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.
"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."
Then I hated all my labor in which I had toiled under the sun, because I must leave it to the man who will come after me. And who knows whether he will be wise or a fool? Yet he will rule over all my labor in which I toiled and in which I have shown myself wise under the sun. This also is vanity. - Ecclesiastes 2:18-19
I forgot to write it in the review, but the authors do an extensive analysis of taxation, and they conclude that even at today's more reasonable rates, tax has a major effect on dynamic asset allocation and distorts it significantly away from the frequent rebalancing necessary to execute this strategy. This, to me, further validated Buffett's practice of trying to buy companies you never want to sell, especially in taxable accounts, so you defer capital gains tax indefinitely.
Good point, it's hard to plan for the long-term with taxation an X factor. It's unfortunately impossible to secede completely from the system, as I discuss in my article on Bitcoin:
I do think an enforceable wealth tax is very unlikely. That would affect the actual pupper masters of the system. The estate tax is already toothless with good lawyers and planning, and a wealth tax would presumably be avoidable with trusts, etc.
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.
The late 90s were a weird time for investors. It was a bubble by valuations, but only in the highest-flying Internet stocks, and stock trading culture was every bit as big, if not bigger. My manager at Radioshack, an Iranian gentleman named Bob, showed me how to trade online on the IBM Aptivas on the display floor and had made a ton of money buying Internet stocks. I was a college student then and easily doubled a $10k insurance settlement I received on AOL, luckily getting out in in 1999. At the same time, you could make significant interest on bonds, or buy "old economy" companies at really attractive valuations. RJ Reynolds, I remember, was paying a dividend yield of 20% but people would pass on that because AOL would double every 6 months. If you look at the chart, the fall in relative outperformance was due to the strategies' sitting out of the worst parts of the bubble. But the absolute return was still positive, earning a nice yield with very little drawdown, and avoided the crash in 2000.
Nice! Thanks for the explanation. Must have been hard to avoid the allure of "new world" bubble stuff during those mad times - even Druckenmmiller succumbed a few hours before the NASDAQ peak!
Prudent strategy and paid off in 2005-07 again. Very interesting as it seems to detach one from the emotions of the market.
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.
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.
In taking a brief look at that paper, it's a pure momentum strategy that diversifies globally across hopefully less correlated indexes. The backtests are undeniable, but I still think momentum strategies feature a black swan tail risk. There are investments out there that have no hope of ever producing positive NPV of cash returned to shareholders. When everyone knows momentum is the only reason to be invested, what happens when momentum turns? Again, it's the embedded assumption that my particular momentum approach will get me out before everyone else.
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.
"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."
Then I hated all my labor in which I had toiled under the sun, because I must leave it to the man who will come after me. And who knows whether he will be wise or a fool? Yet he will rule over all my labor in which I toiled and in which I have shown myself wise under the sun. This also is vanity. - Ecclesiastes 2:18-19
I forgot to write it in the review, but the authors do an extensive analysis of taxation, and they conclude that even at today's more reasonable rates, tax has a major effect on dynamic asset allocation and distorts it significantly away from the frequent rebalancing necessary to execute this strategy. This, to me, further validated Buffett's practice of trying to buy companies you never want to sell, especially in taxable accounts, so you defer capital gains tax indefinitely.
Notice the growing interest in outright explicit wealth taxes, which negate that indefinite deferral.
Good point, it's hard to plan for the long-term with taxation an X factor. It's unfortunately impossible to secede completely from the system, as I discuss in my article on Bitcoin:
https://tomowens.substack.com/p/could-bitcoin-become-money
I do think an enforceable wealth tax is very unlikely. That would affect the actual pupper masters of the system. The estate tax is already toothless with good lawyers and planning, and a wealth tax would presumably be avoidable with trusts, etc.
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.
The late 90s were a weird time for investors. It was a bubble by valuations, but only in the highest-flying Internet stocks, and stock trading culture was every bit as big, if not bigger. My manager at Radioshack, an Iranian gentleman named Bob, showed me how to trade online on the IBM Aptivas on the display floor and had made a ton of money buying Internet stocks. I was a college student then and easily doubled a $10k insurance settlement I received on AOL, luckily getting out in in 1999. At the same time, you could make significant interest on bonds, or buy "old economy" companies at really attractive valuations. RJ Reynolds, I remember, was paying a dividend yield of 20% but people would pass on that because AOL would double every 6 months. If you look at the chart, the fall in relative outperformance was due to the strategies' sitting out of the worst parts of the bubble. But the absolute return was still positive, earning a nice yield with very little drawdown, and avoided the crash in 2000.
Nice! Thanks for the explanation. Must have been hard to avoid the allure of "new world" bubble stuff during those mad times - even Druckenmmiller succumbed a few hours before the NASDAQ peak!
Prudent strategy and paid off in 2005-07 again. Very interesting as it seems to detach one from the emotions of the market.
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.
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.
In taking a brief look at that paper, it's a pure momentum strategy that diversifies globally across hopefully less correlated indexes. The backtests are undeniable, but I still think momentum strategies feature a black swan tail risk. There are investments out there that have no hope of ever producing positive NPV of cash returned to shareholders. When everyone knows momentum is the only reason to be invested, what happens when momentum turns? Again, it's the embedded assumption that my particular momentum approach will get me out before everyone else.
You are right! Corrected in the web version.