we’re back at $50 million. If it’s more, then less than that amount. In any case, it appears he shelled out a lot of his cash on whatever policies it was that they sold him.

By the way, I don’t know if it was the case here, but such policies are often subject to high fees (as well as big commissions for the agents who sell them).

They also advised him to buy several expensive pieces of real estate, which “saddled Kevyn with $27 million in debt, while earning Hodges and Dunphy further commissions.”

Okay, so the fact that Kevyn had to borrow $27 million is a pretty good indication that his cash — pretty much all the $70 million of it — must have been tied up elsewhere.

Now the real estate might or might not have been a good idea. But even if it was a decent investment, I would think one would need a pretty darn good reason to go $27 million in debt over it.

Two years later, according to Kevyn, the defendants “tried to persuade him to surrender his existing life insurance policies and take out a single $600 million policy.”

What the @#%*@?!?

There’s at least some rationale that I can see for a permanent insurance policy — although I personally have serious doubts that such a large policy could be in Mr. Ogawa’s best interest.

But a $600 million life insurance policy? Are you kidding me?

And if the policies they sold him were a good idea two years ago — and these kinds of policies are LONG TERM deals — then why on earth would he need to surrender them just two years later for some other policy?

Well, here’s one reason that comes to mind: Another financial advisor pointed out to Kevyn that this was a deal that Hodges and Dunphy stood to make a multi-million-dollar commission on.

Hmm… I wonder whose pocket those millions of dollars were going to come out of?

The court papers continue, “Kevyn stood no chance to benefit from the insurance financially since he was not named as a beneficiary of the trust that owned the policies.”

Whaaa? What the heck is THAT about?? At this point the whole story starts to become surreal, especially given that both Hodges and Dunphy are lawyers. Now I’m not a lawyer, but I simply can’t figure out any reason for that at all.

Kevyn’s lawsuit was filed 3 months ago, and the result, as far as I know, is pending.

There are a number of lessons we might get out of Kevyn’s tale.

  • Unless you’re really sure of what you’re doing, you need someone else looking at advisors and their proposals with you, to help you sort out the good from the bad. In fact, in many instances it wouldn’t hurt to have a second, entirely independent, investment advisor review a proposal your first investment advisor has put forth.  Incidentally, it was getting a second opinion that reportedly made Kevyn really realize that he’d been had.
  • Don’t just trust what your advisors tell you — particularly if there’s any way that they stand to make big money from you following their particular advice, versus not following it. Think for yourself. Ask questions if you have doubts.
  • A single guy with $70 million, no spouse or children, and one living parent, probably does not need $100 million of life insurance! Let alone a $600 million policy.
  • Be damn careful about anyone who wants to sell you a huge life insurance policy. Those things can be very, very tricky.
  • If you have millions or tens of millions of dollars, there is almost certainly NO NEED for you to go into debt. Yes, there are big businessmen like Donald Trump whose businesses take on large amounts of long-term debt. Those people have years — and usually decades — of successful business experience, and they really, massively, know what they’re doing.
    Even so, there’s no “need” for them to do so. If you have multiple millions of dollars, you don’t “need” to take on the risk of going into debt. You can simply invest the money wisely and live for the rest of your life off of the proceeds of your investment.
  • Finally, it is well worth paying some money — significant money, even — to have a good, independent advisor, who will legitimately work in your best interest. A “fee-only” investment advisor, as long as his fees are reasonable, is probably a decent way to go about this. Why? Because he isn’t going to be making a commission on a particular deal. An advisor who makes commissions may be okay, but you need to know where those commissions are coming from and exactly how much they’re going to be.
  • Paying a small annual percentage for fee-based help is far better than having advisors who are going to mislead you and quite possibly fleece you of hundreds of thousands, or even millions, of dollars. I don’t know how much Kevyn Ogawa has lost, but it sounds like a lot.
  • It still costs money, but Mr. Ogawa ought to have been able to find an advisor who would’ve done a good, impartial fee-based job of managing $70 million for him for well under $1 million a year, total.