Friday, January 24, 2014

Eight Habits to Turn 'New Money' into 'Old Money'

By Bill Bonner

What distinguishes "new money" from "old money"? 

I'm often asked this question because I recently set up something called a "family office." The aim of a family office is to perform this feat of alchemy. It must take money that's earned today... and make sure it's around for the next generation. 

Most people think preserving money is all about what stocks you pick and which money managers you employ. Not at all. 

What matters most is the right family culture. Families with old money all have their own norms, values and no-nos. These largely determine their success or failure over time. 

What follows is a list of eight taboos for families who want to create "old money." You will have your own list. What's important is that you spend time instilling the values on your list in your kids and grandkids. Your family's success rests on their shoulders. 

1. Consuming, not Producing 

Give $1 million to an average person, and he immediately thinks of what it will buy. But give a million to an old-money family, and it goes into a business... an investment... or a new entrepreneurial venture. 

What matters for old money is producing, not consuming. We don't want to consume goods and services. We don't want to consume information and ideas. We don't want to consume Wall Street's fee-stuffed products for high-net-worth individuals, either. 

Let others drive their fancy cars, carry their expensive handbags and have their addresses in the chic zip codes. Old money doesn't show off by buying things. It prefers to keep a low profile... and a low cost of living. 

Old money knows that investment costs have to be kept down, too. The best way to do that is to avoid hedge funds and structured products. Stick with simple, low-cost, long-term investments. 

2. Spending the Family Fortune 

"Never touch the capital" is a hallowed tradition among old-money families. You may spend the interest on the family fortune – even the capital gains it produces. But woe to the heir who draws down the principal. 

The principal must be kept intact. Any distributions should be of interest, after taxes and inflation adjustments. At today's low interest rates, it is hard to earn much income – safely – from your investments. 

Families are tempted to "dip into capital" to make ends meet. There's a taboo against it for good reason. Once you begin living on a previous generation's savings, you will find it hard to stop... until the family fortune is all gone. 

"Eat only what you kill" – as our family governance strategic partner, Joseph McLiney, put it at our recent Family Wealth Forum in Nicaragua – it is a better way of expressing the taboo against spending family wealth. 

It allows you to spend only what you make yourself. The earnings from capital go back into the family fortune, replacing losses from inflation and taxes. 

3. Doing What Others Do 

Most people want to fit in. They seek social approval by doing what other people do. But if you do what other people do, you will get the results that they get. You will become average... just like they are. 

Having wealth is rare. Having it for more than one generation is rarer still. You don't do that by doing what other people do. You have to think more clearly... and avoid many of the ideas, values and habits that most people have. 

You must be willing to be different. Sorry. But that's the price of having old money. 

4. Making a Public Spectacle of Yourself 

Paris Hilton may have enjoyed getting her face in People magazine. But the Hilton family didn't like it at all. Old money likes to keep things private. It favors private businesses, private information, private investments and private lives. 

Private businesses are more profitable to their owners than publicly quoted stocks. They pay fewer legal and accounting fees and spend much less money trying to please investors and the media. 

Today, publicly traded businesses in the U.S. distribute a measly 2%-3% of their profits to shareholders. A privately owned and controlled business, on the other hand, may return significantly more of its earnings to shareholders. 

It may give the owners corner offices, too. In a public company, much of the earnings go to pay CEOs and corporate managers. In a privately controlled corporation, the owners decide who gets the money. 

Old-money families also learn to discount public information – the stuff you get from newspapers and TV. They put a premium on their private information sources. They trust their own eyes and ears... and their personal contacts. 

This attitude informs old-money families' investments. Rather than invest on the basis of what everybody knows, they try to pin their investments on what they know that other people don't. Deep knowledge of particular industries is developed. Special "family secrets" are encouraged. 

Jobs, financing, insurance and a helping hand are available when needed. Old money looks to private sources – primary among them the family – for what it needs. 

5. Too Busy to Make Money 

It's capital that counts, not income. Most people – even high earners – are on a treadmill. They earn. They consume. There isn't much left. Since their consumption depends on their income, they are eager to increase their income at every opportunity. 

Not so with old money. It knows that in the long run, income barely matters. It knows, too, that expenses normally rise with income, but not with real capital gains. 

In other words, when you earn more money, your taxes rise... and you tend to spend the extra money on lifestyle enhancements. But if the value of the family farm goes up, the extra wealth tends to stay put. (See No. 7 below.) 

Old-money families don't care as much about income as they do about capital. Often, they live in houses that were bought many years ago (no mortgages)... they drive cars that were fully depreciated during the Clinton administration (no car payments; no loss in value)... and they eschew costly fads and fashions of all sorts. 

The typical young person is encouraged to go out and get the best-paying job he can find. Then he enters the labor force and spends the rest of his life trying to stay ahead of his expenses. He becomes a living example of the old expression, "Too busy to make money." 

I tell my children: "Don't worry about how much you make. Worry about what you learn... and what you end up with. Tell your employer you'd rather have equity than a salary increase." 

This is true in your careers. And it is true in your investments. If you worry too much about the current yield, you are likely to miss the real payoff later. 

Trading out of winning stock positions, for example, can trigger taxes and incurs trading costs. In your work, as in your investments, you are better off ignoring income and short-term gains in favor of long-term capital growth. 

