Dec 20, 2023·edited Dec 23, 2023Liked by Tom Owens
I have to echo, great review!
Concerning first-generation wealth and staying humble as you wrote in conclusion, I humbly submit this applies equally on an individual level.
This is especially true for first-decade wealth. Whether dot-com stocks, house-flipping, crypto coins and NFTs (lmao), or meme stocks, it appears the new normal in our post-scarcity economy and financial system is an endless series of bubbles. For a variety of reasons 20-somethings are especially likely to catch these on the way up, but not fully realize the forces at work. So instead of taking their windfall and living happily ever after, they inevitably try to parlay it into more using the same playbook, not realizing they were simply lucky to be in the right place at the right time and caught lightening in a bottle.
Nor does it stop being a warning just because you are in your 40's or 50's, or even 60's and 70's.
The only thing one can do is stay humble and recognize when you as an individual *have enough.* Once you are humble enough to feel you have enough, and humble enough to realize you're not perfect and aren't going to win every time, or most probably your last time, it's easier to switch your method and your mindset from building wealth to preserving wealth.
I have Missing Billionaires in my stack to read, although I have only skimmed it and examined the index in writing up these thoughts:
The authors mention the Vanderbilts, but not the Marble House in Rhode Island (https://en.wikipedia.org/wiki/Marble_House), which was built by a woman who married the grandson of Cornelius Vanderbilt. It cost $11 million in 1892, at a time when an ounce of gold was equivalent to $20. (Most of the expense was for 500,000 cubic feet of marble.) A mindbogglingly large figure, it would be $1.1 billion today in gold terms or $17 billion if looked at as a percentage of GDP.
The Vanderbilt story is in a book called "Fortune's Children," which a descendant (Arthur T Vanderbilt II) wrote in 1989 to answer the question frequently asked of him, "why aren't you rich?" The answer is that the descendants of Cornelius, starting with his grandchildren, spent the money extremely rapidly, largely on houses.
The Vanderbilt experience would tend to show that extravagant spending is a key part of the explanation for the missing billionaires. The psychology - mistakes and delusions - of these elite WASPs at the turn of the century is also a window into how founding stock Americans lost their country.
Don't worry about leaving too much money to your descendants because the odds are that they will waste it. Try to leave them good genes and culture. And note that it was the spouses that married into the Vanderbilt family that were responsible for much of the extravagance and waste. Would you be surprised to hear that the builder of the Marble House was a suffragette, and that she later divorced her husband?
The other keys to the puzzle, which the authors don't seem to address, are the confiscatory levels of estate and income taxation during the 20th century from the time that FDR was elected in 1933 until the late 1980s. From 1941 through 1976, the top estate tax rate was never less than 77% and the top bracket was only $10 million. From 1977 through 1981, the top rate was 70% on amounts above $5 million.
The reason that we have the Ford Foundation today is because the Fords had to either do that or hand over their company to the government when Henry Ford died in 1947. And remember that the Fords had bought out all of the minority shareholders of Ford in 1919 for $105 million. If they had been allowed to keep their company, Ford descendants might today still own all of a $40 billion company.
Also consider the investments that the Vanderbilts could have been making during a period of technological explosion if they'd had that $11 million instead of spending it on marble. (https://www.amazon.com/Transforming-Twentieth-Century-Innovations-Consequences/dp/0195168755/) The period between 1900 and 1910 saw the founding of Ford, General Motors, Hershey Chocolate, Harley-Davidson, Pepsi-Cola, Texaco, J.C. Penney, Quaker Oats, and Firestone Tire and Rubber. When Ben Graham started investing in 1916, IBM (then known as CTR, Computer-Tabulating-Recording Co) had a 7% dividend yield, traded at one-third of book value, and less than ten times earnings.
Meanwhile, the top bracket income tax was 91% from 1946 through 1963. The post-war high marginal income tax rates coincided with a period of high inflation, and high income tax and high inflation operate in concert as a wealth tax.
I'm puzzled that the authors think there is a missing billionaire puzzle. The simplest explanation is that the wealth is dissipated by extravagant spending by the heirs and by taxation. During the 20th century, extremely wealthy individuals were barely able to maintain their fortunes during their lifetimes because of the income tax that functioned as a wealth tax, and then the government confiscated almost everything else after they died.
Very interesting and thanks for highlighting the investment relevance.
The chart with the portfolio performance suggests outperformance fell off substantially due to, perhaps ironically the Asia/Russia/Latam/LTCM crisis, so does this suggest that the portfolio is not "more robust to “fat tails” outcomes like the 2000 crash"? Just why outperformance dipped so much in the late 1990s.
You know your stuff! Not that you need my confirmation! ;-) But thank you, as always for sharing, your high quality always insightful and sometimes very funny writing.
Fascinating read, but had to skip over some of the mathematics 😅
Still, enjoyed the discussion of the dynamic portfolio, and the mention of Harry Browne’s Permanent Portfolio. I’ve been pouring over material on Tactical Asset Allocation recently (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461), finding it persuasive but have yet to put it to use.
Still cannot believe the results of the coin flip experiment—what sort of moron puts it all on tails in that scenario!?
The cyclically-adjusted (CAPE or Shiller) P/E for the S&P 500 index is currently 31x, but I question whether using the 10 year average of earnings per share is as useful for market timing now that inflation has returned. The CPI is up 32% over the past decade and the S&P's earnings per share are up about ~40% over that time period. The CAPE may give a false signal to be out of equities if you use it during an inflationary era or one with episodic currency devaluations, as we just had with the pandemic.
The S&P 500 P/E on current earnings is 25x, but the equal weight S&P P/E on current earnings is only about 16x. There is a big difference now between the valuation of the "Magnificent 7" stocks, which now comprise ~30% of the index, and the remaining companies.
