by Bill Bonner, Will Bonner, published 2012
What kind of habits and modes of thought separate Old Money families from everyone else? How do you build a family fortune? How do you get a family to work together toward a single purpose as the “core” is continually invaded by new spouses and children? How do you invest your prodigious wealth at high rates of return? How do you hold on to your family fortune for 100 years? Why does 100 years seem like a long time when it’s really only 3-4 generations of people?
Frustratingly (maddeningly?), the answer most often given in this book to questions like these is, “We don’t know, but here’s our guess.”
What I didn’t get from this book, then, were many specific, useful ideas for implementing with my own family enterprise– or family-as-enterprise. What I did get, and what will be the focus of this review, are a lot of questions, principles to ponder, and general strategic problems in need of robust solutions. This is not a how-to manual for putting together the essential structure of long-lived family institutions such as tax and estate planning, family organization and branding, household management.
Most people will not have a family fortune to contend with. It is not something that can be acquired through a known formula, but rather it is the outcome of an entrepreneurial process that is, epistemologically speaking, random. Just as one can not predictably create a family fortune, one can not predictably control the size or scope of the family fortune, within certain bounds. In other words, your family may have the good fortune to stumble upon a business opportunity with a significant market capitalization. That’s the first hurdle, and there’s no formula for getting there. Then, that fortune might turn out to be worth $50M, $100M, or $5B. That’s another hurdle, and there’s no formula. Failing to seize every opportunity you are presented with might limit your total fortune, and being eager and observant for those opportunities might extend the limit. But there is no recipe for turning something that is worth $50M into $5B unless it was the kind of opportunity that can scale that big in the first place.
Some market opportunities are worth a lot to one person who owns them (“he made a fortune!”), but they’re still not worth a lot to the market or economy as a whole (limited scale). This is an important point because of the gilded cage nature of family fortunes– once you have one, you’re kind of stuck with it, but it’s really tempting to think you have a lot more control over it than you do, or that it’s a lot more durable than it might be.
Imagine you’re the guy with the $50M fortune. You’re pretty happy with your luck, assuming everything else is right in your life, but you’re aware of people with $5B fortunes. If you can generate a $50M fortune, why can’t you generate a $5B fortune? Are those people smarter? Better connected? More productive? What’s the difference?
Luck, and leverage, but using leverage without blowing up is really just a residue of luck.
So you’ve got this $50M fortune. What can you do with it? If you have it invested in the business that created it, you enjoy a nice income stream from it each year (maybe that’s worth $2.5M, maybe it’s worth $5M if you’re really lucky) and you reinvest where and when you can. If your business doesn’t scale easily though, you can’t put it back in and make more. You’re stuck at $50M. What if you take the $50M out by selling the business? Now you have $50M in cash with no annual return and an investment problem. Where are you going to put $50M to work such that you can, say, spend $5M per year and still have $50M left over to do it again next year? Know any hot stocks? You didn’t make your fortune in investing the first time around, what makes you think you’re going to make it there the second time around just because you have $50M now? (Note: you are statistically and logically unlikely to achieve this outcome if you so desire it.) Know any good businesses for sale? Oh, that’s right, you just sold one!
That’s the gilded cage. You’re stuck with a $50M fortune. It’s a nice problem to have, but it’s still a problem. And nothing changes at scale besides the difficulty of the problem. It isn’t easier but actually harder to achieve yield at higher increments of invested capital due to the economic phenomenon of diminishing marginal returns (if this were not the case, you could infinitely scale things by always adding more resources to every project; DMR ensures that the more you add over time, the less incremental gain you get to the point that you get no return or a negative return, ie, waste). If you had $5B, you’d have even fewer places to put it and you’d have given up an even rarer business opportunity in selling.
Unless your business value is about to become permanently impaired and you can see the writing on the wall when no one else can — technological change, regulatory change, some kind of disastrous political or economic event — your business will never be as valuable to you on the market as it is under your ownership, assuming you’re a competent operator. I’m not going to explore what you do if you’re incompetent because that’s a special case, although it follows the same general logic and leads to the same general investment problems.
I think what this means is that the primary challenge for a family with a fortune in terms of managing their business is to be sensitive to the innovation required over time to maintain the economic value of the assets, to manage the capital structure of their business intelligently (ie, not too much debt) so they don’t lose control because of the volatility of the business cycle, and to build cash up and keep their eyes peeled for a truly unique investment opportunity, the kind that made the first family fortune possible. That means it’s more important to avoid doing the wrong things than it is to try to be finding the right things to do. It also means it requires great patience. If we’re talking about building multi-generational wealth, patience is implied in the premise, but it’s still worth repeating. Bonner emphasizes this frequently– find ways to let time work for you, not against you. He believes luck, advantages and businesses all tend to grow over time so the idea is to set things up so those advantages will accumulate in your favor.
Smart investing is not the way to build a fortune. Some people will build a fortune building an investment business (ie, a wealth manager), but it will not be the investing itself that makes them rich but the operational leverage they gain through their fee structure. Because Bonner is a skeptic of “investing” as a tool for wealth building, he would land squarely on my side of the skeptic’s divide about the value public capital markets play in economic growth. Why should a person find it necessary or valuable to contribute capital to a company building things in other people’s towns instead of investing in opportunities in their own town, right “down the street”? Profit signals and differing equity returns will attract capital from disparate areas and thereby indicate relative value across an economy, but I am skeptical that this process and the capital markets in general would be as big a part of the economy overall as they are presently if we were in anything more closely approximating free market conditions without crony capitalist interventions.
So, you may get lucky and find yourself with a fortune, small or large, from a family business. If you do, hold on to it, appreciate it, care for it, tend to it responsibly and hope you or one of your descendants has an opportunity to take another swing at an uncertain point in the future. But don’t try to force it, and don’t think there’s anything you can do to greatly enhance your opportunity beyond what it is. And understand that it will never be as valuable to you as a pile of cash as it is invested in your business.
The other big topic in the book is building the institutional framework of a long-lived family that can participate in this family business over the generations and can also be “true” to the family culture and values. Family planning is an idea that attracts me, and I have spent considerable time on my own with the concept of creating a family brand (what the ancients’ termed a coat of arms) to identify the family and its enterprises.
The trouble I have with family planning is the same trouble I have with all planning, particularly that of the central variety– what if the individual members of your family don’t really find value in your plan? Obviously, raising them with certain values and viewpoints creates a better chance for a kind of coalescing around this identity and direction. But is that how I want to raise my children, by telling them what is important? I think they can figure that kind of stuff out on their own, just as I did. Hopefully I can lead by example, and provide a demonstration of the virtue of the family virtue. But I think a potentially frustrating consequence of putting this emphasis on building multi-generational institutions together is you might find out your family just doesn’t see the use in them. That’s kind of worse case, though, and doesn’t necessarily argue against the project in general.
Yet, what if you’re successful at this? Building a business and building wealth is a coordination problem resolved by growing trust. Who can you trust more than members of your own family? Creating a family organization based on shared values and common identity and linking that organization to a business entity could allow for a uniquely successful competitive strategy and management continuity over a significantly longer timeline than the average public or private competitor– in other words, huge competitive advantages over time. Simultaneously, this arrangement could solve one of the common problems of families and their constituent members, that being how each as an individual and the family as a whole can achieve security, success and satisfaction with one’s productive efforts and life. As I’ve argued in the past, I believe the family is the best institution for accomplishing this task and it is certainly far superior to the currently dominant model of public corporations (for-profit and nation-states/institutional gangsterism).