Family Fortunes

If you look carefully, almost all Old Money secrets can be traced to a single source: a longer-term outlook. The truly wealthy are careful to spend their money on things that hold their values over time. (Location 256)

It’s why they prefer deep-value assets over momentum investing. (Location 266)

It’s why they like investments with long-term payoffs, such as timber, mining, and infrastructure. (Location 269)

It’s 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. (Location 272)

So they work hard, investing in education and professional advice, to make sure they have the personal resources they need. (Location 276)

If there is one thing that marks families with money over the long term it is this: delayed gratification. (Location 307)

Those who look ahead to the future and those that plan for it—surprise, surprise!—have better futures. (Location 309)

Switzerland evolved a forward-looking, patient, and self-sacrificing culture. (Location 354)

The Swiss build houses out of concrete, stone and solid wood, according to the toughest building codes in the world. They even have to have bomb shelters . . . with food and supplies stocked up against disaster. (Location 355)

What’s more, when you look at almost any house in Switzerland, what you don’t see is as telling as what you do. Before your eyes, you will find a handsome building, designed to last for centuries. (Location 368)

It required the Swiss to think ahead, to plan for the lean months. You (Location 375)

For it is a distant future we are talking about, 20 . . . 50 years ahead. (Location 391)

The architectural wealth of Europe is the result of centuries of investment and preservation. The hovels and shacks disappear. The Louvre and Versailles are still there. They are part of Europe’s public wealth. (Location 395)

You can have an ugly house. Or a pretty one. The values, from a tax—or even a market—standpoint could be the same. The pretty one takes more effort to get right. Even over generations. (Location 397)

But life is funny . . . curious . . . and full of ironies. The previous owners had bought the chateau for nothing, paying for it in revolutionary scrip during the French Revolution. The local nobility had fled France for their lives. The chateau was there for the taking. (Location 403)

We had a chateau that was dry and a roof that would last for maybe five times as long as we will. It was costly. (Location 412)

not. Where owners have not fixed the roofs, the chateaux are liabilities. (Location 415)

Many Jews throughout history have worked not as farmers, but as tradesmen, merchants, doctors, teachers, and moneylenders. (Location 427)

Jewish history is a long story of disasters, one after another. Many of those disasters involved avoiding extermination by fleeing. And fleeing costs money. (Location 433)

Adversity leads a people to appreciate preparedness. Wealth is preparation in negotiable form. (Location 438)

Some are smart. Some are dumb. Some show off their money; others don’t. Many—perhaps most—are so discreet that we don’t know who they are and what they do. (Location 465)

Most financial professionals are good at mixing drinks; some are excellent raconteurs. You shouldn’t let them near your money. As for U.S. Treasury debt, it is probably one of the riskiest investments you can make. (Location 473)

This is nonsense, in our view. All wealth either is consumed or must be owned and managed by someone. Serious Old Money accepts the responsibility of taking care of its own money and preparing the next generation to do likewise. (Location 480)

Real family money—Old Money—is rare; it’s way out on the edge of the bell curve. And it involves sacrifice, not self-indulgence. It involves giving up, not getting. It involves more work, not more leisure. (Location 497)

Let’s say, for example, that you’re able to put $1 million in a family trust. If you organize it correctly and get a rate of growth averaging 6 percent compounded (there are some very important tricks you need to know), your grandchildren could have $18.4 million in 50 years. (Location 501)

It’s about building the kind of family that can maintain its wealth and independence over generations. This is no easy feat. It’s against the odds. It’s almost against nature itself. Nature always tries to drag a family back down to the ordinary. And most ordinary people don’t have any wealth to speak of. So if you’re going to have wealth—and hold on to it for longer than a single generation—you’re going to have to do some rather extraordinary things. (Location 507)

Wrong. The “safest” investments always turn out to be the most destructive, from a long-term perspective. And besides, you can’t afford the low returns that these supposedly safe investments bring. You need investment returns higher than average. That means you need an entirely different investment approach. (Location 514)

The typical investor is betting against time. He buys a stock. He hopes the stock will go up . . . and that he will then get out before time takes it back down again. (Location 524)

The big trends are long-term trends. (Location 527)

healthy. A strong family can make money. A weak family can’t even hold onto money that someone else made. (Location 534)

They are not “conservative,” in the usual sense. Instead, they are active and forward looking. (Location 541)

They do not spend their time in idleness and leisure. Instead, they are engaged in business, investment and family activities. (Location 544)

They own huge discount shopping centers all over France and much of Europe. They were able to figure out how to run large-surface, low-price, rapid-turnover merchandising enterprises. Once they had the system figured out, they were able to apply it to several different retail industries. (Location 557)

They got to work early. They stayed late. They “struck oil” in the discount retail business. (Location 563)

First, it helps to have a big family. The disadvantage of a large family is that you have to split up the wealth among more people. But the advantage is that you have more hands to do the work. And the odds are you will have some clever people in the group. (Location 568)

Second, the family decided not to split things up, but to have a system of “everything for everybody,” in which all the children of the founding couple shared equally all the wealth (shares in active companies, mostly). (Location 572)

Also, as new businesses were created, they were spun out from the center—with “everything for everybody” still the guiding principle. (Location 582)

Fifth, they do not sell. They’ve had many chances to “monetize” their businesses. They’ve rejected each one systematically. Their businesses double every seven years. (Location 588)

They are not particularly concerned with quarterly results or with dividend payouts. (Location 594)

This is just a guess, but we think families such as the Mulliezes are likely to be much more important in the future than they were in the recent past. Family money, in particular, is likely to be much more appreciated. (Location 596)

But there is no reason to think that the trend toward centralized authority is immutable. In fact, history may be a long tale full of sound and fury, like the ravings of a lunatic. (Location 634)

The past 300 years have been marked by further and further centralization: first, the consolidation of kingdoms, duchies, and principalities of western Europe in the eighteenth century. (Location 639)

But now we know something. The political/economic model used by European and American nation-states for the last 150 years is going bust. (Location 657)

In The Millionaire Next Door, Thomas Stanley and William Danko found that children who had received family money were worth four-fifths less than those in the same professions who did not receive money from their parents. (Location 720)

One of Old Money’s most precious secrets is time. Here’s another one: modesty. (Location 735)

The best we can hope to do is to guess well so that the space between the beginning and the end is filled well. (Location 738)

Be aware that you may not be able to do all you hope to do, and if you’re not careful, you’ll do considerable harm. Tread boldly, but carefully. (Location 740)

the professionals who offer to help keep family and money are “talking their book,” encouraging you to do things that just, by coincidence, also put money in their pockets. (Location 742)

When society reached the stage at which a significant accumulation of wealth was possible, it too was naturally focused on the family. (Location 760)

While family members proliferated, heads of families and administrators realized that there was a benefit to keeping wealth intact and centrally managed. (Location 777)

This also tended to preserve family wealth, for land was not easy to dissipate. You could sell it. You could mortgage it. Otherwise, it stayed put. It passed from one generation to the next naturally and easily. Rarely was there a “liquidity event” that opened the door to lifestyle enhancements. (Location 788)

The old have not merely abandoned the young to their own fate; they have stabbed them in the back. It’s bad enough that they use up all their own money. But they don’t stop there. They spend other people’s money, too. And then they spend money that hasn’t even been earned yet. (Location 852)

the young in America must be the toughest generation ever. (Location 858)

Rich people have family offices. (Location 881)

We’re talking about people who make their money the old-fashioned way and try to keep it in the family, often for several generations. They see it as an heirloom to be passed down, not used up. (Location 883)

There are four primary elements of family wealth: the human, intellectual, organizational, and financial capital that a family possesses. (Location 926)

If the family balance sheet is too lopsided, if it has financial capital but little else, it probably won’t know how to hold on to the money for long. Or how to generate more of it. (Location 931)

Money earned over a long time comes with valuable lessons attached. You learn how to manage it. How to invest it. How not to waste it. Often, you are loath to spend it. Failure to learn those lessons is usually fatal to a family’s wealth. (Location 936)

How? Well, there are probably no secrets to this part of Old Money success. But the more you encourage, nurture, subsidize, and insist upon the characteristics you want in your family, the more likely you are to have them. (Location 958)

money, you need to make sure they have the training to do so. We are not naïve enough to think that this is as simple a matter as it appears. You might think: Oh, that’s easy; we’ll send our boy to college and make him take courses in economics and finance. (Location 961)

Much of what college professors believe about economics is wrongheaded. And much of what is taught in finance courses is theoretical, abstract, and mostly useless—if not downright dangerous. More than one family business has been ruined by a business school graduate who decides to apply the lessons he learned in school! (Location 964)

Whenever possible, you want to enhance your family’s human capital by bringing individual family members more fully into the picture. Children should be encouraged to participate in business and investment decisions, and challenged to analyze problems in a clearheaded, thoughtful way. (Location 973)

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Julius Caesar learned his trade largely at his father’s side. Your family members should do the same, working alongside one another in order to spread not merely knowledge, but something more important: culture. (Location 977)

John D. Rockefeller Jr. did not share his father’s enthusiasm for business. The old man might have been one of the greatest wealth creators of all time. (Location 984)

The younger Rockefeller focused on his family and setting up a family office structure. That structure is still in place today and has helped seven generations of Rockefellers preserve their wealth and flourish. (Location 985)

The act of letting a son go to pursue his calling was a successful strategy for developing the human capital of the Rockefeller family. (Location 994)

While, superficially, it certainly sounds like a good idea, we’re not sure it is good advice. While you don’t want to stop a child from pursuing his own goals, in practice, most young people don’t know what they want to do with their lives. (Location 996)

Your human capital can also have liabilities, such as substance abuse, behavioral issues, medical problems, investment delusions, or disabled elderly family members. (Location 1000)

An unrecognized, or unprotected, problem is similar to an unfunded liability on a balance sheet. Sooner or later, it is going to blow up. If the family has enough positive human capital, it will survive. If not, it will be dragged down—and effectively cease to be a going concern. (Location 1005)

They know that there are always hidden liabilities, in both human capital and the other kind. They know that they will take unexpected losses. (Location 1008)

They do this by encouraging family members to develop the talents they have, whether or not they bear a direct relation to the immediate financial goals of the family. (Location 1010)

The idea of retirement was invented by social engineers who were trying to develop economic models for welfare/warfare societies. (Location 1016)

state. Later, it was expanded by the Marxists, who were even more ambitious. They wanted even more control from the cradle to the grave—literally. In their great experiment in the Soviet Union, they told the cogs where to live, how to live, where to work, everything. (Location 1026)

And what had the USSR accomplished? The finished products were worth less than the raw materials it started with. It was a value-subtracting business on the largest scale ever, losing money on each sale and trying to make it up on volume. (Location 1034)

For decades, we lived with three generations in the same house. Never once did we notice that our mother and aunt (or grandmother and great-aunt, depending on which generation you were in) were “retired.” (Location 1050)

Not only were they very helpful in household management, but they were a great source of calm and experience in family matters. (Location 1054)

But our mother—and grandmother—is still much in demand. She is a stable, wise, and cheerful matriarch at 90 years old. The fact that she is too frail to travel is actually a benefit. (Location 1057)

Members of successful Old Money families think of themselves as stewards, not owners, of their financial capital. (Location 1064)

Personal money has a purpose: to increase your quality of life. It helps you take vacations. It permits you to live in the house of your dreams (if you can afford it). It pays for your beer. It lights your house. It finances your retirement. (Location 1068)

But that is not what we’re talking about in this book. We’re talking about a different kind of money: family money. It belongs to a family, but to no one in particular. Like all institutional money, it has people who are in charge of it. (Location 1078)

But a custodian who takes institutional money and converts it into his personal money is a poor custodian. He may even be committing a crime . . . or a sin. (Location 1083)

It gets “old” from disuse. It sits there, growing and compounding, undisturbed. It is aimless. Almost pointless. Sometimes useless. (Location 1085)

It increases no one’s standard of living, yet it should increase the quality of life for them all. (Location 1087)

But if you don’t have someone like that in your family—preferably at the head of it—you’re not likely to have “family money.” (Location 1094)

we built as soon as we had enough money to build a proper house, we chiseled the words of Virgil: “Hic domus, haec patria est.” (Location 1102)

Historians will note that modern times are much more like the imperial days of Rome than the days of the Roman Republic. (Location 1117)

Later, during the days of the empire, family fortunes were harder to hold on to—because emperors wanted the money. But that is a long, long story. (Location 1121)

who wants a family fortune is partly to protect himself from the state. (Location 1123)

The aristocrats of France, for example, found themselves practically hunted down as the Revolution turned into the Reign of Terror. (Location 1129)

Business owners and small farmers were systematically persecuted, exiled, imprisoned, or murdered. Anyone who resisted, or might resist, the collectivization of the farms or factories was labeled a “class enemy” and marked for elimination. (Location 1139)

Communists in China were no less brutal. Again, families with independent means were singled out as class enemies. (Location 1143)

What makes these campaigns especially interesting to us is that they targeted families. (Location 1146)

The other thing we take from this is that you are much better off with a well-organized, well-financed family. In all of the above cases, people with family money—preferably beyond the reach of the state—were better off than those without it. (Location 1156)

The modern “family” won’t work for our purposes. That is, you can’t reconcile the need for a very long-term wealth strategy with a moveable, flexible family—at least, not usually. . . . (Location 1186)

Family relationships, however, tend to endure—for better or for worse. (Location 1199)

You might say that the real secret to a family fortune is permanence—or at least as much permanence as is possible in this transitory life. Many things are beyond our control. It is not possible, for example, to live forever. (Location 1200)

Permanence begins at home. And family wealth fails because families fail. (Location 1204)

Serious Old Money families do things differently. They create their own culture. They’re relatively independent. They plan their lives purposely. (Location 1215)

families. They think in terms of 20, 50, 100 years, or longer. . . (Location 1217)

to build the family business and the family wealth. Youth and energy may be valuable at producing wealth. But old age and wisdom are essential to holding onto it. (Location 1219)

do. It takes an extraordinary effort to produce extraordinary wealth. (Location 1257)

The energy that is put into work is often sacrificed at home. (Location 1258)

This is part of what a great matriarch does. She is to be a counterweight to the lightness of her husband in the home. She bears the responsibility of turning an ordinary family into an Old Money family. (Location 1265)

The primary assets are the family members and their unique talents, knowledge, and experience. After all, if you pass along significant financial wealth without the means to manage it, it will be more of a curse than a blessing, and your family will not possess that money for long. Wealth can provide freedom, security, and opportunity for your family. Money can help family members live richer, more fulfilling lives. (Location 1313)

Family members can become dysfunctional and demotivated by receiving large amounts of unearned wealth. They can become combative and litigious. Unearned wealth often leads to strange and deleterious emotional reactions, for example, feelings of unworthiness, incompetence, and guilt. (Location 1319)

