Jan 22, 2020
Welcome to Finance and Fury, The Say What Wednesday
Edition.
Today's question is from Mario
Thanks so much for continuing to put together your insightful
and informative podcasts. I have a question about investment
strategies that last the test of time and can survive and continue
into generations and generations to come.
I have often heard about investment strategies that have
survived through generations where the principle continues to be
managed through conservative investment where capital preservation
is key and the proceeds either continue to be reinvested or passed
on to family.
My question is what are your views about an ongoing investment
allocation that can in fact last the test of time and How is such a
structure set up and continually managed so that the investment
isn’t destroyed when it passes to the next generation of family
members or through turbulent times like war or global financial
crisis? There are many questions that come to mind about
appropriate asset allocation and who decides this, who makes
decisions within the family, protection against rouge family
members or decisions that could destroy everything.
As always love to hear your views and opinions?
No easy solution here – custodial risks is present in a lot of
things
Did an episode on how the wealthy preserve wealth through
investments a little while back –
Summary – go check it out – was called: Title: How to protect an
investment portfolio? And is it worth using hedging instruments or
changing the assets mix? – Quick Recap
https://financeandfury.com.au/how-to-protect-an-investment-portfolio-and-is-it-worth-using-hedging-instruments-or-changing-the-assets-mix/
- Old money families - what it takes to preserve wealth over
centuries and not just short-term cycles - the frequent reply is "a
third, a third, and a third."
- Stands for dividing one's wealth into one-third land, one-third
gold, and one-third fine art
- Obviously some liquidity (cash) is needed for day-to-day
expenses – along with allocations to speculative portfolios
- This isn't an investment strategy for capital growth as much as
capital preservation – i.e. will the investment be around in 100,
200, or 1000 years –
- Looking at centuries timeframes for investments - land, gold,
and art outperform riskier assets such as shares, bonds, and cash -
sound weird but a viewed from the perspective of centuries and not
just years or decades
- Why? These don’t typically custodial risk and have intrinsic
value (usable by people)
- Objections/issues –
- Share and bonds can perform well for long periods – but they
and also cash all involve some claim on a third party
- Contain credit risk in addition, the underlying market risk –
volatility
- Credit risk is what ruins a lot of investments - the investor
is always at the mercy of the issuer
-
- Shares – Company go bankrupt and Bonds can default (no money to
return for your loan)
- Paper currency in the history of the world has eventually
proved worthless eventually – so why is it different this
time?
- No income or yield - Warren Buffett disparages gold because it
has no yield. The reason it has no yield is that has no risk when
bought and stored by you personally (beyond someone stealing it).
Yield is what you earn when you take risk. Gold has no credit risk,
no currency risk, no maturity risk, indeed no risk of any kind. It
is just gold.
- In contrast, Buffett's Berkshire Hathaway stock when priced not
in dollars but in ounces of gold has declined in value by about 75
percent since 2000 from 280 ounces per share to 70 ounces per
share.
- Someone who bought gold rather than Berkshire in 2000 could
today buy four times as much Berkshire stock using the same
gold.
- There has been a similar appreciation in the value of fine art.
Admittedly this is a selective example.
- Yet it is true that over centuries it is the hard assets, not
the paper assets, that retain value through collapse and
catastrophe. The old money knows this—they have seen it all
before.
- Alternatives - value of land, gold, and art is intrinsic –
beyond valuations - If you own it, you own it
- No issuer who can suddenly make your land disappear or turn
your physical gold into confetti
- Possible that a totalitarian regime or an invading army might
confiscate tangible wealth – why I don’t like legislation
- Gold can also be confiscated if in bank institutions – held
personally stuffed in a saddlebag or sewn into the lining of a coat
and moved. Art can be removed from frames, rolled up, and carried
in one's luggage –
- Admittedly land cannot be moved, but with good title and
patience a family can reassert its claim even generations later
once interlopers have been ousted
- No portfolio is perfect or without risk - too often we think of
risk narrowly and ignore the greatest risks of all
- Due to short term focus – normally only happen once in a
lifetime, if that – but looking through history – do happen
- In the form of monetary collapse, social disorder, regime
change, and emergency edicts
Structures – Done similar eps in the past as well on companies,
versus trusts or owning personally –
Now – this is Not concrete – not legal or official advice – but
general in nature – options -
- Start a company to hold the investments – doesn’t have a
limited life – but leaves you open if you own it personally
- Investments - Buy Gold, Buy Land, Buy Art
- Can diversify into other options like shares or bonds as well –
but these do carry additional issuer/custodial risks
- Way to pass these assets down to your family is to leave
control of the directorships and ownership of the shareholding in
your Will to your
- To use a FT to own or not? Why not FT over company? The limited
life of 80 years
- Bloodline trusts –
- Establish trusts for vesting to create new trusts
Issues with this – need a third party as the executor – and it
is going to be costly to maintain – and no guarantee that your kids
or grandkids will continue to manage the money well
That is what this comes down to – the best way to preserve
wealth through generations is to educate and instil the value of
money and how to manage it –
Teach kids about money – have them understand the value of it –
give them control over some of it before they get it in your will
–
No way to force a square peg into a circle – unfortunately some
people if not educated can blow the money –
Seen two cases I advise on – both same set up of having parents
pass away and kids being left with money – one had access at 18
while the other had access to 25 –
One at 18 withdrew everything and bought cars, boats, jet skis,
going out/holidays and a home they couldn’t afford on cashflow –
soon to be left with little – other at 25 – invested and retained
and is now set up for life
If you are talking in the $10s or $100s of millions – may be
worthwhile to have lawyers be the custodians and set up a complex
structure – but if not any benefit can be eroded over the years
from accounting and legal costs
1. Question comes back to – how much of your wealth do you need
to preserve – and at what cost?
-
- Depends on how big the next crash will be – who knows?
Lessons to take away
- Intrinsic Values – Wealth preservation –
- Shares are fine to invest in – especially after the market
collapses – but only if you have confidence in them – would you use
their products in a recession? Intrinsic values can become
zero
- Gold – physical metals – silver as well
- Long term holdings – company won't have a limited life – but
trusts do allow more flexibility
- Long term – the best thing you can do to preserve wealth is to
educate kids and instil the value
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