Although America considers itself a classless society, the reality is different. Americans are obsessed with the idea of social status in all its forms, whether based on media fame, artistic or athletic achievement, or simply money. Despite the fact that America does not have titled nobility, the status of our economic nobles, such as Bill Gates and Warren Buffett, is as high as that of any English duke or earl.
When it comes to status, we look not only at the size of the bank account, but draw distinctions based on the relationship between money and social status. Hence the contrast between “old” and “new” money. The former involve several generations of life on country estates and education in (elite) Ivy League universities, while the latter is something bright and conspicuous. The Astor family has been wealthy for over 200 years, and in fact is the standard of American “old money”.
Outside the US, however, there is even older money, real dynastic wealth, that has been in some families for 300 years or more. This type of wealth has not only successfully survived business cycles, but also wars, invasions, empires, revolutions and natural disasters. To maintain a family’s well-being for so many years and carry it through all adversity, you need more than ordinary investment skills. Such rare success in preserving wealth requires a more global vision, imbued with a sense of history, and the thrill that worst-case scenarios too often become reality.
Americans may find it difficult to accept this idea, as Wall Street salespeople constantly harass them with slogans about investing in “long-term” stocks. No wonder – brokers are more concerned with commissions than client welfare. Stocks can do great long-term performance, although the major indices have barely budged in the past 12 years. Stocks, bonds and cash are always promises from third parties and therefore have credit risk in addition to the already accounted market risk. The investor is always at the mercy of the issuer. Companies end up going bankrupt. Bonds are eventually defaulted. All paper currencies in history have lost all their value at some point, and there is no reason to believe that the same fate will not await the current kings – the dollar, the euro and the Japanese yen.
But the land, gold and paintings have intrinsic value. If you own them, they are yours. There is no issuer who can suddenly make your land disappear or turn your gold into confetti. A painting cannot go bankrupt. Of course, a totalitarian regime or an enemy army can confiscate your property. But even for such cases, there are previously successfully used strategies.
Gold can be collected and tucked into a saddle bag, or sewn into the lining of a jacket and transported to another location. Pictures can be taken out of frames, rolled up and transported in luggage. The land cannot be moved, but if the family has title deeds and patience, they can demand the return of the confiscated property after the regime change. Many Cuban families in South Florida are awaiting the return of their lands confiscated by Castro in the late 1950s following the collapse of his regime, and they may well be doing well.
There are no perfect portfolios without risk. However, we too often use a narrow definition of risk and ignore the most serious risks in the form of financial disaster, social chaos, regime change, and emergency decrees. Warren Buffett looks at gold with disdain because the yellow metal has no profitability. And he has no profitability, because he has no risk. Profitability is what you get when you take risk. Gold has no credit risk, foreign exchange risk, default risk, and no risk at all. It’s just gold.
When you ask the members of these families and their representatives about what it takes to maintain wealth over the centuries, not just cycles, you will often hear the answer: “One third, one third, and one third.” This is the formula for dividing a fortune into one third invested in earth, one in gold, and one in fine art. Obviously, some money is needed for day-to-day expenses, and some can be used for speculation. But the central idea that land, gold, and art outlive and outperform riskier assets such as stocks, bonds, and cash seems perfectly reasonable when viewed from the perspective of centuries rather than years or decades.
If we measure the value of Buffett’s Berkshire Hathaway shares not in dollars, but in ounces of gold, we will see that it has fallen in price by about 75% since 2000 – from 280 to 70 ounces per share. In other words, someone who bought gold and not Berkshire in 2000 can buy four times as many Berkshire shares for the same amount of gold today. Paintings have risen in price to the same extent. We admit that this is a sample example. Nevertheless, for centuries it is hard, not paper, assets that retain their value, despite all the disasters. The old money knows about this, because they have seen all this more than once.