Then, by the third generation, the family has usually become quite usual—that is to say, the unique talents, luck, circumstances, drive, and ambitions that built the family fortune have disappeared, both from the gene pool and from the family memory. (Location 1329)

Here’s a surprise. You probably think the most important contribution to family money is made by the fellow who works night and day to make the money, right? Wrong! The role of the spouse—the person who, usually, doesn’t “work” at all—is critical. (Location 1340)

First, the spouses must agree not to dissipate or consume the money. Then, they must work together to build the institutions, the culture, and the people that can hold it together. (Location 1348)

Instead, she’s a “producer” of capable, confident children. She focuses on her children, making sure that they are emotionally provided for, that they are well-educated, capable individuals. (Location 1357)

She has meaningful emotional relationships with everyone in the family. The CEO can help resolve disputes between family members. She works to strengthen family bonds and maintain harmony. (Location 1369)

One of the most frequent causes of failure is conflict between siblings. How many times do you hear stories about successful families who turn on each other as soon as the patriarch and/or matriarch dies? (Location 1380)

One enters the family business. Another becomes an artist. Often, the real problem is a dysfunctional heir who causes conflict between siblings. The tabloids find these stories immensely entertaining. (Location 1384)

Business-owning families have more fuel for the family conflict hearth. Some members of the family are likely to work in the business and have more control over the family’s wealth. Those on the outside are likely to feel neglected. (Location 1389)

Only strong families keep the fortune in the family. We do not want our money to destroy our families. We don’t want inheritance battles. We would like to avoid divorces and disgruntled or designing spouses. So we have to build strong families. (Location 1418)

I have noticed time and again that strong families are built around strong, shared values. A strong, shared identity. I’m sure most of you have heard of the Cabots and the Lodges—not at all like the Capulets and the Montagues of Shakespearean fame. The (Location 1420)

This issue of family happiness is of particular interest to us because we all know that while a family can be happy without a fortune, an unhappy family will not hold on to its fortune for long. We are talking about how to keep wealth in the family over generations. (Location 1438)

But the family has to be a place where the individuals in it can refresh themselves—a sort of green pasture where you can lie down and be refreshed. Where you can let down your guard, and where you can feel good about yourself just because you are part of that family. (Location 1445)

To build a strong family, Elizabeth believes there are three main things that you need: communication, connection, and culture. (Location 1458)

It’s the matriarch who helps facilitate dialogue. She talks. And she organizes the settings that make others talk, such as regular family meals. When communication is needed, she makes a point of reaching out to family members and stimulating communication between family members. (Location 1460)

Families also need to feel unified. They need to feel that they are more than a random collection of people who just happen to live together, temporarily. They need what Elizabeth calls “connection.” (Location 1465)

Family life is an adventure. The family is a team of adventurers—a band of brothers and sisters—united by their own history in common purpose and common experience. (Location 1467)

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Give advanced notice to heirs about what’s headed their way. This includes financial wealth and other responsibilities. Failure to inform the next generation can devastate young families. (Location 1488)

Avoid alienating family members. All efforts should be made to engage all children in the family affairs. Everyone should have some role that they deem as “important” to the family. (Location 1496)

He had no interest in the family business. Everyone made him feel that if “you are not a businessman or president, you are nobody.” (Location 1498)

His energy and enthusiasm for the family foundation was contagious. He plunged into it and learned how to make “good” philanthropic decisions. (Location 1500)

(We have mixed feelings about philanthropy. Most of it is probably a waste of money—or worse. But it appears to be a good way to keep some family members focused on a common goal.) (Location 1502)

The parents had to change their patterns of rewards and recognition. Once they did, proper communication was restored, trust was rebuilt, and the competition was brought down to a healthy level. (Location 1511)

The father was a leading European industrialist who had built a multibillion-dollar chemical manufacturing company. He did not believe in shared leadership of the family business. (Location 1514)

Maybe one of the grandkids might be interested, but one’s a doctor and the other’s a musician. I doubt they’re interested in giving up their professional careers.” (Location 1524)

It’s a politically incorrect topic. But problematic spouses can tear a family apart. You want to engage family members as much as possible in family affairs, family plans, and family finances. If the children have a sense of what the family is and what it is trying to do, it will help them choose spouses that can help them. (Location 1526)

Succession plans have to be based on the shared vision of your family, not simply by the decree of the patriarch. (Location 1530)

summary, it’s the job of the matriarch to strengthen the family, while the patriarch builds the wealth. There are certainly other ways to do it. But this division-of-labor model has been used by the majority of successful families for hundreds of years. (Location 1531)

burden? Turns out that the old saying “For the hand that rocks the cradle is the hand that rules the world” is true. (Location 1546)

She worked very hard and demanded the same of her children. She, along with her husband, instilled in them a sense of duty to the family and to each other. (Location 1566)

Against overwhelming odds, they have successfully grown family wealth for over 250 years. (Location 1568)

“It is only the reputation, the happiness and the unity of the family which lies close to my heart, and it is as a result of our business dealings that we remain united. If one shares and receives the accounts every day, then everything will stay united, God willing.” (Location 1570)

They reorganized and went on to build the most successful network of investment banking businesses the world had ever seen. (Location 1574)

A great matriarch gives balance to family members by helping fulfill their emotional needs. She provides for them and makes them feel loved. (Location 1581)

It’s the matriarch who builds the family. She develops its human capital. This is the family’s most valuable resource. A family with members who are capable of building and preserving wealth will always be able to rebuild if something goes wrong. (Location 1584)

They survived numerous wars, religious/ethnic persecution, government seizures, plagues, famines—you name it. Over the years, various branches of the banking business failed. But there was always a Rothschild family member somewhere who could help the family. (Location 1587)

Successful families are those that develop their own family culture: a set of beliefs and a sense of mission, as well as a common narrative about who they are, where they came from, and what they are doing. (Location 1596)

Family money depends on family culture. And family culture depends on family members—old and young. Having a family culture that supports wealth generation and preservation is another secret of Old Money. (Location 1601)

Successful multigenerational families spend a lot of time developing a family culture that encourages production and discourages consumption. This becomes a kind of shared family value, another form of “glue” that helps hold your family together. (Location 1604)

Another way of looking at this is that the Old Money family needs to stay as “outsiders.” It has to remain apart—to some extent—from the culture of the masses, or even of the rich. (Location 1609)

Take, for example, the family business. If your family is involved in a business, it will be a major component of your family’s culture. Your family should hold in high regard the unique skills and secrets that make it work. You should also teach these skills and insights to the next generation as a right of passage. (Location 1617)

It is typical in modern America for people to mock or denigrate a business, its customers, and its products. (Location 1620)

owns. He may also be slightly embarrassed about being “in trade” or about the kind of work his family business does. (Location 1621)

He may regard the family business as a bit unworthy, or even unattractive. But attitudes are subtle, infectious, and insidious. (Location 1623)

If your family is not involved in a family business, think about the common occupations your family is involved in. Maybe you come from a line of farmers, lawyers, or doctors. (Location 1629)

But beyond that, the following are a part of the family identity: Niche business know-how. Business infrastructure developed by previous generations. Trusted family contacts and friends. Family reputation (the family brand as understood by outsiders). Financial resources. (Location 1638)

What sort of people do you marry? Does you family tend to marry into other wealthy, socially connected families? Or does it tend to marry into hardworking salt-of-the-earth sort of families? Will the next fiancé fit well into your family? (Location 1661)

How a boyfriend or a girlfriend handles the journey—and the stay at the isolated and arid ranch—tells us how he or she will fit into the family. (Location 1669)

People who “marry for money,” as they say, earn it. Seeing that the prospective spouse will fit with the family identity is more important. A lasting, stable, happy marriage is the most desirable outcome when it comes to family wealth. (Location 1673)

the family philanthropy becomes a focal point of the family activity and identity. (Location 1676)

In our family, we try to avoid politics altogether. We believe in remaining outsiders. We think it is dangerous to try to get on the inside. You risk becoming insiders, looking for handouts and wealth redistribution rather than wealth creation. (Location 1680)

For example, a story of an ancestor overcoming some sort of obstacle can be inspiring for family members. (Location 1686)

This helps you establish what is called a “family brand.” It’s a way of identifying your family and a simple way—like a cattle brand—of keeping track of who you are and why you are different. (Location 1689)

Family rituals and celebrations for family members reaching certain milestones help strengthen family bonds and the sense of belonging. For example, when a new family member joins the Family Council, this is an opportunity for a family rite of passage. (Location 1705)

Beware of allowing family members to opt out of family events. Certainly, there will be periods when individual family members need to “do their own thing.” But, ideally, this should be in addition to the family activities, not a substitute for them. (Location 1710)

These things can take decades and sometimes generations to build up. And they can be used by multiple generations to create wealth. (Location 1714)

Family vacations are an opportunity to strengthen your family culture and identity by doing something that is unique to your family. It helps to have a place to go as a family for vacation and holidays. Keep the old family farm or beach house. Schedule events well in advance. Welcome in-laws, boyfriends, girlfriends, and new family members as warmly as possible. (Location 1722)

Family properties are the most familiar and often-used assets in the family portfolio. This also creates an opportunity to draw family members into the family enterprise by asking them to manage family property. Properties also hold emotional value for family members. Memories are tied to family property. For these reasons, family property should be well managed and treated carefully. (Location 1729)

You want to keep property as a unifier, not a divider. So avoid dividing up properties among family members as much as possible. (Location 1734)

Family gatherings on family property offer an excellent opportunity to strengthen family bonds. These should be held at major holidays, and preferably, there should be a gathering to celebrate an event that is completely unique to the family. Weddings. Funerals. Graduations. Use family properties to mark important family milestones. (Location 1736)

When you make an investment decision, you make a statement about your family’s culture. (Location 1745)

You want family members to view family investments as consistent with the family culture. (Location 1747)

As children grow up, for instance, they are invited to accompany their father on business trips. (Location 1749)

Travel makes up a big part of our family’s culture. We tend to travel fairly frequently. We try to make the effort to learn about different cultures and languages, especially in places where the family business is located. (Location 1751)

The older generations spent 15 years in France. Most of the second-generation children went to French schools and speak fluent French. (Location 1754)

A successful family culture is one family members want to be a part of and identify themselves closely with. (Location 1760)

For over 200 years, the family has managed to stay together and preserve and grow wealth to astonishing levels. There are plenty of conspiracy theories about them. And there’s much that we don’t know. (Location 1766)

The Parisian arm of their banking business was nationalized by the Mitterrand government in 1982. But they were able to rebuild in France, starting over from almost nothing. (Location 1768)

At age 21, he reluctantly went to work for the family business. Nineteen years later, he was finally allowed out. He started a zoological museum and funded expeditions around the world. He formed the largest zoological collection ever amassed by a private individual. (Location 1772)

And Nathaniel Philip Rothschild, age 40, is said to have generated approximately $600 million from his stake in the hedge fund Atticus Capital and the launch of Vallar PLC, an investment company focused on mining. (Location 1781)

They’ve done it by creating, nurturing, and sustaining a family culture that appreciates expertise in high finance. In the early days, this meant strategic marriages, forcing family members into the family business, and other, more extreme measures that would not be prudent today. (Location 1784)

The Rothschild family identity was carefully developed and nurtured from the beginning. Its model of expanding the family business by placing family members in strategic locations was followed by other Jewish financier (Location 1789)

The Kennedy family fortune was made partially from stock manipulation, insider trading, and bootlegging. (Location 1795)

Again, we don’t approve of either of these family examples. As Monsieur Mulliez explained, you want to avoid publicity. You should avoid talking to the press. And you should avoid the lure of becoming insiders. But at least these examples show how powerful family branding can be. (Location 1800)

In forming the family identity, think about what you want to be in 20, 50, or 100 years. You’ll need your family members on board with everything. You’ll need your vision of the future to match with theirs. (Location 1807)

Family businesses and family investments challenge family members. They cause them to stretch, to grow into the responsibilities in front of them. You can help them grow by providing internships, jobs, investment analysis, and on-the-job training in business and finance, as well as more “store-bought” educational opportunities. (Location 1811)

“A hired hand is very different from your own blood!” The job of the family office—its ultimate aim, in fact—is to prepare and harness the potential of your family’s human assets. Some of the ways of keeping family members engaged and learning include: (Location 1814)

For example, when the family bank lends for a new business start-up, or for professional education, family members reach a level of success in their careers so they can support themselves. (Location 1822)

Put another way, the purpose of the family office is to help current and future family members develop their talents and become productive. (Location 1825)

You want to start emphasizing the benefits of delayed gratification to family members at a young age. Family members need to understand how delayed gratification was key to building the family wealth in the first place. And they need to understand why delayed gratification is also necessary to continue growing and preserving wealth for the future. (Location 1830)

You want to transfer your knowledge in a position or a skill to someone else so that they can take over when the time comes. That frees you up to move higher up on the ladder and attend to more important business. (Location 1839)

Most people think they need to hoard their accumulated knowledge so that they become more valuable. Maybe they think it protects their jobs. (Location 1842)

And the sooner, the better. This ensures that your protégés gain real-world experience in managing the family money. (Location 1850)

And you want all family members to be passably competent in financial affairs. Let them each manage a small portion of the family wealth, say somewhere between 0.5 percent and 1 percent. There is no better way for them to learn the ropes. The earlier they make mistakes, the better. (Location 1857)

But that price will be much greater the longer you wait—and perhaps catastrophically high if you wait too long to take advantage of the wealth creator’s guidance. Ideally, you want all family members to be passably competent in financial affairs. They can gain this competence by managing some portion, however small, of family assets. (Location 1861)

We figure it gives them more options, a wider range of experience and particular skills that they would not otherwise have. (Location 1865)

Giving family members the opportunity to explore new cultures helps develop your family’s human capital. (Location 1868)

People in the developing world understand and respect family business, more so than in the United States. (Location 1871)

It can be reassuring for them to do business with a family member of the business owner, rather than an unrelated employee. (Location 1873)

Also, you never know where the next business superstar is going to come from. The college roommate of your younger author is now a valuable employee in our family business. (Location 1877)

In our business experience, too, we find that it is difficult to import upper-level employees. Typically, people enter as very young adults. They absorb the culture of the business. They fit in. Outsiders often don’t fit in. (Location 1882)

Sons and daughters will marry outsiders. You naturally want to protect your children and your family wealth. But you also know of the potential pitfalls involved in meddling in your children’s love lives! (Location 1884)

by way of the Family Council, should make policies regarding spouses. (Location 1886)

But it is important. Family members should understand that when they marry, they bring someone into the family. Whom they marry is an expression of the family identity. (Location 1892)