6. Trying to Beat the Market 

We all have seen the study results. Most of your investment profits come from being in the right market at the right time (beta), not from picking individual stocks (alpha). 

Trying to beat the market is a losers' game. You can count on two hands the number of professional money managers that do it with any consistency. Most individual investors end up having the market beat them. 

If you stick to the romantic notion of beating the market, sometimes you will get it right. Other times you won't. Over the long run, you will make too many mistakes and probably end up poorer than when you started. 

It is better to find a decent market – a beta position – and sit tight. Trading in and out of it... or moving from one market to another... is usually disastrous. The results over the last 30 years, for example, show that an investor in oil, gold, stocks or bonds – had he simply just sat on his positions the whole time – would have had an average annual gain three or four times as high as the average investor during that period. 


Because the average investor couldn't sit still. 

I use the term "beta" in a broader sense, too: It is important that you and your family are in the right place at the right time. 

One hundred years ago, for example, Russia had one of the fastest-growing economies in the world. But it didn't matter how good an investor you were. If you had stayed in Russia at the turn of the last century, you would have lost all your money. Stocks, bonds, real estate – all were confiscated by the Bolsheviks. And your family would have waited two full generations before it could begin rebuilding its wealth. 

That's why we spend so much time trying to understand what is going on in the world. Beta matters. 

And we're not alone. A report in a recent Financial Times tells us that most rich people "make the same investment mistakes as the rest." In short, they go with investment fashions – notably hot hedge funds – rather than sticking to a sensible long-term discipline. 

But "the richest of the rich... are different," the report concludes. They "started liquidating their portfolios and slugging money into cash as early as the summer of 2007. [T]he suspicion has to remain that the very wealthiest escaped into cash because they, almost uniquely, understood the gravity of the situation." 

Why? Because the richest were focused on beta. And they weren't distracted by alpha. 

7. Selling the Family Farm 

Ordinary people need liquidity. Banks need liquidity. The whole financial system needs liquidity. But it's illiquidity that works for old money. 

Families fare best when they have old assets that are hard to buy, hard to run and hard to sell. A family farm, for example. 

It's not easy to sell a family farm. Family members develop a sentimental attachment to it. It's hard to get all the family to agree on a sale. And you usually can't sell it in pieces. You can't fritter it away. It's all or nothing – a big decision that takes time and reflection. 

Families tend to hold onto their illiquid assets... and they grow. 

8. "Na... Na... Na Live for Today" 

Old-money families know they have to give up something today to have more tomorrow – accepting a short-term disadvantage for a long-term strategic advantage. 

Great businesses, great families and great fortunes take time. You have to be willing to invest time and effort... and wait for the payoff sometime in the future. Old money knows how to delay gratification, in other words. 

Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

The above article originally appeared at fill out the Declaration of Interest form to find out more about his project, Bonner & Partners Family Office .


  1. It's really amazing how people can't save money. This goes from multimillionaire sports stars who run out of money a few years after their glory days (cars, yachts, mansions, drugs) to people on welfare who run out after getting their check and spend all their money on cigarettes, booze, etc and barely have money for food.

    Whatever happened to the American attitude of saving your money and investing for the future? Was this all caused by the government and entitlement programs? Probably some of it.

    1. I drive a 1998 Hyundai and live with my family of four in a 400 square foot apartment. I have about $100 left after utility bills, groceries, insurance--true necessities--have been paid. That $100 ends up getting eaten up by surprise visits to the doctor or saved to pay car registration renewal. Save? I can barely live. Good luck to me finishing a better job. I can't even afford to move to find better work, and I can't afford to learn a new trade to escape my situation. I don't live high on the hog and I don't waste any money. I also receive no government handouts. I can only hope that my son can escape our stagnation or slip further so that the government will give him handouts. Those of us in the lower middle class are screwed. If you can see a way out, please let me know. Maybe I should sell my car or move I to an efficiency apartment so I'll have an extra $100 per month to "invest".

    2. And why do you have a family of four in the first place if you can't afford it?

    3. I can pay for what I have (me, wife, mother-in-law, child). It just doesn't allow me to save. I used to earn three times what I currently earn. In case you hadn't noticed, the economy is a giant shit sandwich and many of us are eating more than our fair share.
      Perhaps I should kill my child to have an extra hundred dollars a month? Or maybe I should have one more so that I can qualify for government handouts?
      In fact, you've just inspired me. Fuck snooty assholes like you. I'm going to go full bore octomom. I'm going to go down to the county office building and file for public assistance. I had wanted to be self-sufficient so I could be authentically libertarian, but since you offered no real solution to how a borderline person can save, and offered instead condemnation, I'm going to funk you and everyone else Jerry Wolfgang style. Hello EBT! Hello HUD housing! By the time I'm done I'll be driving a Lexus while pulling in benefits. Thanks for the inspiration.

  2. Don't forget about the impetus of inflation on saving money. Hard to beat 4% inflation at a pegged less than 1% savings account rate. Only other option is holding riskier assets in a completely manipulated and distorted market. Speaking of the difficulty of understanding beta...

    It's not hard to understand why people choose to live hand to mouth when their savings would otherwise be eroded over time.