“Any fool can make a fortune. It takes a man of brains to hold on to it after it is made.”
“Frequent observation of the wild movements in prices would lead one to think that this is caused by nothing more sophisticated than the rolling of dice at some casino table. There is much truth in such observation. However, for those of us seeking to own what is substantive rather than to rent whatever happens to be going up in price, there is little to fear. We would do well to remember that the fluctuation in the price of an asset does not in any way add to or subtract from the value we assign to such asset or its purpose in ownership. If you are doubtful, consider the following.
“In the small French town of Grasse, several generations of the Maubert family have built an outstanding company that makes flavours and fragrances: Robertet, S.A. The family’s 51% stake along with that of three other real owners amounts to 94% of the outstanding shares of the company. And so, even as the shares are listed on the Paris Euronext exchange, little and infrequent trading takes place. One day a few weeks ago, someone sold 16 shares, the only trade of the day, on the bid, and the price of the stock closed down 5% from the previous day. It occurred to me that the Maubert family had suddenly been rendered poorer by nearly $6 million—just on account of this $2,500 trade. Or had they? Did they feel any poorer? Did their real assets change? Did they discuss this darned volatility at the dinner table ?
“I bet not. To the Mauberts and by extension to us, such fluctuation (‘volatility’, they falsely label it) has nothing whatsoever to do with the value of their stake or their purpose in ownership. They do not consider a decline in stock prices to be a threat to their wealth. They are not waiting for the price to go up so that they can sell and get rich quick. Their focus, and ours too, is on the substance that they own. Thus it follows that such fluctuations (or ‘volatility’) do not mean much to us.
“Frankly, volatility is an emotional matter that mostly concerns those who don’t quite know what they are doing but are still hoping that somehow they have guessed correctly. People welcome a 10% move up but dread a 10% move down. In their minds, the former is normal while the latter is ‘volatility’, which they have been told is risk. That idea has been discredited long ago, but people just love to hang on to it as if it were holy writ. Volatility “is only a good measure of risk,” someone said, “if you feel that being rich and then being poor is the same as being poor and then rich.” But old habits die hard. After decades of money delusions, we often talk the talk of being owners or investors but we keep a wishful eye on the wrong things. We regret not anticipating a huge profit in the Caracas stock market and we feel that we missed out by not anticipating what we would have made by following along with those who found safety in the ownership of US government bonds. By seeking profit in terms of prices, we become atrophic in recognizing what is real and what is not.”
- Tony Deden, Edelweiss Holdings.
Get your Free
financial review
A few years ago this correspondent watched, and enjoyed, the FX TV series Trust, starring Donald Sutherland, which deals with the 1973 kidnapping of John Paul Getty III by the Italian mafia in Rome. Getty Senior, played by Sutherland, was at the time the richest man in the world. But he also had a reputation for being a skinflint. He famously installed a payphone for the use of guests at his country pile at Sutton Place in Surrey. Would he pay up to secure his grandson’s freedom ?
At the same time as we were enjoying Trust, we also started reading Fortune’s Children, which bears the subtitle The Fall of the House of Vanderbilt. It makes for a rollicking read. It also confirms the truth in that old saw, “shirtsleeves to shirtsleeves in three generations”.
That is to say, when any great fortune is made, its founder typically starts out from scratch in a hardscrabble sort of way. The second generation typically enjoys the fruits of that founder’s labour and oversees a benign deterioration in the health of the business. By the third generation, the fortune tends to be dissipated. The third generation is back in its shirtsleeves again.
Wealth is a transitory condition. Even gigantic sums of it do not equate to permanence, as the history of the Gettys and the Vanderbilts makes crystal clear. (There is therefore, in a sense, hope for all of us.) One of the particular problems with even modest wealth today is our unique macroeconomic backdrop – over 50 years into an unprecedented experiment with unbacked money (dating back to the 1971 Nixon shock, which dismantled the Bretton Woods fixed exchange rate regime), and over a decade on from the start of a global financial crisis which ushered in the most extraordinary period of monetary accommodation in world history.
