Editor’s Note: Why wealth? Why does it matter? And why would you want to burden your children with it?
Today, Bill explains… in the first part of what he calls his “wealth manifesto.”
A New Manifesto for Building Wealth
By Bill Bonner, Chairman, Bonner and Partners
As T. Boone Pickens used to say, “money is just a way of keeping score in life.” Of course, there’s more to life than just money. So, you could have a winning money score… and still be a loser in life. Many rich people are.
Our goal at Bonner & Partners is to help you not to be a loser – in money… or in life. And we aim to do that by helping you create wealth, preserve it… and use it to build strong, healthy, happy and durable families.
The nature of happiness is too subtle and too nuanced for this manifesto, so let’s focus on the simple part: money.
How do you get wealth? How do you hold onto it? Some of the answer is luck. A child born in Detroit in 1940 was almost certain to be better off in the Motor City than a child born in Mumbai or Lagos.
But in every culture… in every place… there are some people who do much better than average and some families who hold onto their wealth for generations.
There may be many reasons for this in individual cases and in particular circumstances. But here are some principles I believe have nearly universal application:
I. Particularity
There are people who are extremely interested in and fulfilled by public life. They get their entertainment from live sports, movies and TV. They get their news and information from newspapers and other public sources. They get their satisfaction from politics and public issues. And they invest in public companies.
All of those things depend on a general, shared and uniform understanding of the way things work… or at least how they’re supposed to work. And they leave people with very similar ideas… very similar views… and very similar financial pictures.
But what really succeeds is not the general, it’s the particular. It’s the real, immediate, detailed circumstances that matter most.
That is where the anomalous, unexpected, underpriced and under-appreciated advantages come from. That’s why we favor things that are private.
Private companies give you more value per dollar. Private information sources are likely to give you higher quality information, details and insights that are not available to everyone. Private family life is likely to be much more rewarding than public diversions.
In the financial world, especially, it is important to favor things that are private.
A simple example: You can read in the paper that Beijing is booming; or you can go and look for yourself. You can rely on Jim Cramer to tell you a company is a “screaming buy.” Or you can study its books, its strategies and its management – its particularities – yourself.
In the particular, private world you can know things with reasonable certainty. In the public world you never know anything at all. There are no facts, just memes – repeated so often that they are believed to be true, but often with no verifiable content.
Also, as mentioned above, private is cheaper. When you buy a public company, you often pay dearly for lawyers, accountants, celebrity CEOs, finance capitalists, PR agents, SEC compliance specialists – and much, much more complexity.
That is why the price for a dollar’s worth of earnings is typically much higher for a public company than the price for the same dollar of earnings that the company would produce if it were private.
A private company may change hands at five times 12-month earnings. The same company – taken public by a big investment bank – can easily command many times that multiple. For example, at $38 a share, Facebook had a P/E of almost 100 times projected 12-month earnings at its IPO. By comparison, Google traded at 13 times earnings.
Although we can’t always find private companies to invest in, we try to stay as close to private as possible – often buying public companies that act as though they were still private.
II. Temporality
We live in the real world. We must be aware of how it works. The Earth makes one complete circuit around the sun every 365.25 days. There is nothing we can do about that. Time is ineluctable. Its effects are cumulative.
In one or two days nothing of importance may happen in the financial world. In 36,000 days you’re probably dead. In one or two generations everything of importance is likely to happen.
Although the short-term investor may ride whatever trend is current… or whatever momentum trade is in vogue… the serious long-term wealth builder cannot. Every trend ends in destruction and disappointment. The serious long-term wealth builder has to anticipate the end of the trend – and make sure he is not destroyed by it.
That means being on the right side of the magic of compounding – which involves making profits on your profits. You want your gains to compound, but not your costs.
That means it’s extremely important to keep living and investment expenses under tight control. Otherwise, they negatively compound.
The cost of money management and investment services directly and immediately reduces your net return on capital. Over time, returns regress to the mean. And over the long haul, the mean return on investment, in real terms, could be only about 3%.
One or two percentage points a year in extra costs substantially reduces that return. And when your returns fall below your costs, you experience compounding’s dark side.
Finally, the serious long-term wealth builder can wait for the “perfect pitch.” He is not afraid of volatility. He knows that prices go up and down. He knows, too, that he can wait for prices to get to bargain levels before he buys.
He is a “patient opportunist,” in other words. He doesn’t have to meet any short-term performance targets. Buying at epochal lows, he has a much better chance of compounding gains over a long time. And by relying on his own private analysis, rather than the crowd-following, popular delusions of public prices, he is able to make better decisions.
Coming up next week: the second part of Bill’s wealth manifesto – including why “beta” trumps “alpha”… why simplicity trumps complexity… and how to survive over the long term as an investor.