I have to echo, great review!
Concerning first-generation wealth and staying humble as you wrote in conclusion, I humbly submit this applies equally on an individual level.
This is especially true for first-decade wealth. Whether dot-com stocks, house-flipping, crypto coins and NFTs (lmao), or meme stocks, it appears the new normal in our post-scarcity economy and financial system is an endless series of bubbles. For a variety of reasons 20-somethings are especially likely to catch these on the way up, but not fully realize the forces at work. So instead of taking their windfall and living happily ever after, they inevitably try to parlay it into more using the same playbook, not realizing they were simply lucky to be in the right place at the right time and caught lightening in a bottle.
Nor does it stop being a warning just because you are in your 40's or 50's, or even 60's and 70's.
The only thing one can do is stay humble and recognize when you as an individual *have enough.* Once you are humble enough to feel you have enough, and humble enough to realize you're not perfect and aren't going to win every time, or most probably your last time, it's easier to switch your method and your mindset from building wealth to preserving wealth.
Again, great post and great substack. Thank you.
Great review!
I have Missing Billionaires in my stack to read, although I have only skimmed it and examined the index in writing up these thoughts:
The authors mention the Vanderbilts, but not the Marble House in Rhode Island (https://en.wikipedia.org/wiki/Marble_House), which was built by a woman who married the grandson of Cornelius Vanderbilt. It cost $11 million in 1892, at a time when an ounce of gold was equivalent to $20. (Most of the expense was for 500,000 cubic feet of marble.) A mindbogglingly large figure, it would be $1.1 billion today in gold terms or $17 billion if looked at as a percentage of GDP.
The Vanderbilt story is in a book called "Fortune's Children," which a descendant (Arthur T Vanderbilt II) wrote in 1989 to answer the question frequently asked of him, "why aren't you rich?" The answer is that the descendants of Cornelius, starting with his grandchildren, spent the money extremely rapidly, largely on houses.
The Vanderbilt experience would tend to show that extravagant spending is a key part of the explanation for the missing billionaires. The psychology - mistakes and delusions - of these elite WASPs at the turn of the century is also a window into how founding stock Americans lost their country.
Don't worry about leaving too much money to your descendants because the odds are that they will waste it. Try to leave them good genes and culture. And note that it was the spouses that married into the Vanderbilt family that were responsible for much of the extravagance and waste. Would you be surprised to hear that the builder of the Marble House was a suffragette, and that she later divorced her husband?
The other keys to the puzzle, which the authors don't seem to address, are the confiscatory levels of estate and income taxation during the 20th century from the time that FDR was elected in 1933 until the late 1980s. From 1941 through 1976, the top estate tax rate was never less than 77% and the top bracket was only $10 million. From 1977 through 1981, the top rate was 70% on amounts above $5 million.
The reason that we have the Ford Foundation today is because the Fords had to either do that or hand over their company to the government when Henry Ford died in 1947. And remember that the Fords had bought out all of the minority shareholders of Ford in 1919 for $105 million. If they had been allowed to keep their company, Ford descendants might today still own all of a $40 billion company.
Also consider the investments that the Vanderbilts could have been making during a period of technological explosion if they'd had that $11 million instead of spending it on marble. (https://www.amazon.com/Transforming-Twentieth-Century-Innovations-Consequences/dp/0195168755/) The period between 1900 and 1910 saw the founding of Ford, General Motors, Hershey Chocolate, Harley-Davidson, Pepsi-Cola, Texaco, J.C. Penney, Quaker Oats, and Firestone Tire and Rubber. When Ben Graham started investing in 1916, IBM (then known as CTR, Computer-Tabulating-Recording Co) had a 7% dividend yield, traded at one-third of book value, and less than ten times earnings.
Meanwhile, the top bracket income tax was 91% from 1946 through 1963. The post-war high marginal income tax rates coincided with a period of high inflation, and high income tax and high inflation operate in concert as a wealth tax.
I'm puzzled that the authors think there is a missing billionaire puzzle. The simplest explanation is that the wealth is dissipated by extravagant spending by the heirs and by taxation. During the 20th century, extremely wealthy individuals were barely able to maintain their fortunes during their lifetimes because of the income tax that functioned as a wealth tax, and then the government confiscated almost everything else after they died.
Very interesting and thanks for highlighting the investment relevance.
The chart with the portfolio performance suggests outperformance fell off substantially due to, perhaps ironically the Asia/Russia/Latam/LTCM crisis, so does this suggest that the portfolio is not "more robust to “fat tails” outcomes like the 2000 crash"? Just why outperformance dipped so much in the late 1990s.
You know your stuff! Not that you need my confirmation! ;-) But thank you, as always for sharing, your high quality always insightful and sometimes very funny writing.
Fascinating read, but had to skip over some of the mathematics 😅
Still, enjoyed the discussion of the dynamic portfolio, and the mention of Harry Browne’s Permanent Portfolio. I’ve been pouring over material on Tactical Asset Allocation recently (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461), finding it persuasive but have yet to put it to use.
Still cannot believe the results of the coin flip experiment—what sort of moron puts it all on tails in that scenario!?
One other thing:
The cyclically-adjusted (CAPE or Shiller) P/E for the S&P 500 index is currently 31x, but I question whether using the 10 year average of earnings per share is as useful for market timing now that inflation has returned. The CPI is up 32% over the past decade and the S&P's earnings per share are up about ~40% over that time period. The CAPE may give a false signal to be out of equities if you use it during an inflationary era or one with episodic currency devaluations, as we just had with the pandemic.
The S&P 500 P/E on current earnings is 25x, but the equal weight S&P P/E on current earnings is only about 16x. There is a big difference now between the valuation of the "Magnificent 7" stocks, which now comprise ~30% of the index, and the remaining companies.