Edited source – Nick Maggiulli, Of Dollars and Data
This article summarises the story told in the book Fortune’s Children: The Fall of House Vanderbilt.
It was January 4, 1877 and the world’s richest man had just died. Cornelius “The Commodore” Vanderbilt had amassed a fortune of over $100 million over his lifetime as a railroad/transportation pioneer. The Commodore was of the belief that splitting the family fortune would lead to ruin, so he left a majority of his wealth ($95 million) to his son William H. Vanderbilt. At the time of this bequest, $95 million was more money than was held in the entire U.S. Treasury.
The Commodore’s decision not to split his empire proved auspicious. Over the next 9 years, William H. doubled his father’s fortune to nearly $200 million through proper management of the railroad business. After adjusting for inflation, the $200 million Vanderbilt fortune would be worth roughly $5 billion in 2017 dollars.
However, William H.’s death in late 1885 would cultivate the seeds of folly that would lead to the fall of House Vanderbilt.
Within 50 years not one Vanderbilt would be among the world’s richest, and when 120 of the Commodore’s descendants gathered at Vanderbilt University in 1973 for the first family reunion, there was not a millionaire among them.
How could this be? We might start with a saying popularized by the great Charlie Munger, Warren Buffett’s long time business partner: “Invert, always invert”. Originally formulated by the German mathematician Carl Jacobi, the idea was to solve a problem backwards rather than forwards. So rather than asking, “What’s the best way to keep wealth?”, we might ask ourselves, “What’s the best way to lose wealth?” In the Vanderbilt story we have the answer. So without further ado, here’s a step-by-step guide on how to lose a fortune:
1 Spend money like no one else
Have you ever:
- Dined while on horseback?
- Owned 9 mansions on Fifth Avenue (some of the most expensive real estate in New York City)?
- Thrown a party that cost $5 million?
- Sunk your yacht and then immediately ordered a larger yacht in order to not upset your wife?
- These are just a few examples of the Vanderbilts’ spending decisions during the infamous Gilded Age in American history.
2 Never buy an income producing asset
Of all the financial sins committed by House Vanderbilt, this one is probably the worst. During their entire fall from grace there is no account of a 3rd or 4th generation Vanderbilt purchasing a significant income producing asset.
3 Sell your assets at the worst possible time
One of the clearest examples of this was the Vanderbilt vacation home known as Marble House in Newport, Rhode Island. Marble House cost $11 million to build in 1892, which is equivalent to roughly $300 million in 2017 dollars.
(Photo: Marble House, Wikimedia Commons)
However, in the midst of the Great Depression in 1932, Marble House was sold for a price of $100,000, or less than 1% of its build price.
A similar fate befell William H. Vanderbilt’s collection of 183 European masterpieces. At the time they were the best collection of foreign paintings money could buy and had cost $2m to assemble. During chaotic auctions on the evenings of April 18 and 19 1945 they were sold for a mere $323,195.
So what are the learnings?
- Monitor your spending in the context of the bigger picture. Get a sense of how sustainable your lifestyle is. This is financial planning 101. A really good adviser has the tools to help you strike the right balance between the near term and long term, legacy and lifestyle, family and community.
- Build a strong portfolio of income generating assets. Invest in a spread of ventures that will produce various forms of income in the form of profits, rents, interest or royalties across multiple business cycles
- Remember, sometimes there are no buyers. Always keep adequate cash for unexpected outcomes and riding out market crashes. This rule is especially true in specialist businesses, markets for luxury items and other esoteric assets.
- If you never learn to manage money, you’ll become poor again. Remember you may only need one big break to get wealthy. Hanging on to it may be the hard part. The late Commodore put it rather well: “Any fool can make a fortune. It takes a man of brains to hold onto it after it is made.” – Cornelius “The Commodore” Vanderbilt.
(Cover Photo: The Breakers, Wikimedia Commons)
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