By Bill Bonner
Most people think preserving money is all about what stocks you pick and which money managers you employ. Not at all.
What matters most is the right family culture. Families with old money all have their own norms, values and no-nos. These largely determine their success or failure over time.
What follows is a list of eight taboos for families who want to create “old money.” Consider these the core values of Bonner & Partners Family Office. You will have your own list. What’s important is that you spend time instilling the values on your list in your kids and grandkids. Your family’s success rests on their shoulders.
Mistake #1 – Consuming, not Producing
Give $1 million to an average person, and he immediately thinks of what it will buy. But give a million to an old-money family, and it goes into a business… an investment… or a new entrepreneurial venture.
What matters for old money is producing, not consuming. We don’t want to consume goods and services. We don’t want to consume information and ideas. We don’t want to consume Wall Street’s fee-stuffed products for high-net-worth individuals, either.
Let others drive their fancy cars, carry their expensive handbags and have their addresses in the chic zip codes. Old money doesn’t show off by buying things. It prefers to keep a low profile… and a low cost of living.
Old money knows that investment costs have to be kept down, too. The best way to do that is to avoid hedge funds and structured products. Stick with simple, low-cost, long-term investments.
Mistake #2 – Spending the Family Fortune
“Never touch the capital” is a hallowed tradition among old-money families. You may spend the interest on the family fortune –even the capital gains it produces. But woe to the heir who draws down the principal.
The principal must be kept intact. Any distributions should be of interest, after taxes and inflation adjustments. At today’s low interest rates, it is hard to earn much income – safely – from your investments.
Families are tempted to “dip into capital” to make ends meet. There’s a taboo against it for good reason. Once you begin living on a previous generation’s savings, you will find it hard to stop… until the family fortune is all gone.
“Eat only what you kill” – as our family governance strategic partner, Joseph McLiney, put it at our recent Family Wealth Forum in Nicaragua – it is a better way of expressing the taboo against spending family wealth.
It allows you to spend only what you make yourself. The earnings from capital go back into the family fortune, replacing losses from inflation and taxes.
#3 – Doing What Others Do
Most people want to fit in. They seek social approval by doing what other people do. But if you do what other people do, you will get the results that they get. You will become average… just like they are.
Having wealth is rare. Having it for more than one generation is rarer still. You don’t do that by doing what other people do. You have to think more clearly… and avoid many of the ideas, values and habits that most people have.
You must be willing to be different. Sorry. But that’s the price of having old money.
#4 – Making a Public Spectacle of Yourself
Paris Hilton may have enjoyed getting her face in People magazine. But the Hilton family didn’t like it at all. Old money likes to keep things private. It favors private businesses, private information, private investments and private lives.
Private businesses are more profitable to their owners than publicly quoted stocks. They pay fewer legal and accounting fees and spend much less money trying to please investors and the media.
Today, publicly traded businesses in the U.S. distribute a measly 2%-3% of their profits to shareholders. A privately owned and controlled business, on the other hand, may return significantly more of its earnings to shareholders.
It may give the owners corner offices, too. In a public company, much of the earnings go to pay CEOs and corporate managers. In a privately controlled corporation, the owners decide who gets the money.
Old-money families also learn to discount public information – the stuff you get from newspapers and TV. They put a premium on their private information sources. They trust their own eyes and ears… and their personal contacts.
This attitude informs old-money families’ investments. Rather than invest on the basis of what everybody knows, they try to pin their investments on what they know that other people don’t. Deep knowledge of particular industries is developed. Special “family secrets” are encouraged.
Jobs, financing, insurance and a helping hand are available when needed. Old money looks to private sources – primary among them the family – for what it needs.
#5 – Too Busy to Make Money
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 were fully depreciated during the Clinton administration (no car payments; no loss in value)… and they eschew costly fads and fashions of all sorts.
The typical 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 careers. 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 incurs 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
We all have 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 losers’ game. You can count on two hands the number of professional money managers that do it with any consistency. Most individual investors end up having the market beat them.
If you stick to the romantic 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.
It is better to find a decent market – a beta position – and sit tight. Trading in and out of it… or moving from one market to another… is usually disastrous. The results over the last 30 years, for example, show that an investor in oil, gold, stocks or bonds – had he simply just sat on his positions the whole time – would have had an average annual gain three or four times as high as the average investor during that period.
Because the average investor couldn’t sit still.
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.
One hundred years 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 waited 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. A report in a recent 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. The 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
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 onto their illiquid assets… and they grow.
#8 – “Na… Na… Na Live for Today”
Old-money families know they have to give up something today to have more tomorrow – 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.
These are 8 lessons I’ve learned from old money families about how to preserve wealth for generations.