Masters Series: Cultivating the 'Habit of Wealth'

Editor's note: Our offices are closed today for the Thanksgiving holiday. So we are taking the opportunity to present a special three-day Masters Series from one of our favorite writers and the founder of our corporate affiliate Agora Inc., Bill Bonner.

Bill was the first "Master" we featured when we launched our weekend Digest series more than a year ago... As we've said before, our goal with the Masters Series is to bring you the world's best insights on investments, economics, politics, and history... Bill provides them in spades.

Today's essay comes from the May issue of Bill's latest project, Bonner & Partners Family Office. Bill's mission is to share with subscribers the wealth-preservation and wealth-building secrets of the world's most successful families. In the following piece – the first of a two-part essay – Bill explains why cultivating a habit of wealth is so important if you want your family legacy to survive. (We'll feature the second part of his essay tomorrow.)

Cultivating the 'Habit of Wealth'
By Bill Bonner, Bonner & Partners Family Office

Four years ago, I embarked on a highly unusual project. I set up a something called a "family office." The goal: to make sure the Bonner family legacy stays intact.

Operating a family office is such a long and difficult business that we need to stop and remind ourselves why we are doing it.

It would be a whole lot easier to give our money away. To let the government take it. Or simply to let the lawyers sort it out after we are gone. Although I am suspicious of these alternatives, I can't prove the results will be any better with our family office approach.

Who knows? Maybe even Ted Turner's gift of $1 billion to the UN will turn out to be money well spent.

But I doubt it.

Real wealth is never really in the public's hands. Every dollar, every acre, every ton of steel or pound of butter ends up under someone's control. Some living person benefits.

If the government takes your money, it is only to pass it along to one of its favorite activities. No matter how it describes the activity – feeding the poor, protecting the country, or stimulating the economy – the money always makes its way to someone else's pocket.

Warren Buffett's Volte-Face

Some people, notably Warren Buffett, believe society is better off if each generation has to earn its own way. Buffett believes people who prove they can earn wealth should be the ones who have it and control it – not those members of what he calls "the lucky sperm club" who inherit it.

Presumably, this "meritocracy of wealth" would lead to better decisions, faster gross domestic product (GDP) growth, and a more prosperous world. But to achieve this brave new world, Buffett suggests that the government tax the wealth of each dying generation so members of the next one can begin on a level playing field.

You can see the nonsense of this immediately. The wealth that passes to the government doesn't just sit there until the brightest young entrepreneur or the sharpest new investor claims it. Instead, government bureaucrats allocate it to whatever project they favor at the time. Instead of being invested by the best wealth creators… it ends up being put to work by the worst – politicians and bureaucrats.

The next generation finds itself poorer because the wealth that its parents created has been wasted... spent... and used up. Government does not preserve wealth; it consumes it.

Capital claimed by the government in the form of inheritance taxes does not remain a pool of resources to be drawn out by the next generation. Instead, it is given to the unemployed... to contractors and consultants... and to people who are retired or in need of medical attention. Not necessarily bad things, but not the sorts of things that bring prosperity and growth.

But Buffett has recently moved in our direction. He put his son Howard – who had previously been kept largely out of his business – in position to take over when he is gone.

Buffett had previously argued that people with the responsibility of allocating wealth should be the brightest and best – those who had proven their mettle in the world of business and finance. Surely, Howard Buffett was not chosen by those standards. Compared with the many thousands of top money managers, investors, and businessmen Buffett might have chosen, Howard has little experience and fewer successes.

Perhaps there are other standards at work?

The Habit of Wealth

The world is a better place when productive capital is not drained away by the government. Families, trained to invest wisely and to preserve their wealth, are almost certainly better custodians. They are much more likely to retain and enhance their capital over generations.

Why?

The skills necessary for building wealth – including the habits and the customs that allow you to hold onto it and pass it along to the next generation – can take a long time to accumulate. Why are the Swiss so wealthy, for example, and the Bolivians... or the Zimbabweans... or the Albanians... or the Baltimoreans... so poor?

The Swiss have the habit of wealth; the others do not.

There are some skills that take more than a generation to acquire. Great hotel chains, for example, are often in the hands of a single family for many generations.

A young man who grows up in such a family works in the hotel from an early age. He sits at the dinner table when important issues are discussed. He learns from his parents and grandparents. He has the hotel industry "in his blood."

That is true in the publishing industry, too (in which my family has an enterprise)… or the entertainment industry. In Hollywood, there are some skills that can take years of technical training. Lighting. Sound. Camera work. There are also many habits and attitudes that make showbiz different from other businesses.

Some are subtle and almost invisible to outsiders. Some are matters of traditions and connections that "open doors" for young people. People who grow up in the milieu – in showbiz families – understand the codes. They are more likely to have the skills necessary to succeed than new arrivals.

So part of the reason we do what we do is simply to give our children an edge.

Regards,

Bill Bonner

Editor's note: Bill and his team have spent the last five years studying the techniques the world's wealthiest families use to grow their wealth over generations. He recently recorded an interview describing some of these strategies for growing and preserving wealth. Bill and his team are releasing that interview on December 4. To make sure you hear his thoughts about how to build a lasting legacy, register here.