In terms of more formal policy, you need something that addresses wealth protection in the context of the 50-50 potential for divorce. (Location 1896)

agreement. This kind of thing seems a bit anti-romantic. But under certain circumstances, it is recommended. It depends on the financial situation of the person getting married and the legal structures the family is using to hold wealth. (Location 1898)

but as we understand it, the beneficiary’s assets in a perpetual trust, such as the one my family uses, would not be considered marital property. But income or profits derived from money distributed from the trust during the marriage would be considered marital property. (Location 1901)

That’s partly because we’ve had only a handful of meetings, and we’re still getting the hang of how they will work. (Location 1907)

If she is in our meetings, would that give an extra, unofficial vote to her husband? (Location 1910)

What if all six children married in quick succession? The addition of so many “outsiders” would change the makeup of the family’s governing committee very quickly. (Location 1911)

For instance, as we mentioned, after graduating top of his class from Brown University in 2000, 23-year-old Raphael de Rothschild, scion of one of the world’s wealthiest families, died of a heroin overdose at a friend’s apartment in Manhattan. (Location 1922)

But perhaps they can detect problems sooner; they are usually in closer and more frequent communication with one another. Whether they can do anything about the problem is another question. (Location 1925)

But one route is to have a procedure already spelled out in the family constitution. Then, without making judgments on any particular family member, you can merely apply the rules as necessary. (Location 1928)

The Family Council can allocate funds for treatment and other health-related matters. (Location 1931)

After the family, the other essential element of family money is the money itself. Where does it come from? How much do you need? How do you get it? (Location 1945)

But probably more important than the money are the other things we inherit from our parents. It’s a competitive world. Those who inherit money have a head start. (Location 1952)

easy. Partly because there are so many clever people trying to find ways to take it away from you, and partly because you might be eager to get rid of it yourself. (Location 1956)

Nature detests a monopoly and abhors a vacuum. Family wealth is like a monopoly; it is a concentration of assets in a family, monopolizing wealth that might otherwise be spread to the four winds. Nature doesn’t like it. And she sends out agents of all sorts to try to eliminate it. (Location 1961)

But the worst inside risk is the heir himself. First, he might not be up to the challenge of managing wealth. Second, he may feel guilty about having it and be eager to get rid of it. (Location 1968)

Most people are able to see through the thin veil of unfairness to the more profound truth behind it. We are all born with strengths and weaknesses. We take what we get. We make the best of it. That’s fair. (Location 1975)

Some people are born smart. Others are stupid. Again, studies show what you’d expect. Smart people, those who score highly on IQ tests, earn more money, are less likely to get divorced, live longer, and more rarely go to jail than stupid people. (Location 1982)

They found that IQ predicted success much better than socioeconomic status. In other words, being born into a rich family or a poor family mattered less than if you were smart (as measured by IQ tests). (Location 1986)

Probably the thing that makes one most successful in life is merely luck. As John D. Rockefeller put it, the way to success is to (1) get to work early, (2) stay late, and (3) strike oil. (Location 1996)

But we are telling you what to do once you have one. Why? Because it shows you how difficult it is to do what you’re trying to do. The more money you have, the more reasons you find to get rid of (Location 2013)

Most people with money have no reason to feel guilty or proud. They were neither particularly smart nor particularly greedy. They were just lucky. And they are not likely to do any good by giving their money away or advocating higher tax rates on the rich—unless, of course, they actually want to give it away or pay it in taxes. If they do, it merely shows that they are not fit to have it. Better to move it along to more able hands. What the hell? Spend it. (Location 2018)

The world is full of people who want to get ahead. Everyone wants as much power, status, and money as possible, with the least effort. Some work for the government. (Location 2026)

Your money is capital. It is a call on resources. As far as we can tell, the best thing you can do for yourself and others is to invest it wisely, with the hope of a real profit. Profits are the only things that tell you with reasonable certainty that you are actually adding value. (Location 2032)

A friend of ours had volunteered to go to Nicaragua during the Sandinista years. He felt guilty about the way the U.S. government had reacted to the communist takeover of the country. He wanted to help out by building houses. (Location 2047)

This, of course, costs money, too. You are now replacing the market system, which needs none of these things, with a system of centralized, bureaucratic management. Instead of honest buyers and sellers, now your paid functionaries decide who gets bread and who doesn’t. These management systems divert further resources from actually providing food to paperwork and administration. (Location 2089)

Prices, freely determined, are what tell you when something is worth doing and when it is not. They tell you how much both resources and energy cost. (Location 2105)

Bill Gates and Warren Buffett are certainly geniuses. At least at making money. Wouldn’t it be asking a little much to expect them to be geniuses at getting rid of it, too? They know what it takes to make money—good ideas, properly managed, properly funded. (Location 2113)

Giving money away is the spirit, not the practical doer, at work. It may not make sense from a purely economic point of view; that is, the net effect is probably to depress output. But it may increase human happiness. A man can be made happy by a number of things. Not all of them are the sort we are proud of. Not all of them increase the world’s well-being. (Location 2132)

The man is a hero. Is the money well spent? Is the charity worthwhile? Is the result greater wealth/more happiness—or less? Nobody knows. Nobody really cares, either. That’s another problem with charity: The giver is not more blessed; he is a bigger jerk. He cares only about his own status and about his own vanity, not about what harm his money actually does to people. (Location 2151)

That’s true for those who have their own businesses, too. If they are selling services that they provide themselves, they face the same limits as a salaried worker. They are selling time. And their time is not that valuable. (Location 2172)

But before we go on, let’s address a niggling little point: numbers themselves. You will notice that we say “about 2 percent” rather than 1.3 percent or 2.8 percent. You have to understand that precise numbers are a bit of a lie. They pretend knowledge that really isn’t there. The fact is, nobody knows how much investors made over the past 100 years, with or without dividends. It is impossible to know such a thing. (Location 2199)

Who would leave money in the original Dow stocks for 111 years? No one. Alas, human beings are not programmed for stock market investing. They tend to project forward their recent experiences and forget the experiences of those who went ahead of them. (Location 2234)

Even if he had the fortitude to sit through such alarming crashes and held on through the Great Depression . . . and through the calamity at Dunkirk . . . and through the bombing of Pearl Harbor, he certainly wasn’t going to make it all the way to the end of the war. (Location 2242)

Investing is what you do to preserve and enhance a fortune, not to make it. (Location 2253)

The difference is simple. If you are in the financial industry, you are a seller; if you are a retail investor, you are a buyer. You make money, generally, as a seller, not as a buyer. (Location 2256)

Many make money by creating and selling those products. (Location 2258)

If something grows at a fixed percentage each year, the amount it grows in each successive year will get bigger over time (even though the rate of growth remains the same). And small differences in the yearly growth rate result in big differences in long-term results. (Location 2291)

Today’s wealth is based on trade, commerce, production, financing and the other moving parts of a capitalist machine. Even land-based fortunes, of which there are many, are usually the result of rising demand and increased prices caused by the pressure of a growing capitalist economy. (Location 2516)

Researchers asked rich people how much money they needed to be rich. A million dollars didn’t get you very far in the eyes of these rich people. They said you needed $7.5 million, minimum. (Location 2547)

That is why so many people with high incomes have no money. As soon as they get a raise, an entrepreneur offers them something they can’t live without. (Location 2557)

In our experience, you can live “as though” you were rich on, say, $350,000 per year. (Location 2558)

Having investable assets in the $250,000 to $5 million range simply makes you one of the “mass affluent,” as the financial services industry now calls them. (Location 2573)

A smart young man, he figured he could parlay a small fortune into a very big one. He set up an investment firm. He made some bets. Within a few months he had lost it all. (Location 2583)

F-U money is the money you need so that you are not at the beck and call of every son of a bitch with a 2-cent stamp. It is the amount of money you need to be free. It could be a lot or a little, depending on your ambitions. But it is the money you need so that you can do what you want. (Location 2594)

The rich are often accused of being overly concerned with money. In our experience, it’s the poor who spend the most time thinking about it. When we were poor, we had to think about how we could afford to get the radiator fixed in our old truck or how we might make ends meet if we lost our job. (Location 2602)

When you don’t have F-U money, you tend to be interested in politics. You want the government to pay for your pills, your children’s education, and your retirement. You figure it’s written somewhere in the “social contract.” Or even in the constitution. You will be a good citizen, vote, and pay your taxes. The government will look out for you. If you have no independent means of your own, the bargain is almost irresistible. (Location 2610)

When you are planning for a family fortune, however, there is no question of spending capital. You cannot spend it; it no longer belongs to you. Even if it still belongs to you legally, if you think of it as spendable, personal money, it won’t remain “family money” for very long. (Location 2635)

If you were committed to preserving the family capital, you could spend only the amount in excess of 8.3 percent. (Location 2645)

Think about how much you can put into the pot and what you can do with it that does not involve spending it. As we will see, as little as $300,000 can be a worthwhile family asset. But the more the merrier. As your resources grow, so do the things you can do with them. (Location 2652)

Houses are very inexpensive, at least compared with what we’re used to in the Baltimore-Washington metro area. You could have your own garden. A few goats, chickens, and rabbits. An old car. A wood stove. A library card and an Amazon account. (Location 2655)

Would this be a barren and boring life? Not at all! Gardening, building, reading, visiting with friends, watching movies on the home computer. What more could you want? And with such low fixed costs, you could easily splurge from time to time with a weekend in Manhattan or Miami. (Location 2660)

Looked at that way, a $300,000 capital fund becomes less useful, but still extremely helpful. It is enough to finance a house. The family could simply take the mortgage, rather than leave the money in T-bonds, and make sure the mortgage gets paid. (Location 2675)

Probably the most agreeable way to build a family fortune is just to own something you like owning that subsequently becomes very valuable. That happens from time to time. (Location 2700)

The rate of return per year is much more modest—only 8.73 percent. But what a way to make your money! The family had the pleasure of living and using the house for a century—and made $9 million to boot. (Location 2718)

Few people can tolerate an investment that grows, even at 10 percent per year, for a very long time. They want the money now. They have spending plans. They may even need the money for very legitimate and worthwhile purposes. Education. Health care. Weddings. Funerals. (Location 2733)

Wants and needs rise to meet the income available to them; that is a financial law as rigorously enforced as the law of diminishing returns or the law of supply and demand. That’s why it’s so hard to be rich and get rich at the same time. The way to beat this phenomenon is either to exercise remarkable self-control or to outrun your wants and needs with “escape velocity” wealth. That is, wealth that rockets up so fast, you can’t shop fast enough to keep up with it. (Location 2745)

A family may own a farm or an apartment building. The asset is not very exciting, so they forget about it. (Location 2750)

That’s the beauty of real estate. It does not go up any faster than anything else, but it is hard to spend. (Location 2752)

He is trapped. He gets rich in spite of himself. Nor does he pay current taxes on his rising wealth. This allows him to build wealth on a pretax basis, greatly enhancing the rate of return. (Location 2753)

You make a small investment. You add to it. You keep at it. (Location 2756)

expenses. If you are lucky, you will be able to hide the fact from the rest of the family, allowing the compounding more time to reach escape velocity. (Location 2758)

Another place compounding works is in business. Often, businesses reflect the kind of compound growth you might otherwise get from an investment; only, it is less obvious. Accumulated effort compounds like dollars and cents. Work, capital investment, contacts, skills and a little luck are a great combination. (Location 2763)

But let the business grow, and one day you could realize that you’ve reached the point where your earnings and capital can grow faster than your expenses; you’ve reached financial escape velocity. (Location 2770)

Another way to reach FEV is by owning assets that can’t readily be turned into cash. Timber, real estate, a business itself—these can go up 10 times or more without giving you any easy way of adding to your expenses. (Location 2774)

The nouveaux riches seem to want to spend their money to announce to the world that they’ve “made it.” They want to show off, to prove something, to flaunt it. (Location 2782)

It is more likely to drive an old car and wear old, threadbare fashions. (Location 2784)

And it cultivates its superiority with its own codes, such as the reluctance to show off wealth. (Location 2786)

Locking money up for long periods of time can help money go from new to old without getting wasted. Not only does this protect it from you and your family, it protects it from the government. (Location 2790)

events. They don’t tax unrealized, compounding gains. This why most successful families favor very long-term investments in very illiquid assets. (Location 2791)

Among our friends is a family that owns vast tracts of forest. They have been in the family for five generations. (Location 2794)

But it would so shock the family culture and family conscience that it is almost impossible to do so. It would take a very ambitious, very brash business school graduate to even suggest such a thing. And then, with luck, the rest of the family would overrule him. (Location 2795)

It just sits there, waiting for the next generation, the next round of inflation and repricing. It is an asset that is hard to spend, hard to dissipate, and even hard to appreciate. It is just there. (Location 2799)

the less desirable the property, the more profitable (Location 2804)

Slum real estate and parking lots produce decent yields. Horse farms produce less income than soybean farms. Pawnshops are more profitable than art galleries. (Location 2804)

They only own slum apartment buildings for the money. So the money has to be good in the slums. (Location 2806)

But sticking with our theme, we see that while old, rich families may own “prestige properties” and racehorses, it is likely that the new fortune was made elsewhere—perhaps in ghetto housing or chicken farms. (Location 2811)

Our own weakness is for old stones. We love broken-down houses, preferably mansions with walled gardens. We can’t resist wanting to fix them up. This really has little to do with the subject of this book, at least not directly. (Location 2813)

Baltimore has been very instructive to us. We’ve learned that city government can destroy a city, no matter how many advantages it has. (Location 2824)

Yet despite all these advantages, the city has been in decline for three-quarters of a century, with a rapid, almost terminal decline over the last two decades. (Location 2834)

Nevertheless, we have made Baltimore our home, both for ourselves and our business. We work in mansions that no one else wanted that are inefficient for office use, but nevertheless bring a certain charm and graciousness to business (Location 2840)

So far, we have worked on two semi-abandoned chateaux and a tumbledown ranch house in Argentina. (Location 2844)

But the general rule is this: The more the property is attractive, the less it is a good investment. (Location 2847)

The more the business is prestigious, the less it is profitable. And the easier it is, too, the harder it is to make money in it—which we explore in Chapter 4. (Location 2849)

Most family fortunes are created by successful businesses. Not by careers. Not by professions. Not by investing. Not by winning the lottery. (Location 2875)

Just as multigenerational families invest differently, so are there some things about family businesses that make them different from regular businesses. And so are there some things that most people take for granted about business that are probably not so. (Location 2880)

It is a business. A family business. Fortunes die easily. (Location 2885)

Money is easily spent. Easily neglected. Easily wasted. It is not solid enough to hold on to. In today’s world, it is something that usually exists only in our imaginations—or in ghostly electronic form. (Location 2887)

A business is different. It is much more real, tangible, in your face, and demanding. (Location 2898)

