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X----------------------------------/
8
Money Mistakes
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.
Why?
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.
X----------------------------------------------/
Hope
you enjoyed the information... in my end, I am grateful to know that
is not how much money you've generated yet the ultimate count is how
much money you kept which the same generated passive income.
Hence,
anybody can be wealthy~~you just need to apply yourself. Moreover, I
feel it to say that you and I have the same rights and opportunities
as everyone else to take as much as you want.
Before concluding, and to be honest with you that by indicating
in here the aforementioned email that I've received, and so by putting
again my stand & view points on personal finance, all of them are my considered financial blueprint to escape the rat race.
In effect, it is not necessary to become a millionaire in order to inform more so to share, however, in my case I want to share my financial mind-map vis-a-vis escape route from financial turmoil.
Humbly to punctuate,
it is not material and/or significant on whether I have money or not,
the point I want to express is the very content of this information.
I
want to
personally
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shared
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Your emails and comments mean a lot to me...
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