As we sometimes quietly tell prospective clients, now is in many respects a lousy time to be wealthy. (This holds especially true for the benighted people of Britain, toiling under a Marxist ‘government’.)
Quite seriously, when we meet new clients, we often wish we could have been with them some months prior, so that if they could have asked us whether it was appropriate for them to wind up or sell on their business and retire, we could give them just one word by way of response: “Don’t.”
Billy Vanderbilt represented the second generation of that storied family, his father’s favourite son. He gained no especial benefit from what he inherited. Arthur T. Vanderbilt II takes up the story:
“By his early sixties, he was tired and worn out. “The care of $200,000,000 is too great for my brain or back to bear,” he confessed to his family. “It is enough to kill a man. I have no son whom I am willing to afflict with the terrible burden. There is no pleasure to be got out of it as an offset – no good of any kind. I have no real gratification or enjoyments of any sort more than my neighbour on the next block who is worth only half a million. So when I lay down the heavy responsibility, I want my sons to divide it, and share the worry which it will cost to keep it.”
There is, of course, also a world of difference between a living business and a heap of cash. The living business compounds a monetary return almost effortlessly. But the heap of cash is inert. To earn any kind of return it must be transformed into various kinds of things, all of which come with some degree of risk.
Which is why, for the last ten years at least, our hypothetical and somewhat redundant advice to any ageing entrepreneur or businessperson would be to delay retirement if at all feasible, to avoid converting one’s life work into that inert heap of cash.
Both the financial situation and the political situation seem more than usually fraught today. Although interest rates are finally starting to normalise, there are already signs that a market kept alive by years of overly easy money is now starting to fray at the seams. A generation of investors schooled to believe in variations of the infamous “Fed put” are, perhaps naturally, salivating like Pavlov’s dogs at the prospect of yet more of the same on any broad market weakness.
We are not so sanguine. Perhaps those of us who can still remember the stagflationary 1970s are suffering from overmuch recency bias. We suspect not.
Similarly, our politics does not inspire much hope. To reiterate, the economic position of the UK is threatened by a globalist administration that displays its hatred of humanity on a daily basis. The same holds for much of the EU, notably in Germany, formerly an economic powerhouse but now a much diminished force flirting with self-imposed energy suicide. At a global level, unconscionable amounts of government debt seem to be ushering in some form of new monetary system right before our eyes.
So much for the problems. What about solutions ?
We revert, again, to our friend Tony Deden, a fund manager based in Zurich who, we believe, has as much understanding of capital preservation as anyone alive today:
“For those of us who are intent on protecting our capital, this is not the time to be either doubtful or irresolute as to the right thing to do. Furthermore, it makes no sense to rely on financial assets, markets, consensus opinion, the promises of well-meaning folks or the wishful expectations of the many. On the contrary, this is a time for conviction and boldness. Our overriding aim, as I have described earlier, is to focus exclusively and fiercely on independence, scarcity and substance. To do so, we need to make a wholesale change in how we think about everything.
“The crisis everyone is talking about—yes, the one that is about to unsettle the world we have known for so long—is one that starts and ends with leverage, unsustainable debts, insolvent governments and insolvent banks. It is a crisis of money, money substitutes and money-related activity and assets. Consequently, the destruction of credit, the ‘deleveraging’ everyone talks about, and the ensuing impoverishment in terms of money, need not in any way destroy the physical capital employed. Some of this capital is useful and sustaining; in other words, it has economic value.
“Most financial and investment professionals fail to make the crucial distinction between what is economic and what is purely financial. In fact, everything is measured by the same ruler and counts as if it were the same. We have become accustomed to seeing higher asset prices, more money and greater financial activity and counting it all it as desirable growth. As a consequence, we have long been used to viewing our investments as a means of ‘making money’ rather than with the eyes of owners intent on accumulating capital and productive assets.