Remember our general rule: The harder it is, ceteris paribus, the better it is. The longer it takes to make money, the longer it is likely to stick around. (Location 2904)

First, money from a business is more reliable than money from stocks or other investments. (Location 2914)

That is not true of business wealth. Businesses take many years to build. They are sold off only reluctantly and with considerable difficulty. Businesses are illiquid; they cannot be exchanged for other things readily. They are, at least in that sense, more permanent than cash. (Location 2919)

Second, one of the reasons families like businesses is that they earn money from them. Money invested in other ways may pay little or no dividends (see below). (Location 2925)

This is partly because it is difficult to sell off a business in little pieces. If you have 200,000 shares of a stock, it is easy to sell a few shares every time you need a little ready cash. (Location 2928)

Third, a business is not dead capital. It is alive in almost every sense of the word. It includes living people: customers, employees, managers, competitors, and suppliers. This requires owners to have real, human relationships, with the loyalties and responsibilities that go along with them. (Location 2932)

A business has a very real, physical sense, too. There are buildings. Machines. Trucks. There is a place. (Location 2935)

Given these advantages, a family fortune based on a family business does not have to be as big as a fortune based on cash. You can easily see why that is. (Location 2943)

But private businesses typically sell for multiples of only 4 to 10 times earnings. Or less. So a business that produces $100,000 worth of dividend income might be worth only $500,000 or $1 million. (Location 2948)

But that’s just the beginning. Because the owners of the business control its spending, too. And its hiring. Often, two or more members of the family are employed by the business. (Location 2951)

But in our experience, business owners often have considerable flexibility about how money is spent and frequently enjoy “perks” from before-tax income. (Location 2956)

They build fortunes by operating a business—even if it is a business within a business, a form of intrapreneurship, where people operate small businesses in the context of a bigger one. (Location 2965)

Here it’s an advantage to be in a different town, preferably in a different country. They don’t know who you are—for all they know, you’re an eccentric billionaire, looking for opportunities. (Location 2976)

This technique works best for people who have a wide array of knowledge and other connections. (Location 2981)

why should these people want to talk to you after the first five minutes, when they’re sizing you up? (Location 2982)

Anyway, I would take that grubstake and hit the road and go someplace new, as different as you can get from wherever you start. That way you’re new, fresh, unique. If you’re American and you stay in the U.S. where there are masses of people just like you, no one has any special reason to hire you; (Location 2994)

The important thing to remember is that you have to think like an outsider, not an insider. Insiders make money by succeeding in existing organizations. They can be very important, very competent, very hardworking, and very well paid. But it’s very hard to build a fortune as an insider. (Location 3005)

You have to come up with something new or a new way of doing things or just a better way of doing things in an old industry. (Location 3008)

He points out that most successful entrepreneurs are not risk takers. They are interested in building businesses, not in gambling. (Location 3011)

But they try to minimize the risk by following very sensible, conservative rules. (Location 3013)

The idea is very simple. You begin very small. You try a number of things. If you’re lucky, you’ll find something that works before you run out of time, money and confidence. It may be a small thing. But it has to pay the bills. It has to generate enough money to keep the lights on and allow you to try other things. (Location 3016)

Of course, there were good times and bad times. Often, when we forgot the “one step at a time” rule, we lost money. Sometimes lots of money. We thought, for example, that we could turn a chateau in France into a conference center. (Location 3038)

We had to step across into a different culture and a different political and regulatory environment. We didn’t know how to manage a conference center. We didn’t know how to control the renovation. (Location 3040)

In another failed venture, we took up a satire newspaper. It was “publishing” in a broad sense. (Location 3053)

“I take chances all the time,” he said. “But I never take a chance so big it could sink the business.” (Location 3064)

Learn from them. Then, take some more small risks. Never put the business itself in jeopardy, because it is very hard to start a business, and it becomes more and more valuable as you learn more and more lessons. (Location 3066)

You know what works only by eliminating what doesn’t. Of course, you try to draw general rather than specific lessons from each failure. But you are never too sure how much you can generalize. (Location 3071)

Time and money are limited. You don’t want them to run out before you’ve come across a sustainable business model. And remember, as long as your business is “alive,” you are still in the game—testing, trying, and failing. (Location 3077)

we can discover it only by trial and error. It also highlights an important but underrated attribute of the successful entrepreneur: modesty. (Location 3080)

In fact, after 35 years in our career, we often feel that we know less and less. (Location 3084)

The person who thinks he knows the answers without testing, though, is a risk to himself and his business. (Location 3086)

So the odds that he has fallen on a good one are small. (Location 3087)

There is hardly a real entrepreneur in the world who still has a straight nose. If he stands his ground and takes the punches—steadfastly enduring all that life can hit him with—he will soon be out cold on the mat. (Location 3091)

The real business builder knows he has to bob, weave, and duck. He has to roll with the punches, not take them in the head. And if he has a vision, he knows it is no substitute for real experience. (Location 3094)

Contrary to popular myth, business builders try to avoid risks whenever they can. They soon learn that there are a lot of sucker punches in the world of business; they need to avoid them if they are to stay in business and succeed. (Location 3097)

The trick is not only to learn from your own experience, but to take as much from the experience of others. You don’t want to be a mutation. You want to be an improvement. And you do that by studying, watching, and listening to other people who have tried to succeed in your chosen industry. (Location 3107)

As successful people become older, they become more reflective. They wonder why they succeeded. They reminisce. They take guesses. (Location 3117)

He didn’t invent anything. He just applied the lessons we had learned over many years (and at great expense). His new business took off almost immediately and is still going strong. (Location 3125)

There are always new ideas, new inventions, and new innovations coming out. Most, like mutations, are dead ends. They never go anywhere. (Location 3135)

industry—that has already proven itself, but which is not fully implemented. That is, he wants to launch his boat on a rising tide. Because he knows that success is not just a matter of his own genius and hard work. It is also a matter of luck—and the kind of luck you get when you have the wind at your back. (Location 3144)

where it has moved from the fringe to the mainstream. (Location 3148)

The smart money was probably betting against us. Entrepreneurs were rushing to the Internet to put up web sites. The new medium was so attractive that it attracted not just entrepreneurs with vision but investors with money. (Location 3158)

First, the new medium was the place to be. There was no use ignoring it. The Internet reached the “tipping point” in the mid-1990s; (Location 3169)

soaring. An entrepreneur, starting out, has a much better chance of making a success in an expanding business. (Location 3175)

While many, perhaps most, entrepreneurs are opportunists, the person who is trying to build a durable family business is not. Not in the ordinary sense. (Location 3182)

investors—not necessarily an idea that will make a good business. (Location 3186)

The initial investors were also very short-term oriented. They weren’t interested in building a real business or even in creating real wealth. What they wanted was an attractive idea that could be developed and then sold to other investors at a profit. (Location 3188)

We don’t recommend that approach for two reasons. The first reason is obvious: It usually doesn’t work. It’s hard to make fast money. In fact, the fastest way to make money is to make it slowly. You can try to make it fast forever and never get anywhere. But try to make it slowly . . . keep at it . . . and you’ll probably end up with at least something—eventually. (Location 3200)

You’re actually trying to build a successful business. And successful businesses are built, as we’ve seen, by trial and error over a long period of time. (Location 3205)

The quick-hit entrepreneur, however, has only money. (Location 3207)

Instead of investing a fortune of other people’s money in a vision, the successful wealth builder invests little bits of family money to learn something. Then, only when he has proven out his concept does he put down big money. (Location 3211)

But the family wealth builder is not interested in becoming a media hero. He wants to be a family hero. And he will more likely succeed by not taking the risk of a big, expensive, flamboyant failure. (Location 3217)

fortune—even if it is tiny—at risk. (Location 3218)

He wants something else: to succeed at building wealth for his family. He takes no giant leaps. He risks not his whole wad. (Location 3219)

For another thing, he is not at all a “lone wolf.” He almost never succeeds on his own. A real business is a collaborative effort. (Location 3224)

Mark Ford says that every successful business needs at least three key people: an idea person, a marketer, and a pusher. (Location 3239)

Most often, it requires real businesspeople who are capable of managing the key business processes: production, quality control, and sales. (Location 3255)

The third stage is where the business grows beyond the founder and its initial managers. Often, the founder—who tends to be a maverick, an eccentric, and often a royal pain in the derriere for his more mainstream managers—gets edged out. (Location 3259)

The goal of the family is not necessarily to manage the business itself, but it must understand it intimately and control it completely. (Location 3261)

but the business must respond to the needs and goals of the family, and not necessarily its managers or outside stockholders. (Location 3263)

So the managers tend to pay themselves far more money than they are worth. Plus, they give themselves huge perks and bonuses, far more than they deserve. (Location 3274)

This is related to another insight. Not only must a business be started by “outsiders,” it must continue to focus itself on the world outside of itself. (Location 3289)

managers believe they must keep the employees happy. This is a big mistake. It focuses the organization in the wrong direction, inward . . . toward itself. (Location 3291)

By accident and instinct, he had hit upon a good idea. If he’d thought about it more, he would have added: “Oh yes, and fire any manager who ever mentions employee morale again.” (Location 3298)

focused outward, toward the people on the outside it is meant to service: customers, suppliers, partners, and associates. (Location 3305)

It is the role of shareholders, properly informed and motivated, to keep a business focused on what really matters. (Location 3309)

Whether tied to the business by blood or by employment contracts, the goal is to increase the real value of the business over time. (Location 3311)

Family shareholders are the kind of capitalists that capitalism needs. They are willing to make investments over years—even over generations—in order to build the value of their business. (Location 3316)

enterprises. Instead, aim for something such as a chain of car washes, dry cleaners, or salvage firms. (Location 3323)

But if you want to make a family fortune, pick a difficult industry, with high barriers to entry, low prestige, and little liquidity. Make it hard to get in—and hard to get out. (Location 3325)

If you are a typical businessman or investor, you want a business that is as profitable as possible, as soon as possible. You also want one that is as marketable as possible. (Location 3330)

It is a difficult business, perhaps with relatively low returns on capital. It requires active, on-site management. It is physical, tangible, observable—and something to which people can become sentimentally attached There is generally little liquidity, and a “liquidity event” is a very big deal. The main asset—land—compounds in value without capital gains or income taxes. (Location 3340)

General advice: Concentrate your forces when trying to get somewhere in life—diversify your assets when trying to protect them. (Location 3346)

Of course, this is not true for hourly work. But it is true in most businesses or professions where experience counts. (Location 3368)

The statistics we found show that married men earn 11 percent more than their unmarried counterparts, and that the gap widens as they age. (Location 3371)

We believe that specialization, concentration, and accumulation pay off in a spectacular way—a lot more than 11 percent per year. (Location 3373)

The young man graduated from college two years ago. He could have easily entered the family business. Instead, he decided to try to make his career in one of the world’s most difficult métiers, as a singer/musician/songwriter. (Location 3383)

She, too, has chosen a difficult career; she trained as an actress, moved to LA, and had—like her brother—approached her career in a disciplined, organized way. (Location 3390)

not careers in which discipline and organization come easily or pay off readily. There are no fixed hours. And no fixed route to professional advancement. Half the work you do, at least it seems to us, is just figuring out what work to do. (Location 3392)

The point we are making is that success doesn’t always come immediately. And it’s not easy to sustain a career that doesn’t provide quick, positive feedback. But in our experience, it pays to stay the course. (Location 3404)

They leave school not knowing much of anything. If they can read and write clearly, they have an advantage over most college graduates. But school doesn’t prepare them very well for real life. (Location 3407)

But the sequence of events in real life doesn’t follow simple scripts. Instead, it is endlessly complex with “facts” that are always subject to doubt. (Location 3410)

In school, the complexities of real life are removed so that students can be tested on set groups of memorable, learnable, understandable bits of stripped-down, sanitized “knowledge.” (Location 3416)

And unless your job is to throw the switch on a toll bridge or to collect tolls on a toll road, your new knowledge is likely to involve a great many things that are uncertain, unknowable, and variable. (Location 3434)

Generally, the more formulaic the work, the less scope there is for making money at it. (Location 3440)

It may involve raising money, “selling” your ideas, taking a chance on a new career or a new business, convincing clients to leave their habitual sources, or convincing employees to work harder—or better. (Location 3447)

Remember, success is competitive. While you are adding to your business capital, your competitors tend to wear out, move on, or retire. (Location 3483)

The longer and harder you work at something, generally, the more success you have. But there’s an intriguing idea left dangling. What if you could work at something longer than a single life span? (Location 3486)

The idea is both self-evident and shocking. In America, you are supposed to be self-reliant, self-sufficient, and independent. (Location 3489)

What if it weren’t true? What if your success in life depended largely on your parents and grandparents? We know that wealth is accumulated over many generations. We know that just by looking around. Our generation did not build many of the edifices we see, nor clear the fields where crops are planted, nor invent the automobile, the airplane, the television, or the toaster. We inherited those things and much more besides. (Location 3492)

All it means is that taking the whole population, average people who have more education tend to earn more than average people who have less education. (Location 3517)

But what about earnings that are not average? What about the fellow who was going to be a doctor and instead decides to start a business of his own or goes to work for a pharmaceutical company? Would he be better off with more years of book learning or more years on the job? (Location 3521)

Had he arrived on the scene in 2005–2007, for example, he might have loaded up the family with a portfolio of mortgaged-backed derivatives, in order to earn higher yields from “safe” investments. (Location 3540)

You can imagine him telling dad and the old-timers that there were new and better ways to do things and that they should be trying to “maximize shareholder value” by leveraging the firm. (Location 3543)

Julius Caesar never earned an MBA. Nor did Cornelius Vanderbilt. Or Henry Ford. Or Andrew Carnegie. Or practically any of the great successes of business and financial history. MBAs hadn’t been invented! (Location 3560)

“The thing about doing business in China,” said a man sitting next to us on an airplane, “is that it can take a very long time to build up trust. And without it, you’re lost. They don’t trust you. So they won’t treat you very well. That’s how they protect themselves, by cheating you first.” (Location 3570)

Investment firms often have a “sucker list.” It is a list of people with money but not much investment experience. (Location 3606)

Actually, nothing could be further from the truth. Serious Old Money investors barely follow the news and never react to it. They know that the really important trends take years to develop and then many years to play themselves out. You can take your time . . . months . . . years . . . before making a decision. There is no need to feel rushed. (Location 3613)

the more pressure you are under to make a decision, usually, the more likely you are to lose money. (Location 3616)

Investment success happens by taking big positions in big trends and leaving them alone for a long time. (Location 3619)

Now we’re looking at opportunities we think will pay off over the next 30 years. We’ll tell you more about them in the next chapter. (Location 3625)

opportunity. We could invest now and expect to earn three times the performance of the Dow, each year, over the next, say, 20 years. But what’s the hurry? There’s a better (Location 3629)

