Emma’s Note: This week, we’ve been bringing you a series of classic essays from Bill.
As families gather over the holidays, we’ve been looking at how they can work together to create wealth that will last generations…
Yesterday, we looked at Bill’s list of things that are considered “not cool” when it comes to preserving intergenerational wealth. Top of the list was spending!
Today, we look at the remaining things Bill advises against if you want to maintain your family’s wealth over the longer term.
In yesterday’s Diary, we looked at four of the behaviors that “aren’t cool” for families who want to create “old money.” Today, we complete our look at that list.
It’s important that you spend time instilling the values on your list in your kids and grandkids. Your family’s success depends on them. The holidays are the perfect time to start that conversation…
5. Cash Flow – Not Cool
It’s capital that counts, not income. Most people – even high earners – are on a treadmill. They earn. They consume. There isn’t much left. Since their consumption depends on their income, they are eager to increase their income at every opportunity.
Not so with old money. It knows that, in the long run, income barely matters. It knows, too, that expenses normally rise with income, but not with real capital gains.
In other words, when you earn more money, your taxes rise… and you tend to spend the extra money on lifestyle enhancements. But if the value of the family farm goes up, the extra wealth tends to stay put. (See No. 7 below.)
Old-money families don’t care as much about income as they do about capital. Often, they live in houses that were bought many years ago (no mortgages)… They drive cars that are fully depreciated (no car payments; no loss in value)… And they eschew costly fads and fashions of all sorts.
In most households, a young person is encouraged to go out and get the best-paying job he can find. Then he enters the labor force and spends the rest of his life trying to stay ahead of his expenses. He becomes a living example of the old expression “Too busy to make money.”
I tell my children: “Don’t worry about how much you make. Worry about what you learn… and what you end up with. Tell your employer you’d rather have equity than a salary increase.”
This is true in your career. And it is true in your investments. If you worry too much about the current yield, you are likely to miss the real payoff later.
Trading out of winning stock positions, for example, can trigger taxes and incur trading costs. In your work, as in your investments, you are better off ignoring income and short-term gains in favor of long-term capital growth.
6. Trying to Beat the Market – Not Cool
We have all seen the study results. Most of your investment profits come from being in the right market at the right time (beta), not from picking individual stocks (alpha).
Trying to beat the market is a loser’s game. You can count on two hands the number of professional money managers who do it with any consistency. The market beats most individual investors in the end.
If you stick to the heroic notion of beating the market, sometimes, you will get it right. Other times, you won’t. Over the long run, you will make too many mistakes and probably end up poorer than when you started.
We often cite the Fidelity report that shows that the best investors – whose portfolios show the best long-term returns – are dead. They don’t read the news. They don’t watch TV. They simply sit tight (or, more precisely… lie still).
Don’t worry about “alpha” (beating the market). It is better to find a decent market – a “beta” position – and stick with it. Trading in and out of it… or moving from one market to another… is usually disastrous.
I use the term “beta” in a broader sense, too: It is important that you and your family are in the right place at the right time.
About a century ago, for example, Russia had one of the fastest-growing economies in the world. But it didn’t matter how good an investor you were. If you had stayed in Russia at the turn of the last century, you would have lost all your money. Stocks, bonds, real estate – all were confiscated by the Bolsheviks. And your family would have had to wait two full generations before it could begin rebuilding its wealth.
That’s why we spend so much time trying to understand what is going on in the world. Beta matters.
And we’re not alone. The Financial Times tells us that most rich people “make the same investment mistakes as the rest.” In short, they go with investment fashions – notably hot hedge funds – rather than sticking to a sensible long-term discipline.
But “the richest of the rich […] are different,” the report concludes. They “started liquidating their portfolios and slugging money into cash as early as the summer of 2007. [T] he suspicion has to remain that the very wealthiest escaped into cash because they, almost uniquely, understood the gravity of the situation.”
Why? Because the richest were focused on beta. And they weren’t distracted by alpha.
7. Selling the Family Farm – Not Cool
Ordinary people need liquidity. Banks need liquidity. The whole financial system needs liquidity. But it’s illiquidity that works for old money.
Families fare best when they have old assets that are hard to buy, hard to run, and hard to sell. A family farm, for example.
It’s not easy to sell a family farm. Family members develop a sentimental attachment to it. It’s hard to get all the family to agree on a sale. And you usually can’t sell it in pieces. You can’t fritter it away. It’s all or nothing – a big decision that takes time and reflection.
Families tend to hold on to their illiquid assets… and they grow.
8. “Na… Na… Na Live for Today” – Not Cool
Old-money families know they have to give up something today to have more tomorrow – what we describe as accepting a short-term disadvantage for a long-term strategic advantage.
Great businesses, great families, and great fortunes take time. You have to be willing to invest time and effort… and wait for the payoff sometime in the future. Old money knows how to delay gratification, in other words.
As Albert Einstein noted, compound interest is the ninth wonder of the world. But it only becomes a miracle at the end, not the beginning. That’s when you get the huge increases that create real family fortunes.
Regards,
 |
Bill
Managing Editor’s Note: I hope you have enjoyed this series of classic essays from Bill all about building and preserving family wealth for generations to come. If you enjoy Bill’s writing, I encourage you to consider his latest book, Win-Win or Lose… Bill says it’s the last book he ever intends to write.
He also believes it’s his most important book. It’s a history book, a psychology book, an investment manual, a business book, a self-help book, and a novel of the future – all in one. His book will help you make sense of what’s really happening in 2020 (and beyond).
Go here to find out how you can get a limited-edition hardback copy.
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