Warren Buffett's Wealth
Monday, 7/08/2013 17:47
How the Sage of Omaha came around to the "family office" way of thinking...
TODAY we want to do something a little unusual,
writes Bill Bonner in his Daily Reckoning.
We want to tell you why we've set up something called a 'family office'.
Family offices have for hundreds of years been protecting and growing family wealth, based on a number of unique long-term investment strategies. They've also been helping families pass on their wealth through the generations.
Of course, 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 we're suspicious of these alternatives, we 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 we 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 favourite 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.
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 producers would lead to better decisions, faster 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, it is allocated to whatever project the government favours at the time.
Instead of being invested by the best wealth creators, in other words, 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...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.
We've always thought the world is probably 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?
Because 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 our 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. An old friend set up a family foundation. He gave it a modest motto: Primum, non nocere. First, do no harm.
He is not naive enough to think that just because he intends to do good, good will inevitably result. We've seen over and over – in foreign aid programs, in domestic social welfare and in rich families – that giving money to people is not necessarily a good thing.
Foreign aid undermines local businesses. Social welfare programs remove the incentive to work. Inheritances often have the same effect: The children become 'trustafarians' with few skills, little self-confidence and even less self-esteem. So my friend undertakes his own do-good programs very carefully, with his eyes wide open.
We do the same. But we also recognize that since all wealth ultimately must be owned by someone – no matter what we do – our wealth will change hands. If it goes into the pockets of welfare recipients or foreign aid programs, we will not see the damage it does. But that is comfort only to a scoundrel.
Instead, we take the responsibility that our friend takes – to direct our wealth to people who will not be harmed by it. Instead, we hope to make them stronger. That is a large burden...but it is one we cannot escape.
We will try to do the best we can.
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