Most people think you should invest one way to create a fortune and another way to protect it. That idea is wrong. Time, not the size of your portfolio, is the key variable. If you’re interested in long-term, multigenerational wealth, you should use the same techniques whether you have little money or a lot. (Location 3640)

We don’t recommend you try, for the reasons outlined in Chapter 3. But since the techniques for building and maintaining family wealth are essentially the same, you’re going to have to know how investing works. (Location 3643)

We share Buffett’s approach to stock picking. And we share his general philosophy. But only to a point. He’s surely right about how to pick stocks. But picking stocks is not all there is to it. (Location 3650)

Second, investing in something you don’t understand will probably not work, either. There’s no reason this is necessarily so. Anything priced in an efficient market should be properly priced, with about as many people who believe it is too cheap as believe it is too expensive. But markets are not necessarily efficient. And if there’s any inefficiency in it at all, the ignorant investor will be the victim of it. (Location 3656)

We’re looking for the fortune-making trends that will multiply our wealth by 10 times or more over a long period of time. We don’t want to beat the market. We just don’t want to get beaten by (Location 3685)

Here’s a simple rule: The more they want to sell you a financial product, the less you should want to buy it. In Paris, the best apartments never even show up in the realtors’ windows. Instead, every one has a dozen admirers waiting for the owner to die. Buyers are usually friends or family with a special “in.” (Location 3719)

The best deals are rarely presented to the public. They go to friends and family—the people who are “in the room” when the deal is done. (Location 3722)

But wait. How is that possible, we wanted to know? Why don’t the local farmers buy it themselves? If they can make that kind of return, they should be able to get all the financing they need. (Location 3730)

The first question, of course, should be “what’s wrong with it?” Unless you’re one of the neighbors, or unless you really know what you are doing, you have to assume that the neighbors are describing you as the “out-of-towner moron” who might buy it. (Location 3734)

Investors are permitted to see themselves making high returns on what seems like a can’t-lose proposition. After all, the world needs more food! Sometimes investors are even told that their earnings are “guaranteed.” (Location 3738)

The best investment is one that no one tries to sell you. And that no salesman represents. (Location 3775)

neighbor who buys the good bottomland, the person who knows more about it than any other buyer and who realizes what the value really is. That’s why you want to be in business—and the best thing to buy is the thing that expands and improves your business, the thing you understand better than anyone. (Location 3776)

When it is depressive, buy. When it is manic, sell. You want to buy what no one tries to sell you from buyers who are completely discouraged. You want to buy things that mark you as a bit of a nut. (Location 3783)

An investor who lived through the entire twentieth century probably would have gone broke at least three times. Maybe more. Let’s begin by assuming he dodged the crash of 1920–1921 and the depression that followed. (Location 3794)

You see, Old Money is not like other money. It shouldn’t try to be. Most people don’t have any money. People who have money are different by definition. If you want to have money, you have to do things differently. (Location 3837)

A serious family, with a serious long-term wealth strategy, on the other hand, can’t do that, for a number of reasons. First, the obvious: It knows that chasing alpha will give it only average returns over time. It knows that average, long-term returns are very small. As discussed in Chapter 3, it wants to do better than that. (Location 3857)

How to do it? The secret is to use the one big advantage of very long-term investors: time itself. (Location 3863)

Put simply, asset allocation is how serious investors think about investing. This approach is backed up by historical data. Two separate studies—one by Brinson, Hood, and Gilbert in 1986, and another by Ibbotson and Kaplan in 2000—showed that professional fund managers’ asset allocation decisions are responsible for nearly 100 percent of returns. (Location 3867)

The stock market took its sweet time, too. But that’s the way beta investing goes. One decision. Lots of waiting. The Dow lollygagged around for five years after 1980 before it hit 1,500. So, let’s say you waited five years and bought at 1,500. Then you waited again. Gradually, the Dow rose. And rose. And rose. (Location 3905)

In fact, they buy what the wealth managers consider the least safe and least conservative investments. And they try to do so at the moment the pros consider them at the very height of their riskiness. (Location 3926)

Old Money investor. Alpha is all about winning. The alpha male is the leader, the hero, the winner. (Location 3939)

He’s got the big wheels and the big biceps when he is young. When he’s older, he’s got the big bank account. (Location 3940)

In investments, he likes systems, secrets, hot tips, new technology—anything that will help him make money fast. He’s a winner in whatever he does. And he keeps score! (Location 3944)

Instead, we want to succeed. Right here on Planet Earth. (Location 3947)

It means avoiding getting involved in extraneous investments, businesses, gambles, projects—even when it looks as if you could win at them. (Location 3949)

It’s success we’re after, not victory. And success for the family beta investor means taking the time to listen to the market’s story. Giving it time to tell its story. Letting it explain itself before you take a major position. (Location 3953)

Your choice of beta—your asset allocations. The number of years you are invested. Your rate of return per year. (Location 3957)

So the stock also has a value. And that value is almost always different to the traded stock price on a given day. Underlying value doesn’t change much or often. But the traded stock price changes every day, and often by a large amount. The secret to successful value investing is to buy stocks when the price is significantly below the value. (Location 3969)

When traded prices are well above value, you sell and move into better opportunities or cash. (Location 3973)

While others need to invest for a payoff of 5 or 10 years down the line, we can wait, even for generations, if need be. So we can take advantage of the “miracle” of compounding in a way others can’t. We can wait for compounding to work its magic. (Location 3976)

Let’s assume for a moment that your investment strategy ends up making 15 percent per year on average over time, before taxes, but after costs. (Location 3993)

Income is usually taxed at higher rates than capital gains. So you may think this is just a tax effect. (Location 4024)

The first investment—let’s call it the “Payout”—gives you a 10 percent dividend every year and no capital gains. The second investment—let’s call it the “Reinvest”—gives you no dividend, but 10 percent capital gains every year. The pretax return to you is the same in both cases. But the way you get it is different. (Location 4027)

The reason is that profits from the Reinvest have initially grown tax free and been taxed only once at the end of the 30 years. Profits from the Payout have been taxed every year because you received income. (Location 4042)

Jeffrey Snider describes why confusing volatility with real risk is a big mistake: (Location 4073)

Treating risk as though it were just a mathematical expression of the recent past permitted the modern wealth adviser to tell his client that he could get predictable returns by mixing and matching various investments according to their historical volatility and gains. (Location 4088)

In particular, the falling price of credit meant that even bad investments could be refinanced at lower interest rates. (Location 4101)

There’s another very important reason to let the market tell its story. Family money must last through more than a single bull market. (Location 4105)

And you can’t afford to gamble, either. If you have a million dollars and you judge the chance of a big run-up in the cotton market as 50/50, you can put your whole wad on cotton—either you’ll have a lot more money or you’ll have nothing. (Location 4110)

The point is, sometimes it pays to stop chasing alpha—the next deal, the next stock, the next triumph—and step back and look at the big picture. (Location 4153)

The United States was the world’s leading oil exporter, up to 1974. But now Americans buy energy at the world price, just like everybody else. And the price is rising. U.S. consumers compete with consumers all over the globe, including those in emerging markets. (Location 4196)

We don’t necessarily believe that any of them will become the America of the twenty-first century. But we take it for granted that they will be the big oil users of the future. At present, the per-capita use of oil in the United States is 10 times what it is in China. But the trend is clear: Oil use in the emerging world is rising rapidly, as you’d expect. (Location 4238)

Here’s another reason America may not be such a good beta bet over the next 20 to 50 years. A big advantage that Americans enjoyed in the past was that they were relatively ungoverned. At the time of the American Revolution, the total tax take from the government is estimated at only 3 percent. When, in the Declaration of Independence, Thomas Jefferson writes about the English crown having “sent forth a swarm of agents to harass the people and eat out their substance,” he was using a bit of hyperbole. There weren’t many government employees. An American, especially one on the frontier, could live his whole life without meeting one. (Location 4262)

“It’s either control or money,” says a friend of ours. He means that a controlled economy doesn’t produce much money. But a free market economy that does produce wealth is “all out of control,” which is even more unbearable to many people. (Location 4271)

Mr. Market always tells you what things are worth—right now. Tomorrow, he changes his mind. Investors and business people are always guessing about which direction he will take next. And sometimes he makes major mistakes—such as the value he put on the tech stocks (Location 4277)

The mistakes of philanthropists and politicians are corrected, too, in the fullness of time. But not easily. And not cheaply. Never “marked to market,” they are corrected only by war, bankruptcy, poverty, hyperinflation, and/or revolution. (Location 4285)

For approximately 199,700 years, the growth rate of the human species was negligible. Vanishingly small. Zilch. For thousands of years at a stretch, there was no change in populations or living standards. (Location 4300)

If it is true, is it also true that the developed economies have reached the limit of the “cheap energy” dividend, which began with the large-scale exploitation of coal in the eighteenth century, followed by the wide use of oil in the nineteenth and twentieth centuries? (Location 4305)

What about nuclear? Well, a possibility, but recently, nuclear power was dealt a huge setback. It’s not cheap, not when you add in all the safety features and the cost of the occasional emergency. Many nations are now reexamining their energy policies to decide whether nuclear has any role to play at all. What (Location 4309)

America. The United States had the most innovators. The most new high-tech startups. The most applications and computers. The most capital invested in the new industry. The most educated, technically literate, well-financed people in the world. They also had the slickest capital markets, ready to grease as much money as possible toward a promising new company. (Location 4319)

We’re suggesting that the kind of growth the United States saw in the nineteenth and twentieth centuries was anomalous. (Location 4328)

And one of those laws tells us that new technology, whatever it is, eventually arrives at declining rates of return. (Location 4330)

The investment returns of the past 200 years actually may reflect this anomaly. That is, they may be the product of abnormal growth rates brought about by the introduction of fossil fuels. (Location 4339)

It may also be that the prejudices investors developed—such as the bias toward the stock market over saving money in gold—may be the product of unusual circumstances, rather than the reflection of universal, eternal investment truths. (Location 4341)

The same could be said for investment opportunities. If a project can’t be explained to a man standing on one leg, it isn’t a good investment. All the rest is detail. (Location 4357)

The deal—investment or business—has to be simple. There can be a lot of detailed paperwork behind it, but the basic deal must be simple enough that you can remember it. (Location 4360)

Most beta bets are based on wissen. And a lot of what people know to be true turns out to be not true at all. That is why you have to choose your beta bets very carefully and monitor them regularly. And it’s why it’s very important to remind yourself at all times that whatever you think, you may be wrong. (Location 4396)

First, this is a trade that only very long-term-oriented investors can make. Over the next year, or the next five, or even the next 10 years, the relative performance of developed and emerging market assets is unpredictable. Anything can happen. So if you’re investing for an outcome five years out, you should probably ignore this suggestion all together. (Location 4403)

Of course, the trap could be somewhat obvious, too. In the near term, the world seems to be in a Japan-like deleveraging phase. This has the curious consequence of shifting capital from the fast-growing emerging economies to the United States—a slower, more debt-drenched, fully developed economy. (Location 4409)

it). If it intensifies—and expands—it is quite likely that the flow of investment capital from the emerging markets to the United States will increase, while the flow of goods and services from the emerging markets to the United States, Europe, and Japan will decrease. (Location 4412)

Fortunately for us, popular investments—that is, those that are likely to underperform the market—also happen to be oriented to the short term. Not only do people want to make a lot of money, they want to do it quickly. (Location 4432)

Those will be the favorites of people who want their profits sooner rather than later. Since the payoff from favoring emerging markets could be far in the future, we are probably safe in guessing that it is not, generally, an overbought position. (Location 4436)

The developed world has shopping malls. So they built them in Beijing and Mumbai, too. Developed economies have highways, ports, container shipping, banks, McDonald’s, and all the rest of a modern economy’s infrastructure and output capacity. (Location 4452)

It is an expression of the principle of “regression to the mean.” For approximately 199,700 years of human existence, a man’s labor in India was about as rewarding as a man’s labor in Africa or Europe. (Location 4458)

to innovations and discoveries brought “on line” in the eighteenth and nineteenth centuries and fully expressed in the twentieth. These were two: America and the use of fossil fuel. (Location 4465)

They found money—gold and silver—which gave their economies an immediate rush. But the effect was short lived and harmful. What they got was the equivalent of today’s sugar rush from printing-press money: an increase in the supply of money with no increase in the ability to produce things. The result was inflation—and the impoverishment of the entire Iberian Peninsula. (Location 4472)

Oil-fired machines soon increased output so greatly that the average person in America, Europe, and, later, in Japan became much richer than his contemporaries in the undeveloped world. (If there were a racial, cultural, or geographic hypothesis explaining Europeans’ comparative success, Japan disproved it. Even after being defeated in World War II, it grew richer more rapidly than any nation ever (Location 4480)

What if the “Lost Decade” we have just gone through is actually more ordinary? What if very low rates of growth were the “mean” to which we have just now reverted? (Location 4486)

By the late twentieth century, people in the developed world took progress and gross domestic product (GDP) growth for granted. Governments went into debt, depending on future growth to pull them out. So did corporations, insurance companies, pension firms, and ordinary households. Everyone counted on growth. Spending and tax policies were based on encouraging growth. Whenever growth stalled, governments rushed to try to get it going again. (Location 4505)

Today, there is hardly a mortgage, stock, bond, municipal plan, government budget, student loan, retirement program, housing development, business plan, political campaign, health care program, or insurance company that doesn’t rely on growth. Everybody expects normal growth to resume after we have put this sluggish period behind us. (Location 4511)

made possible by the discovery of new continents and cheap energy? (Location 4514)

But once the new, wider niche was filled out, his progress and population growth leveled out and once again became stagnant. So we have to wonder: Is the developed world at the end of its growth spurt? (Location 4521)

Why the 1970s? We can only guess. Most of the tools and machines we take for granted today were invented in the 1920s, 1930s, and 1940s. After World War II, they were put into service in all the developed countries. (Location 4526)

Gross energy use per person peaked out (in the developed world). The rate of return on an incremental unit of debt went down. Rebounds from recessions grew progressively weaker; they were driven by making credit cheaper. Real hourly wages peaked in the United States. (Location 4532)

people stopped using more and more energy. (Location 4535)

The U.S. economy was a powerhouse then because it was so unlike what it is today. It was a free-market economy back then. Willing buyers and sellers made capital allocation decisions. Sometimes they were right. Sometimes they were wrong. But the markets corrected mistakes, continually redirecting capital from weak hands to strong ones and from failed projects to successful ones. (Location 4543)

We don’t know if any Westerner fully grasps how it works. Even the Chinese we talk to are perplexed. But there is no question that central, regional, and local planners, by no means pure capitalists, direct vast amounts of investment capital. (Location 4548)

