What separates the rich from the rest of us?
“They have more money,” said Hemingway.
But how did they get it? How do they hold onto it?
That’s a bit more complicated.
I recently drove through a working class neighborhood in Baltimore called Dundalk. It is an area of simple one- and two-story wooden houses on small lots.
Fifty years ago, it was where Baltimore’s industrial labor force lived. They worked in industry – for Bethlehem Steel, General Motors, The B&O Railroad and in the busy harbor.
Today, those high-wage industries are mostly silent and rusting. Some sites along the water have been converted to loft apartments for Baltimore’s young professionals. And some of the children and grandchildren have moved away – to the suburbs or to other cities.
But most of them are still there. Their parents and grandparents earned a good living. But few got rich. And now, few of their descendants are rich either.
Across town in the rich “old” northern suburbs of Roland Park and Ruxton the people are different.
The rich left the city many years ago. But in these green suburbs they remain. Some richer. Some poorer. But, by and large, the same people whose parents were there 50 years ago.
What accounts for it?
How come some families stay rich generation after generation, while others never have a nickel?
“Culture,” you will say.
You won’t be wrong. But what, specifically, about culture and education is it that makes such a big difference in outcomes?
Simply put, you might say the secret is that these “Old Money” families take the long view.
But there is something deeper and more important. These families know how to turn time into an ally instead of an enemy.
They have worked out very specific strategies that use time to boost investment returns (much higher rates of return… with lower risk).
And they have worked out ways to use time to prepare the family to not only protect money… but to make it grow.
This is why they invest in education and training. And why they make sure family members add to their collective wealth, rather than subtracting from it.
It is why they try to guide their children to suitable spouses. They know that a rotten apple will spoil the barrel.
It is why they spend time and money on lawyers and accountants, too – making sure that the structures are in place to pass along wealth and protect it.
It is why they prefer deep value assets over momentum investing. Over time, value rises to the top. Momentum slows.
It is why they will wait a long time – many, many years – for the right investment at the right price.
It is why they like investments with long-term payoffs – such as timber, mining and infrastructure. And it’s how they are able to benefit from compound growth – letting relatively modest gains grow over several generations.
It is why they are almost fanatical about eliminating costs – taxes, investment charges and unrewarding living expenses. They know that wear and tear, over time, will wreck their family fortunes.
It is why they develop long-lasting partnerships with the professionals they need to make sure their interests are protected and their plans are carried out.
Let me ask you something. If you thought you’d live forever, would you do anything different?
Wouldn’t your attitude to your money change a little? Wouldn’t you slow down, realizing that you’re not in such a hurry to make money?
And wouldn’t you reduce your spending too – knowing that your money would have to last you a long, long time?
The truly wealthy are careful to spend their money on things that hold their value over time.
It is why they do not trade in and out of investments. Instead, they find a few positions and stick with them – for decades.
It is also why they prepare their families, over the course of many, many years, so that they will be prepared for the challenge of managing and enlarging the family wealth.
This is what separates the serious money from the here-today-gone-tomorrow crowd. The serious money knows there’s a lot more to successful wealth building… especially over the long run… than just stock picking.
Instead of trying to control the uncontrollable – the returns you get from stocks – they are focused on what they can control.
Of course, most really wealthy families have a family office somewhere in the background making sure these things are on track.
And without someone dedicating time to making these things happen, they often don’t. Most generational wealth transfers fail. Money that was hard earned is lost through poor investment decisions and lack of planning.
When it comes down to it, you might say that successful families do all the things unsuccessful families don’t want to do.
These things take work. But if you’re determined to keep wealth in the family, the sooner you start on them, the better.
Editor, Diary of a Rogue Economist
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