The Missing Billionaires

The book opens with a puzzle. If the great American fortunes of the past had simply been invested in the stock market and spent at a sustainable rate, there should be scores of billionaire heirs today, yet the descendants of Cornelius Vanderbilt and his peers are missing from the rich lists. Haghani and White argue that those families mostly did not pick bad investments; they sized them badly and spent too much. Their remedy is a decision framework built on expected utility, with the Merton share as its workhorse: allocation to a risky asset should rise with its expected excess return and fall with risk aversion and with the square of volatility.

Haghani joined Salomon Brothers in 1984, co-founded Long-Term Capital Management in 1993 and founded Elm Wealth in 2011. White is Elm's CEO, after roles at Citadel and Bank of America. Both have lost money in markets, and the book draws on the LTCM experience as a cautionary case. Emmanuel Roman wrote the foreword.

What sets it apart is the mix of rigor and practicality. An experiment in which 61 finance-literate subjects bet on a coin weighted 60 percent toward heads, and 28 percent went bust, shows how badly even professionals size bets. Later chapters apply the same logic to retirement spending, human capital, taxes, options and the equity risk premium. The Economist named it a best book of 2023 and praised its consistent, explicit framework.

The caveats: the math is demanding, the authors run a wealth manager, an Economic Times reviewer reduced the argument to a case for diversification, and one practitioner noted that Elm's live strategy adds a momentum overlay the book's model lacks. For allocators, advisors and serious individual investors, it is one of the clearest treatments of position sizing available.

1. Sizing beats selection. Most of the damage to old fortunes came from taking the wrong amount of risk, not from owning the wrong assets. The first question for any position is how much.
2. Use the Merton share as a sanity check. Because the optimal allocation falls with the square of volatility, doubling an asset's risk requires roughly four times the expected excess return to justify the same position.
3. Bet a fraction of Kelly. In the coin experiment, staking 10 percent of the pot on each flip, half the Kelly amount, would almost certainly have reached the payout cap with no chance of going broke. Full Kelly is too volatile for most people.
4. Spend a percentage, not a dollar amount. Spending a fixed fraction of wealth cannot lead to ruin, while fixed-dollar spending often does. Investors who will not adjust spending should take less investment risk.
5. Let valuations move the allocation. The authors estimate expected equity returns from the inverse of the CAPE ratio, compare them with TIPS yields and adjust stock exposure as that gap changes, a rules-based way to own less equity when it is expensive.

After an opening chapter that poses the puzzle of the missing billionaires, the book is organized in four sections and a short coda.

1. Investment Sizing (chapters 2-8). Starting with the biased-coin experiment, the authors introduce the Kelly criterion and the Merton share, ask how much to hold in the stock market, defend expected utility against its critics and revisit LTCM in Reminiscences of a Hedge Fund Operator.
2. Lifetime Spending and Investing (chapters 9-11). The framework extends to retirement and to spending decisions for both perpetual institutions such as endowments and individuals with finite lives, showing why spending a fixed fraction of wealth is safer than fixed-dollar withdrawals.
3. Where the Rubber Meets the Road (chapters 12-18). Practical chapters on measuring personal risk aversion, human capital, the characteristics of major asset classes, investing with no truly safe asset, options, taxes, and risk versus uncertainty.
4. Puzzles (chapters 19-23). Short essays on why a great lottery can be a bad bet, the equity risk premium puzzle, perpetuities and negative interest rates, and the Costanza Trade.
5. Conclusion and extras. A closing chapter on utility and wealth, a bonus chapter on Liar's Poker and learning to bet smart, a cheat sheet and a list of rules of thumb.