Then the digital revolution was a flop, too. An enormous flop. Millions of people may be using the World Wide Web, looking at photos of congressional crotches or planning the next “flash riot,” for example. Hundreds of people may have become billionaires by selling electronic devices and Internet stocks to the masses. But how much has the Internet contributed to the wealth of nations? Apparently, not a damned thing. (Location 4591)

Great advances in living standards and related increases in the value of equities have been driven by big increases in energy use. (Location 4603)

Meanwhile, growth rates in the developed world have declined. In real terms, as mentioned above, U.S. growth in the twenty-first century seems to have fallen back to medieval levels. Why? Who knows? The concept we are presenting here—that developed economies have reached the point of diminishing returns on additional energy inputs—is a maverick idea, at best. Perhaps it is true. Perhaps it isn’t. (Location 4607)

After 60 years of credit expansion, it is time to reduce debt. That alone could be responsible for the failure of growth and material progress. But why was there so much (Location 4611)

But if our analysis of the effect of energy on GDP growth is correct, that is just beginning. Developed economies could lose a whole century. (Location 4624)

What is most remarkable about this freakish new money system is that it is always on the road to hell, but never seems to get there. Since 1971, paper currencies have lost value at a breakneck speed. You’d think their necks would be broken by now. In 1972, we bought a gallon of gasoline for 24 cents. Now it is 16 times that much. Gold has gone up 50 times—for a 98 percent loss to the dollar holder. If this pattern continues for another 40 years, a gold doubloon will buy about what it does today. A dollar will buy nothing. (Location 4668)

But the fall in yields (the rise in bond prices) should not come as a surprise. Japan’s government debt lost its triple-A status in 2002. Yields did not rise. Instead, they stayed between 1 percent and 2 percent. Then, when equities plummeted after the S&P announcement, Japanese 10-year notes—IOUs of the most deeply indebted nation on Earth—reached an all-time high, with yields just below 1 percent. (Location 4677)

A debt deflation causes prices to fall. When prices are falling, even a zero interest rate gives investors a positive rate of return. And it isn’t even taxable. (Location 4682)

harder. People switch from borrowing, spending, and investing to exterminating debt and hoarding cash. That’s when stimulus measures—fiscal or monetary—cease to work. It’s when the formula of the previous half-century becomes worthless. That’s when the cynics begin warming up for their final laugh. But we’re getting ahead of ourselves. (Location 4704)

Recession came, with the economy going into the worst recession since the 1930s. But it worked, and the price of the dollar—measured in gold—rose for the next 20 years. Woe to the “gold bugs” who stuck with it. . . . (Location 4715)

In a credit expansion, truly wonderful things happen. A bank takes $10 worth of capital and—thanks to the fractional reserve banking system—lends out $100 or more. Consumers spend money that they never actually earned. This, too, has a wonderful effect. Businesses typically pay out in wages much of what they take in in sales receipts. Labor is an expense. It is also their major source of sales. But when sales come from credit, there is no offsetting expense item. The money that would have been paid out in wages drops to the bottom line as profit. (Location 4764)

Consumers pay back $100 worth of loans and the money shrinks down to $10—or worse. Often, loans are not repaid at all. In this simplified example, if a single $10 loan is not repaid, the bank’s capital is wiped out. It cannot loan any money to anyone. What happened to the $10? It disappeared. (Location 4769)

Businesses make fewer sales so they need fewer employees to make them. Joblessness increases, further reducing household incomes, sales, and profits. (Location 4774)

It doesn’t take much imagination to see how these trends become self-exterminating. The higher debt grows, the less able the economy is to support it. Debt must be paid down, not increased. (Location 4799)

But more than that, they also try to figure out to whom the debtor owes money and sell his paper, too. (Location 4803)

This reduces the value of the debtor’s remaining good assets at the very moment he needs them most. And if he needs to borrow more money to stay afloat, his interest rates rise—making it harder than ever for him to make ends meet. In a matter of minutes, the poor fellow—be he an individual, a bank, a company, or an entire nation—is wiped out. His paper—his IOUs—are worthless. (Location 4806)

People rarely experimented with a pure paper money system. Their intuition told them it was a bad idea. So what happened when they tried it? Though the historical record is short, at least it is clear: No paper money system ever lasted through an entire credit cycle. (Location 4816)

It has run for 40 years. It has allowed huge imbalances to build up, as well as the huge run-up in private- and public-sector debt. What will happen as the deleveraging downstroke runs its course? (Location 4819)

Hard structures are the legal structures—trusts, tax and estate planning, and so on—that make having money a burden. It takes time and hard work to get them in place and to understand them. And then you must remember what you’ve done and why. (Location 4849)

There are four key “hard structures” you need: A will and an estate plan A trust A tax strategy Investment/bank accounts (Location 4878)

certain life insurance payouts are not included in an estate, for estate tax purposes. So if you can convert wealth that you hold in a bank account or other assets to an insurance program, you may be able to avoid taxes. (Location 4902)

because much of the challenge of protecting wealth over generations is avoiding unnecessary costs. (Location 4906)

Like almost everything else involved with multigenerational wealth planning, there’s a big difference in how insurance works over a short term and how it works over a long term. Over a short term, you may protect yourself against a risk at reasonable cost. But over a long term, the risk is more likely to be realized as an event. (Location 4909)

“Yes, all that is true,” continued our colleague. “I hate insurance, too. But the difference between what you’ll pay the IRS and what you’ll pay the insurance industry can be huge. (Location 4924)

“Here’s how it works. You just take your million and buy a life insurance product. Then you sell the death benefit to your heirs for peanuts—because who knows when you’ll die? It’s not worth very much. With this product, they end up getting a $1 million insurance payout—guaranteed.” (Location 4930)

It tends to stretch out . . . and disperse readily. A cash payment from an insurance company falls on most heirs like champagne. Within weeks, it is probably consumed. (Location 4940)

They must be rigid enough to hold up to the tempests that are surely coming. But they must be flexible enough to bend to the winds you can’t possibly foresee. Locked into an insurance program, you may find yourself unable to shift your windscreen to face the challenges. Ideally, you do not want to have to depend on an insurance company—or any other company—to protect your family money. (Location 4954)

Why? Because an estate is what you leave when you die. Ideally, you don’t die. Of course, that is unlikely. But when you do die, you might still have organized your affairs so well that you leave no estate. So you don’t need a plan for it. If you do it right, you will not own anything when you die. Now that we think about it, it’s probably better to not own much of anything all your life. But that’s a long discussion. (Location 4958)

By the way, in much of the world, people pretend not to own anything. That is why diamonds, rare coins, and other forms of wealth that are hard to keep track of are so popular. (Location 4964)

One of the first considerations of hard structures is an obvious one. Family money has to be owned by someone. You want it to be owned by someone who doesn’t die, doesn’t get drunk at parties, and doesn’t run off with a buxom redhead. (Location 4981)

“A family can stand one weak generation,” says our friend Lord Rees-Mogg. “But not two.” (Location 4986)

And the most suitable trust for this sort of thing is what is known as a “dynasty” or “perpetual” trust. A trust can last, in theory, forever. (Location 4988)

rule. The answer: the length of any life in being at the time the trust was begun, plus 21 years. States have generally modified the rule to make it more predictable. But a few states have eliminated the rule all together. This makes it possible for a trust to last, theoretically, forever. (Location 4991)

For example, a minority interest in a business is subject to a discount. A business is simply not worth as much if you do not control it. So, rather than sell the business to the trust at full market price all at once, you may sell it in pieces and reduce the price of each piece to reflect the minority discount. How much of a discount can you get? It depends. But we have seen some as high as 40 percent. (Location 5018)

One part is the part you assign to the trust. The other part is a “life estate,” giving you the right to the income from it while you are alive. Depending on how old you are, a “life estate” or a “life interest” should substantially reduce the value of the remainder of the asset. (Location 5022)

do: You sell it to a trust with your children or grandchildren as beneficiaries. You retain a right to change the trustee. The trust is, therefore, defective. For federal income tax purposes, it is as though it didn’t exist. (Location 5042)

You have taken the asset and transferred it to the trust. So the trust takes the income—$100,000 per year—and pays it to you. Meanwhile, you use the money to pay the taxes on the earnings and to pocket what is left. (Location 5046)

the trust owns the pawnshop free and clear. Then you give up the right to change the trustee. This perfects the trust: From this point on, the trust is viewed as the owner for U.S. federal income tax purposes, as well as for inheritance tax purposes. The asset has been transferred, free of death taxes. (Location 5049)

Expatriation is most frequently discussed in its more radical form: leaving the country. We’ll get to that in a minute. In a word, we’re in favor of it. Europeans and other nationalities do it all the time. But it’s a bigger move for Americans because they can’t just move out to avoid U.S. taxes. They also have to give up their U.S. citizenship. Not many people are willing to do that. And it’s not a good idea—for most people. (Location 5074)

However, a trust can be an exceptionally good way to avoid all taxes—including income and capital gain taxes—if you set it up the right way. Again, it may not matter to the ordinary person. He pays relatively little in taxes. And he figures, grosso modo, that he gets as much from the government as he contributes. (Location 5100)

reduction. First, they allow people to live in their jurisdictions at low—or no—tax rates. Sometimes you can negotiate a deal with a tax haven. Often, you don’t have to. Tax havens typically do not tax income from a trade or business that is not done locally. As you can imagine, few people earn much money from local tax haven businesses. Instead, the typical tax haven exile has already made his money or has income from non-local sources. (Location 5109)

The general rule is that residence is determined by a long list of interrogatories, beginning with where a person actually spends most of his time and ending with where he goes to church and with whom he plays bridge. Most countries claim anyone who stays more than half the year within their borders as a resident. And most then expect him to pay taxes like any other resident. (Location 5122)

proving that you are a resident of another. Not easy to do when you travel frequently. So what you want to do is to establish “permanent” residency somewhere, whether or not you actually ever live there. (Location 5136)

Naturally, the best place to be a permanent resident of is a place where you would plausibly be a real resident, where you are able to build the kind of connections you need and where tax rates are low. This, of course, depends on many different considerations. Family wealth is often low-income wealth, for example. (Location 5143)

But keep in mind that a family needs a permanent home. (We’ll talk more about this later.) That permanent home should be in the “right” place. A place where it is safe, stable, and plausible. (Location 5151)

We were studied, followed, tracked, and shaken down. (Location 5161)

Americans are particularly ill-prepared to deal with international taxation in an effective way. We Americans tend to try to obey the law. (Location 5166)

We bought a house. Naturally, we hired lawyers to structure the purchase in a taxwise manner. And naturally, the lawyers failed to foresee what would happen. Within a few months, we got a notice telling us we owed a rather large amount of tax, the consequence of a detail we no longer recall. (Location 5168)

Later, when we got to know people better, we realized that we had been fools. Lawyers in France—and other countries—typically give one kind of advice to Americans and another to their local clients. And when we described the transaction to an accountant a few years later, he looked horrified. Of the tax bill, he inquired in disbelief and amazement: (Location 5174)

“You paid it? You’re not supposed to do that. The tax people must have been shocked. They were just negotiating with you. They didn’t expect you to pay it.” (Location 5179)

These are weaknesses in the American character that will probably be corrected in the years ahead. But readers should be aware that their own instincts and training are not always well suited to the circumstances in which they live. (Location 5189)

Tax havens are still useful, though less so. Governments all over the world have ganged up against them. In order to use the world’s banking system and benefit from trade and travel agreements, the tax havens are being forced to open up their records and betray their clients. (Location 5198)

Typically, you will have your house and most of your assets in your home country. You may have investment property. You may have stocks, bonds, and cash, as well as business interests. These may be the elements of your family wealth. They may be only your personal wealth. But it’s also a good idea to have some wealth outside the country where you live and work. Why? You never know. (Location 5207)

Just days later, we were awakened before dawn and told we were being deported to Siberia, with 15 minutes to gather any personal belongings needed for immediate use. Our land, homes, and possessions were now property of the Russian state. My wife, my three-year-old daughter, and I were put into a truck with a group of others and taken to a railroad station. (Location 5251)

The Poles could not leave here under the penalty of death. It was freezing cold, 20 degrees below zero. The locals were told they must shelter us, but they were also very poor; the NKVD allocated three or four families to a house. The locals were as good as they could be to us under the circumstances. (Location 5260)

I also bought tools and worked cutting wood, fixing stairs, or other odd jobs for a few rubles or more often food. I sometimes went days without food so that my daughter and wife could eat. We managed to survive the first harsh winter and the following summer, and despite my coming down with malaria and my wife almost dying of typhus. We were able to get medicine and food from those who had it—as long as we had some gold. Zlotys (Polish currency) had never been accepted, rubles were, but gold was now preferred over anything. (Location 5264)

Remember, your family’s wealth depends on two variables: its net (of costs/taxes) return per year and the number of years it continues. (Location 5308)

Ideally, you will have a bank or investment firm that you trust—with someone you know you can work with, with an unassailable reputation and an unleveraged balance sheet, and low fees. This is not going to be easy to find. Few institutions will match that description. And the best of them won’t want you for a customer. (Location 5310)

“I’m sorry, sir,” said this very proper Englishman. “I don’t know how to tell you this . . . so I’ll just tell you. You don’t have enough money to interest us. We only take accounts in excess of $200 million.” (Location 5323)

Foreign banks don’t want American clients. Why? Because the United States imposes such a burden of paperwork and menaces both clients and banks with such painful penalties, the banks have generally thrown up their hands and tossed out their U.S. clients. (Location 5328)

Whenever we open an account we have to send proof of residence, not to mention passports and other identification. You could probably fabricate a whole separate non-U.S. identity in order to open a tax haven account, but God knows what would happen if you were discovered. You risk losing all the money you were so desperate to protect. (Location 5336)

But there are plenty of gray areas in and about the tax code. He had gotten himself into an area that was not only gray but dangerous. The IRS threatened to declare his tax-saving strategy not only ineffective but illegal. In theory, he could have been tried for a crime and put in jail. (Location 5343)

The trouble was it also put an ocean between his wife and her family. Living in Paris was fun—for a while. But the couple soon felt cut off from their own children and from the life they wanted to lead. (Location 5347)

Our friend gave up his foundation and his tax-saving plan. He paid the tax he would have paid had he not embarked on his tax adventure years earlier. He paid a modest fine and immodest legal fees. The deal was done. (Location 5353)

the more complicated your strategy, the less effective it is. Lawyers and accountants get rich. You get poor, frustrated, and nervous. Many, maybe even most, are not worth the risk, the expense, and the familial wear and tear. (Location 5358)

If it is not yours, the taxes that arise from it will no longer be your concern. At least that is the idea. (Location 5363)

