I continue to brood over the great difficulty of growing wealth over decades, especially for families that have moved from being in business to being portfolio investors in charge of an "endowment." The task of any endowment, which must not only provide current liquid income for the present generation but must also be invested for the future, is forbidding. And I confess that, notwithstanding yesterday's great events, I also continue to brood over the near-inevitable decline of the United States as the world's top power, and what that means for those who hold most of their wealth here.
David Cannadine's "The Decline and Fall of the British Aristocracy" is an epic study of the political, social, and economic decline of what, as late as the 1870s, was still the richest group in the richest empire in the world. Your consigliere, as is his weakness, cared mostly about the money stuff. Specifically, I asked myself the following questions: How could people who were so rich and powerful lose so much of both in such a short period? Were there any exceptions to the rule of general decline, survivors and even thrivers worthy of study? And, most broodingly, are there any lessons for today's financial "aristocrats," who form the wealthy elite of today's wealthiest world power? Some impressions:
- It's remarkable just how much the wealth of the British aristocracy, and the power and prestige that followed from it, rested on just a few foundations which, once shaken, brought the whole thing down. The main foundation of the class was wealth in the form of land, and the main foundation of land as a form of wealth was the profitability of agriculture. Shielded from foreign competition and favorably taxed, British agriculture was very profitable from the 1840s all the way to the 1870s (about as long, I would point out, as Wall Street's long expansion, which most date from 1982). Landowners of the time could have been forgiven for supposing such a state would continue indefinitely, and many (and their willing lenders) conducted their affairs as if it would. Most landed estates were mortgaged or otherwise encumbered by leverage.
- Of course, the good times did not last. An agricultural downturn began in the 1880s and did not abate for another 70 years. Estates that could once support their mortgages (and their owners' lifestyles) fell into ruin. The P/E ratio of land purchases collapsed and financing dried up. Sound familiar?
- At the margin, taxes made a big difference. Accompanying the agricultural depression in Britain were a range of new taxes on the landed aristocracy, both on income and on capital. I'm forced to wonder how much of today's American finance aristocracy, particularly professional money management in the L.P. form (hedge funds, PE Funds, VC Funds) was helped along by favorable tax laws, and how much of that would go away if the laws were changed.
- Yes there were survivors, and even some aristocrats who managed to thrive in the new order. Amazingly to me, in the 2008 Sunday Times Rich List you can still find a few names that once appeared on Cannadine's list of the greatest British landowners circa 1880. And I don't think they were all simply lucky (although it helps to have started with a lot of money), so it is useful to study them. As usual, capital allocation (really re-allocation) was key*. As early as 1879 one lord advised his brethren to sell part of their landholdings, pay off their debt, and invest whatever proceeds remained in equities, often foreign equities. Many did and ended up better off. Others shifted horizontally into industries in which they already had some expertise, such as agribusiness or land development or, in the case of those who best combined good luck and skill, London real estate development (see here and here, and note that the estate of the Duke of Westminster was, during the crucial period of general aristocratic decline, unencumbered by leverage, which no doubt gave him room to maneuver). Others could not or would not adapt. I suspect that many held onto their land not because they truly believed "things will come back soon," but because of the tradition and prestige associated with that particular asset. They learned a lesson that today's contemporary art collectors may be about to: when the profitability of an asset departs, its prestige departs soon afterwards.
It would be wrong to take this book as a perfect guide of things to come for the American wealthy. But a poverty of imagination--the inability to conceive of a future different from the present--is so inherent in the human mind that it can only be overcome through conscious effort. This particular disease seems to strike wealthy investors most strongly, those to whom good times have been the most good. For me therefore, the study of history is a form of mental calisthenics, a way of exercising the "times will surely change and I will have to change along with them" muscle that would otherwise decay into uselessness.
* Now that I think about it, the best modern parallel to the decline of the British aristocracy may be the decline of the great 20th century media dynasties. Like their spiritual ancestors, the current generation of media owners inherited assets (chiefly monopoly newspapers) that conferred on them both great profits and great prestige. But the world changed around them, and what used to be widely considered the most solid form of wealth was no longer so. Some saw it coming and managed to reallocate capital to other things (the Grahams, the Thomsons, the Murdochs) while others could not or would not for reasons of prestige, or were too busy living well to notice.