You may have worked all your life to build up wealth. Then, by signing a document, you will no longer be able to decide what happens to it. Legal “ownership” could be in the hands of someone you don’t even know: a trustee. What if the trustee stabs you in the back? How do you control the trustee? What can you do if the trustee absconds with your money? (Location 5367)

mission: to keep poor people from getting into the United States and to keep rich people from getting out. Illegal immigration is a problem on one side; illegal emigration is a problem on the other. (Location 5379)

Those who sneak out often do so to protect the fortunes that they created already. (Location 5382)

The world is a competitive place. Poor people compete with each other for jobs. Rich people compete, too. Wealth, beyond what is needed for survival, is relative. You have a certain amount. Someone else has more. Standards for being “wealthy” change with place and time. A person with very little money may still be considered wealthy in an African village. Put him in Zurich and the locals will put him on welfare. (Location 5385)

They can compound their money at lower tax rates. Tax rates in the emerging markets, generally, are much lower. In Russia, for example, the top marginal tax rate is only 13 percent. In Europe, tax rates are higher than those in the United States. France even imposes a “wealth tax.” (Location 5396)

A friend of ours counsels people to diversify across several different countries. He says you should put yourself in one country, your bank in another, your business in another, your income in another, and your investments in a fifth one. Each country should be selected on the basis of how well it functions for that particular purpose. (Location 5424)

problem. The U.S. government taxes you—personally. It doesn’t care where you live or where you put your money. (Location 5430)

If the tax haven company is a U.S.-controlled foreign company, the IRS reserves the right to look into the company and determine the real source of its earnings and the real beneficial owners of the money. On these facts, the income would be reassigned to you. (Location 5435)

This may seem odd or even evil, but remember that the person who wants to conserve money over several generations—generally a person who might be considered “rich”—must try to pay less tax than people of more modest means. We have seen what time does to money. It wears it down. It wears it out. And it whacks it with unexpected losses. You protect yourself by having businesses and investments that make enough gains to offset the losses and by reducing the impact of fees, taxes, and inflation. (Location 5449)

Well, there are probably many people who would like to turn their backs on America and stop being Americans. But that’s not what this strategy is about. It’s about a family’s financial strategy. We’re not talking about loyalties, fidelities, sentimentalities, or even nationalities. (Location 5462)

We are still proud to be Americans, but we are not necessarily proud of our current government. (Location 5471)

“In the beginning, all the world was America,” wrote John Locke. He meant there was a time when the entire world was like America in the early eighteenth century: open and free, an Eden waiting to be discovered. (Location 5479)

Besides, citizenship is a political creation—the product of laws passed by politicians. Nationality—being an American—is something very different. It is the product of culture, attitude, and custom, which are natural things, almost antipolitical by nature. (Location 5486)

that it is a family solution, not an individual solution. And it is not an attempt to break off contacts with our home country. Instead, it allows a family to keep its ties with the United States (or other home country) while developing wealth independent of the home tax system. (Location 5490)

The essential ingredient is that one member of the family must not be a U.S. citizen. This family member—preferably a young person—should have few appreciated assets at the time of expatriation. This means that the “exit tax” will be minimal. (Location 5494)

must then set up non-U.S. hard structures. These structures become the holder/controller of the family’s non-U.S. assets. Sounds simple enough. Of course, it is not. (Location 5497)

He pays no exit tax because he has no appreciated assets. He then sets up an offshore structure—typically a trust, a corporation, a new will, and a bank/investment account. This structure buys the pawnshops from the parents at fair market value. He pays $10 million, making yearly payments of $1 million for 10 years (plus interest). The money still comes out of the business. It still goes to the parents. But the business, the profit-generating capital asset over time, is moved to a foreign entity, where it is free and clear of U.S. taxes. (Location 5506)

itself, as a capital asset, may now be beyond the range of the U.S. taxman. It may be transferred—in the trust structure—to the next generation without tax consequences. Its after-tax earnings, too, are now the property of a non-U.S. owner. (Location 5513)

Now, in this example, the $1 million of post-tax tax earnings may now build up, with interest and capital gains, also free from U.S. taxes. Properly managed, they may grow free from any taxes. (Location 5519)

This gives a family much more flexibility. Ideally, the expatriate family member also establishes a toehold overseas. Perhaps the entire family will want to expatriate some day. Who knows what might happen? (Location 5529)

The reason is simple: Accumulated wealth in the U.S. structure is subject to complex and expensive inheritance and gift rules. Outside the United States, assuming you choose your jurisdiction carefully, wealth can be transferred to the next generation simply and with no tax. It can also build up, year after year, with zero income or capital gains taxes. (Location 5532)

It could then be bought by a foreign entity and moved outside the United States, possibly giving much more in the way of benefits to the owners. (Location 5536)

Politics, power, and bureaucracy are the enemies of real wealth. It’s easy to be drawn toward them because it is natural to want to use money to buy political muscle for the purpose of protecting wealth. But it is a trap. Better to keep a distance. This inside/outside strategy helps keep the family at arms’ length from any political system. (Location 5547)

The developed world, generally, and the United States, in particular, do not seem to be the best bets for family wealth over the next few decades. Their costs are high. Their political and economic systems seem decadent, even degenerate. (Location 5552)

You need an owner of the family wealth, usually a trust. (Location 5559)

The owner needs an investment/bank account, usually in a place where you can trust the banks and the currency. (Location 5560)

You need a will and an estate plan. (Location 5560)

And you need a tax strategy that makes sense and connects these pieces with your family’s wealth and financial goals. (Location 5561)

The secret to this longevity is having secrets—valuable secrets. (Location 5582)

Each generation of Kongo children had to have a comprehensive knowledge of woods—right down to knowing how the temperature and humidity of various microclimates affect wood over time. These techniques allow wooden buildings to last for hundreds of years. (Some are designated as World Heritage (Location 5586)

Your family must sing together. These soft structures help get everyone on key. They provide instructions and rules for future generations of family members to follow. Organizations need rules and structures in order to endure. Even bridge clubs have their rules. So do churches and empires. Families, too. More or less formal structures allow groups of people to get on with their work without having to constantly reinvent the rules. (Location 5599)

It has a history. It has its foundational texts. It has a narrative. It has a governance or leadership structure. It has traditions and rituals, its dos and don’ts, its conventions and protocols. At least in theory, everyone knows how it works and all agree to work within the rules and guidelines it imposes. (Location 5604)

You want to turn your family money into an institution, rather than a temporary collection of people or the reflection of a single personality. (Location 5614)

Institutions are identified with a social purpose and permanence, transcending individual human lives and intentions, and with the making and enforcing of rules governing cooperative human behavior.” (Location 5616)

When family fortunes are lost, it’s usually the family that falls apart first. And it falls apart because it lacks organization and leadership. The problems are almost always family-centered, not money-centered. (Location 5618)

These are essential. But there are also specific structures, such as a Family Council and a family investment committee, that help the family govern itself. Even a large, tax-advantaged family fortune will most likely disappear within three generations without the proper family governance system in place. (Location 5624)

This is a real pity because our research shows that families are much better off figuring out the family side of things first. The culture, the soft structures, are actually the most important part of your family wealth plan. (Location 5641)

Everything seemed to be going well until it came time to renegotiate a lease between cousins. Then and only then did family members discover how distant one group of cousins had grown from another, even though they lived barely a mile away from one another. (Location 5647)

The trouble was, after so many years away from it, they no longer had the skills or tools to operate it successfully. After a few years, the family business—which had never had a mortgage against it before—was deep in debt, while the cousins with the necessary expertise struggled to make a go of it in a new location. (Location 5652)

What sort of family do you have? What kind do you want? What are you trying to achieve? And how do you want to govern yourselves and manage your money? You really can’t move ahead without answering these questions. You can answer them precisely, in writing. Or tacitly. But they must be answered. Otherwise, you won’t know what kind of hard and soft structures you need. (Location 5659)

The matriarch and the patriarch, the founders of the family dynasty-to-be, should agree on a vision for the future. It doesn’t have to be precise. (Location 5668)

who they are, what they want, how the family is going to live, and what will happen to the family assets in the next 5, 10, 20, 100 years. (Location 5670)

The children need to contribute to the discussion (even if it is sotto voce), sign on to the project, and understand what will be required of them. (Location 5671)

Or if they are unwilling to share the founders’ ideas about how wealth should be controlled and used, the family money project is not likely to go far. But assuming the children buy into the program, the family can move ahead. (Location 5674)

It’s called the “endowment model.” It consists of the following soft structures: The Family Council A mission statement and constitution The family bank The investment committee An education and mentorship program The family philanthropic committee (Location 5681)

on the best practices of multigenerational business-owning families. (Location 5685)

The Family Council determines the success or failure of your legacy over time. It creates and manages all the other soft structures that you will learn about in this chapter. Within the trust framework that we recommend, the Family Council also manages all distributions from family assets. As such, the Family Council is the linchpin of your family office structure. (Location 5691)

It’s your money, after all. Why bring others into the process of deciding what happens to it? (Location 5695)

And wealth creators—in addition to being lucky—tend to be hardheaded. They do not necessarily appreciate others meddling in “their” affairs. They do not necessarily like the windy democracy of family meetings. They may even question the judgment or competence of the people on the Family Council and wonder if they couldn’t do better on their own. (Location 5697)

Without a governing group in place, and a system of governance that works, family wealth is almost guaranteed to dissipate in the space of two generations. (Location 5705)

Drafting a family mission statement and family constitution. Overseeing the investment committee and monitoring performance of family investments. Managing and drafting legal documents concerning the family estate planning. Managing the family’s philanthropy efforts. Overseeing family property management. Resolving family conflicts. Managing the strategic and tactical goals of the family enterprise. Organizing activities that strengthen family bonds. Formulating policies for family members working in the family business. Formulating policies regarding inclusion or exclusion of spouses. (Location 5716)

They must respect—and act on—its decisions. You need to make sure the decisions of the Family Council cannot be bypassed. (Location 5722)

wealth—should be based on persuasion and consensus, not a majority vote. (Location 5724)

Major changes should only be made slowly and reluctantly. (Location 5725)

The role of the Family Council is to preserve the family and its money. It cannot afford to act hastily or to ignore the opinions of family members. It must move like a big ship: slowly, deliberately, and with all hands onboard. (Location 5726)

else. But if the wealth creator is smart, he will treat his wealth as bounty from heaven, to be shared with the rest of the family, rather than his own personal property. That is, of course, the whole point: to transform personal money into family money. (Location 5730)

You should try to make the Family Council as “official” as possible. It should not be seen as just an artificial appendage of the wealth creator or a ruse by which he tries to get the rest of the family to do what he wants. Distribute an agenda ahead of meetings. (Location 5735)

have. Typically, family offices, which manage the details of a family’s wealth, have a bookkeeper or trustee who can be very helpful at family meetings. There may be important footnotes and elucidations that the family office person can provide. (Location 5740)

Introduce the family office concept to the family. Organize the family budgets. Get everyone thinking about how we can work together on family projects. Start to get the system of family governance working. (Location 5744)

Our Thanksgiving meeting made the family office more concrete. For the first time, it drew a clear distinction between family office projects and resources and the elder author’s personal projects and resources. (Location 5749)

Certain assets are designated for the family. Others remain in individual hands. Until the wealth creator in your family does this, you don’t have family money. (Location 5751)

The meeting was a major leap forward. This was mainly thanks to Jean, who administers our family office in Baltimore. She came with a neatly organized binder that contained extensive data about our family office assets and liabilities. (Location 5776)

participation. There was a lot more interest in the family business than we were aware of. The family business is a big part of our family’s identity and our only source of income. It is important to those of us who work in it and to those who don’t. The children have grown up in and around the business. All have a keen attachment to it. (Location 5779)

family. They have very different interests and professions—physical therapy, acting, medical school, geology, and music. We had been concerned that it would be difficult to get them all involved in our family office project. It turned out not to be difficult at all. (Location 5783)

The selection process depends on your family culture. Typically, in the first and second generations, all family members are part of the Family Council. Everyone is expected to familiarize himself with the issues affecting the family and to participate in the decision-making process. Young family members can start participating in the Family Council in their early teens. (Location 5790)

Under this system, an elected senior family member will represent different family branches to avoid the Family Council becoming unwieldy. (Location 5794)

Excluding people who play such an important role in the family can breed ill will toward the Family Council. (Location 5796)

Spouses do not necessarily share the family’s culture or its goals. And in today’s world, divorce is common. You wouldn’t want to bring a spouse into the inner sanctum of your family wealth, only to have him or her leave on bitter terms 12 months later. (Location 5799)

You want your Family Council and its system of governance to last for a long time. That means it will need to function with the participation of a diverse group of people, not just the group currently involved. (Location 5802)

But what if your son or daughter married a gold digger? (Not likely. But you have to think of all the possibilities.) What if one married someone who was either uninterested in or opposed to the family’s goals? What can you do? (Location 5807)

After all, it’s these unspoken conflicts—many involving spouses—that cause so many families to fail. (Location 5812)

a perpetual trust, also called a “dynasty trust.” We discussed trusts in the previous chapter. A perpetual trust, as the name indicates, holds assets on behalf of beneficiaries in perpetuity. (Location 5815)

trust beneficiaries must be engaged in “productive behavior” to be eligible for distributions, and then only for education, business, and career advancement. It’s the role of the Family Council to make these distributions. It is also the job of the Family Council to determine that beneficiaries are abiding by the terms of the trust. (Location 5817)

Assets are distributed by the Family Council only for the purpose of funding productive family-member projects. The model helps hold and preserve the family wealth, instead of distributing it. (Location 5825)

united. And the model helps future generations be more successful by making resources available, while neither undermining them nor robbing them of their own need to work and support themselves. Only family members engaged in “productive behavior” are eligible to sit on the Family Council. (Location 5827)

The purpose of our trust is to: Give support for family members starting new careers. Fund family member educations. Help support family members in the arts or humanitarian work. Fund family member business ventures and start-ups. Assist in emergencies. (Location 5837)

In return for these benefits, beneficiaries have the following responsibilities: Helping guide the investments in the family portfolio as a member of the investment committee. Participating as a member of the Family Council. Helping manage the family property. Helping protect and grow the family business grow in a manner consistent with family values. Helping manage any family philanthropy. (Location 5841)

Different family members will play greater or lesser roles in each of these things, depending on their inclinations and abilities. And these responsibilities will become more significant and complex down the road. (Location 5846)

But, more important, it emphasizes self-reliance and individual achievement, while at the same time providing support for family member ventures. We want to be a family of producers, not consumers. (Location 5849)

Most members of the second generation are just starting their careers. They don’t yet have the pressures of supporting a family and of competing in the business world. Those things will put more pressure on the family office. We have a long way to go, with many challenges ahead. (Location 5851)

The family mission statement is supposed to give your family a shared sense of direction. (Of course, if it doesn’t have a shared sense of direction already, writing out something is probably not going to help.) More important than the mission statement itself may be the act of trying to write one. It may show you that you don’t really have a mission or a unified idea about what you’re trying to do. (Location 5861)

The first meeting is especially important because it sets the tone for all that comes after it. During this process, it is important to remember that disagreements can be healthy. Issues are coming to the surface, and opinions are being expressed. Remember: For your family mission statement to bring your family together, it has to include everyone—even family members who appear not to “fit in.” Try to bring all family members into the process. (Location 5868)

The family constitution provides a mechanism for realizing the goals spelled out in the mission statement. It is usually prefaced with a statement of your family’s core beliefs, its values, and its more practical considerations, such as how the family aims to manage its wealth and run its business, if it has one. (Location 5877)

The Family Council drafts the family constitution. It typically explains: Who makes up the family. Who makes up the Family Council. How the family is governed. How family money is managed (for example, choosing an investment director and the members of the investment committee). How family assets (for example, real estate) are managed and used. When the Family Council meets and how it communicates. The family’s code of ethics. How family conflicts are resolved within the family and how family members can avoid litigation. A plan for changing the constitution, as necessary. The family constitution does not need to be a formal document. (Location 5882)

We are still a young family, and things are not yet that complicated. We don’t need a full-blown constitution yet. But we will need one. Around the time of the transition between the second and third generations is when families tend to need a constitution. (Location 5890)

We don’t want family money to fund lifestyles. (Location 5893)

we want to be able to financially support family members’ productive pursuits. That’s why we set up a family bank. (Location 5894)

These can be outright disbursements, or they can be loans. Loans typically don’t carry interest. But borrowers are required to pay them back in full. (Location 5896)

They give them access to cheap funding. And they reduce the amount of costly outside debt family members need to take on. (Location 5901)

The Family Council also makes disbursements for family members’ educations. It supports them when they’re getting started in new careers and new business ventures. (Location 5908)

So the purpose of distributions from the Family Council must be the financial stability of family members and the sustainability of the family bank itself. (Location 5910)

Family members must pay their own debts. In our family’s case, we expect each family member to live on what he earns. But we don’t mind helping him get started. (Location 5913)

That doesn’t mean that everyone is a leader. It means your family needs to make decisions collectively. But be warned: consensus becomes increasingly difficult as the family expands. (Location 5917)

The best you can do is to start early, include everyone, and be consistent. Permanent leadership is one of the great secrets to preserving a family fortune over generations. (Location 5922)

The best way for a wealth creator to successfully transfer the reins of power is to oversee that transition himself while he still has his wits about him. That means making the transition sooner rather than later. For the wealth creator, it means a transition from being the “commander-in-chief” of the family to an elder. (Location 5926)

Elders serve as a sort of judicial branch of the family. Elders can also help resolve family disputes and make sure the family is following its stated values and goals. (Location 5930)

If you set things up right, the wealth creator will be happy to take on the role of elder at the right time. Beyond settling disputes, elders should transmit the family culture from generation to generation by telling the family stories and being the family history. (Location 5934)

Centuries ago, the Irish clans had a system called tanistry, wherein a successor to the chief was chosen from a group of eligible males who were related, via the male line, within four generations of the chief. (Location 5940)

While members of the Family Council are equal, someone in the second generation needs to fill a leadership role. (Location 5946)

He would be more focused on family office issues than the other members of the Family Council. Let’s face it, not everyone is going to have high levels of interest and understanding of family office matters. (Location 5951)

The family office tanist needs to help the discussion by introducing important information that might affect Family Council decisions. He needs to make sure that the Family Council discussions stay on track, that they focus on business issues and do not try to deal with personal issues, for example. (Location 5953)

The lack of family disputes can mean issues are simmering below the surface. These unspoken issues have a nasty habit of coming to the surface when there is a major family event, such as a death, a wealth transfer or the sale of the family business. (Location 5961)

There are relationships—and there is the problem. Moderators should emphasize the importance of maintaining healthy relationships and then deal with the problem based on its own merits. (Location 5967)

They can do this by first clearly identifying the problem and the conflicting interests. Then they can brainstorm to identify the joint interests and options for resolution. They should set a tangible, mutually beneficial objective that can be reached by the most desirable option of resolution for both parties. (Location 5970)

Unresolved disputes break up families and destroy wealth. (Location 5974)

It is the job of the Family Council to protect the family and the family wealth from threats. It should avoid judging individual family members on moral issues. (Location 5976)

who is a known drug addict may not be eligible to receive any funds from the family bank. It should try to keep its position as businesslike as possible. It needs to avoid “getting personal.” (Location 5978)

All family members of a certain age and in sound mind get a vote on the Family Council. But the founder typically retains the right of veto. (Location 5984)

it typically functions as a representative democracy. Each council member gets an equal vote. (Location 5986)

We urge you to operate on the basis of consensus, and universal consent, rather than majority rule. But it’s up to you. (Location 5988)

The Family Council becomes more representative of various wings of the family. There are too many family members (usually more than 30) for everyone to be a part of the council. (Location 5991)

family. But he takes his wealth creation and investing skills with him. Family wealth is then transferred from the widow and her children to the children of investment managers and estate planners. (Location 5997)

The committee stays in regular communication and shares investment ideas. But with such an ultra-long-term time horizon, the committee does not do a lot of buying and selling. New investment committee members from each generation are trained and groomed from a young age. They learn about investing through educational programs and direct experience. They deliberate long and hard. They study. They think. There is no need to make quick decisions in family money investing. There is plenty of time to learn. Just relax and take your time. (Location 6003)

Instead, get your family together often. And get it to pay attention to the investment performance of your funds. The members should take an interest—and, hopefully, satisfaction—from your investment progress. This will focus their attention on what you’re doing and give them a sense of purpose. So how do you get future generations to learn about managing money? (Location 6010)

The tanist to the wealth strategist needs to have a thorough understanding of investment strategy and years of direct experience in investing. The tanist apprentices with the current wealth strategist. It’s part of the wealth strategist’s job to educate the other members of the investment committee and to train his successor. (Location 6024)

The wealth strategist leads the investment committee team to create an asset allocation model and the follow-through for implementing the model. He should also act as chairman of the investment committee. He should have the most investing experience and be capable of directing the overall strategy. He should understand asset allocation and risk management (deep value investing, diversification, and position sizing). (Location 6030)

The elder of your authors doesn’t believe in philanthropy. He thinks it is throwing money away, at best. At worst, he thinks it hurts the beneficiaries. (Location 6037)

But philanthropy is a major component of most successful families and successful family offices. It is important for family members. It gives them a unified purpose and builds the family culture. It also helps them focus on properly administering wealth . . . and getting results. (Location 6041)

Make it as personal and direct as possible. Control the spending carefully. See the results for yourself. Take responsibility for the outcome. For example, while we have serious doubts about giving money to people for “education” and about education itself, we nevertheless provide scholarships for the children of the people who live on our ranch. (Location 6047)

And while we have mixed feelings about religion, we still built a wing on the local church so the itinerant priest would have a place (Location 6050)

we also are building a clinic on the ranch—staffed and furnished by the local government—so the families there will have somewhere to go to get medical help. (Location 6052)

And most families do fail. Ninety percent of family-owned businesses do not last past three generations of ownership. And the ones that do succeed for longer can still have a dramatic falling out when things go bad. That’s why you can read about so many scandals about wealthy families in the newspapers. (Location 6060)

and emotions. Family mediators, the family elders, and/or the matriarch need to untangle this mess and deal with one issue at a time. (Location 6071)

Chester was more ambitious, charismatic, and aggressive than Morris. He felt that he was mainly responsible for the success of the business and deserved a larger share of it. (Location 6094)

At this point, Chester realized that he and his sons could bilk compensation out of the business in various ways. They formed side businesses that provided services to the company at inflated prices. (Location 6101)

Emperors, popes, and the Prussian kings awarded the family with titles and landed estates, and from then onward his family amassed fortunes. Albert, along with his mother and sister, still lives in the 500-room castle in Regensburg, Bavaria, that his family acquired in 1812.8 (Location 6184)

He was the largest landowner in Germany. He owned a bank, breweries, metallurgical companies, 10 other palaces and castles, and extensive properties in Brazil, inherited from the Portuguese royal family. (Location 6189)

Overspending and bad investments took a toll on the family’s great wealth. When Prince Johannes died in December 1990, following two unsuccessful heart transplants, he left debts totaling more than $500 million. Just months before his death, the prince had fired his management consortium because of their poor performance. (Location 6197)

Through her diligence, she was able to preserve the family wealth as a trustee on behalf of her young son. At age 18, Prince Albert inherited the family fortune, which had endured thanks to the efforts of his mother. (Location 6207)

She’s known for her flamboyant style and frizzy hair and for having received extensive plastic surgery. (Location 6215)

First, the managers of these businesses, rooted in history and tradition, saw entrepreneurship and innovation as key to their success. For the business to last, there has to be a wealth creator in each generation. (Location 6416)

Incredibly, most of the families still own 100 percent of their companies. They are extremely protective of the family equity. And some had established restrictions on family members selling out of the business. (Location 6418)

But there’s one thing above all else that bound these families together. They all developed strategies to preserve and enhance their family assets. That is, they all transferred their history, their legacy, and their values down through the generations. (Location 6422)

Trying to hold on to control of the family wealth for too long without working out a succession plan with the rest of the family is a recipe for (Location 6429)

We were tempted to mention the jubilant crowds that attended the execution of Louis XVI, or the idealistic youth who gathered to jeer at Nicholas II when he and his family were shipped off to Yekaterinburg, where they would be murdered, along with their valet and even the cook. (Location 6526)

These events are hard to predict. Even something as obvious as the revolution in Egypt was unforeseen by almost everyone. We pay the CIA hundreds of billions to keep on top of things like this, but as one journal put it, sarcastically, CIA forecasts “kind of suck.” (Location 6539)

A “peaceful revolution,” for example, can turn bloody mighty fast. And no one gives you advance notice. (Location 6550)

We’ve spent a lot of time anticipating disaster. We expect a collapse of the international monetary system, for example. It is almost inevitable, but it is still unpredictable. We can’t say when or how it will come about. (Location 6556)

It is possible that these financial calamities will cause a major economic disruption, like the collapse of the Roman Empire. In the chaos, trading networks could fall apart and take many decades to be rebuilt. Gross domestic product growth could turn negative and remain in the red for years. Developed regions could slide backward for generations. Emerging markets could explode. Who knows what would happen? (Location 6561)

There are no subsistence farmers living in cities. Nor do urban populations “live off the land.” Instead, they depend on complex networks of commerce. The typical city dweller produces neither food nor energy. He sits all day in an office, completely dependent on others to provide power and food. Then he goes home, still completely dependent on the division of labor for his most important needs. (Location 6583)

backward, much of the specialization that developed during the boom years turns out to be uneconomic, unaffordable, or unwanted. People may be willing to pay someone to park their car when they are flush. But when they are broke, they will park their own cars. (Location 6619)

Generally, when the black swans come out, you are better off in the country—with country-boy skills, real friends and family close at hand, and old-time farm supplies. (Location 6627)

He was sure it was coming. So he moved to Arkansas where, he said, “I’m protected by 300 miles of armed hillbillies.” (Location 6629)

What do you need to survive a disaster? First, you need access to water. As we’ve seen in Japan, even the most developed and sophisticated infrastructure in the world can collapse when it is struck by an earthquake and a tsunami. Public water pipes break. It can take weeks or months to replace them, assuming the government and local utilities are still functioning. (Location 6646)

water: a spring; a well; a small, clean (Location 6649)

Failing that, you should have enough water stocked up to last at least a couple of weeks. (Location 6650)

When we were confronted with the Y2K crisis more than a decade ago, we lived in Paris. Maybe the French bureaucrats would be able to maintain order, and maybe they wouldn’t. (Location 6664)

We figured we’d wait for the desperate mobs to leave the streets. Then we’d drive out of the city and make our way to the country. Once there, we had food stockpiled in the pantry and firewood ricked up to the eaves in the barn. There were cattle on the hoof in the fields and chickens in the henhouse. (Location 6666)

Your stronghold should be a place where you can live almost indefinitely on local resources. It doesn’t mean you have to have everything you need on your own property. But you have what it takes to trade with your friends and neighbors to get what you need. You may have to barter for a cow or vegetables with the local farmers, for example. You may have to improvise with tools and machinery. You will almost certainly get your hands dirty. And you should keep on hand some small gold and silver coins. They could be useful. (Location 6669)

Obviously, the first protection against famine is wealth. There is almost always food available at some price. Generally, but not always, it goes to the highest bidder. So having some money is in itself a measure of safety. Always has been. (Location 6683)

Fed during the last two decades have made America’s rich richer than ever, while the incomes and wealth of 99 percent of the population have barely risen at all. If food supplies were short, it wouldn’t be at all surprising if the mobs turned against “the rich,” intentionally withholding food from them. (Location 6687)

Mobs need scapegoats. And hungry mobs are not particularly careful about whom they choose. “That’s one of the big differences between the French and British aristocracy,” our family matriarch, Elizabeth, enlightened us: (Location 6698)

The English aristocracy, on the other hand, tended to be jealous of its local rights and privileges and stuck close to its land. They were never so cut off from the local people and never so dependent on the court of St. James in London. (Location 6705)

That was part of the reason they evolved a different, more decentralized system of government with more emphasis on individual rights and limited central power. And it’s probably why there was never any popular uprising against them. (Location 6707)

Stay close to your roots, your base, and your family stronghold. You need roots, a sense of being connected, a refuge from the outside world, a place where your family is safe and sure of itself. As our old friend Gary North says, you need a place where you can “dig in.” (Location 6710)

In light of this, you should have a place where the family can run, hide, and survive. Where? The best place is a farm—a place not too far from where you usually are, easy to get to, and stocked with enough food and water to keep you going for a few months. Best bet is an old-fashioned pantry full of canned goods, chickens in the hen house, and a pig or two in the sty. (Location 6717)

Family strongholds help families develop their own culture . . . their own resources . . . their own histories. They are good places to get the family together for holidays, for reunions and to help family members learn to work together. They’re places that you remember, no matter where you go or where you live. They’re places where grandparents live. Where family portraits and family papers are stored. Places you think about. Places where you bury your gold. A family stronghold or a refuge is also a good place to retreat to, to recover and to think. It should be fully paid for, of course. You don’t want to have to worry about it. It should be a real stronghold where you’re safe. And where you’re happy. So if you lose your job, for example, it’s a place where you go back to, to take time to think about your next move. Or if you want to write a book or invent a new computer app or just try to figure out what’s going on in your life, a family stronghold is a good place to do it. It should be quiet, tranquil, and protective. (Location 6735)

Working together as a family is probably the best way to build a family and to hold onto family wealth. (Location 6752)