“For the sake of conviction and boldness, I see our investment practice forward having just two simple and distinct pillars: first, ample liquidity, and second, a collection of permanent and productive assets to which we can add opportunistically.”
We now view the investible universe as essentially comprising two very distinct types of assets. One is value investments – high-quality companies, run by principled, shareholder-friendly managers, where the shares of those companies are available, for whatever reason, at a meaningful discount to their inherent value. We especially value real assets, including those relating to the monetary metals, gold and silver, and broader commodities, given the ongoing currency debauchery and likely inflationary future ahead.
The other, which is a type of portfolio insurance, is price momentum strategies, such as systematic trend-following funds. In a sense, this latter type of trading vehicle is almost an autopilot which has a good chance of performing when it really gets tough out there, and when most other types of assets fail to deliver.
These two strategies are almost chalk and cheese – but that’s the whole point of prudent diversification. We like to think even Cornelius Vanderbilt himself would have approved. Capital preservation, in real terms, is not just the main thing – it’s just about the only thing that matters.
(We recently interviewed Tony Deden on our ‘State of the Markets’ podcast. Interested readers can listen here and on a variety of podcasting platforms.)
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
“Any fool can make a fortune. It takes a man of brains to hold on to it after it is made.”
“Frequent observation of the wild movements in prices would lead one to think that this is caused by nothing more sophisticated than the rolling of dice at some casino table. There is much truth in such observation. However, for those of us seeking to own what is substantive rather than to rent whatever happens to be going up in price, there is little to fear. We would do well to remember that the fluctuation in the price of an asset does not in any way add to or subtract from the value we assign to such asset or its purpose in ownership. If you are doubtful, consider the following.
“In the small French town of Grasse, several generations of the Maubert family have built an outstanding company that makes flavours and fragrances: Robertet, S.A. The family’s 51% stake along with that of three other real owners amounts to 94% of the outstanding shares of the company. And so, even as the shares are listed on the Paris Euronext exchange, little and infrequent trading takes place. One day a few weeks ago, someone sold 16 shares, the only trade of the day, on the bid, and the price of the stock closed down 5% from the previous day. It occurred to me that the Maubert family had suddenly been rendered poorer by nearly $6 million—just on account of this $2,500 trade. Or had they? Did they feel any poorer? Did their real assets change? Did they discuss this darned volatility at the dinner table ?
“I bet not. To the Mauberts and by extension to us, such fluctuation (‘volatility’, they falsely label it) has nothing whatsoever to do with the value of their stake or their purpose in ownership. They do not consider a decline in stock prices to be a threat to their wealth. They are not waiting for the price to go up so that they can sell and get rich quick. Their focus, and ours too, is on the substance that they own. Thus it follows that such fluctuations (or ‘volatility’) do not mean much to us.
“Frankly, volatility is an emotional matter that mostly concerns those who don’t quite know what they are doing but are still hoping that somehow they have guessed correctly. People welcome a 10% move up but dread a 10% move down. In their minds, the former is normal while the latter is ‘volatility’, which they have been told is risk. That idea has been discredited long ago, but people just love to hang on to it as if it were holy writ. Volatility “is only a good measure of risk,” someone said, “if you feel that being rich and then being poor is the same as being poor and then rich.” But old habits die hard. After decades of money delusions, we often talk the talk of being owners or investors but we keep a wishful eye on the wrong things. We regret not anticipating a huge profit in the Caracas stock market and we feel that we missed out by not anticipating what we would have made by following along with those who found safety in the ownership of US government bonds. By seeking profit in terms of prices, we become atrophic in recognizing what is real and what is not.”
Get your Free
financial review
A few years ago this correspondent watched, and enjoyed, the FX TV series Trust, starring Donald Sutherland, which deals with the 1973 kidnapping of John Paul Getty III by the Italian mafia in Rome. Getty Senior, played by Sutherland, was at the time the richest man in the world. But he also had a reputation for being a skinflint. He famously installed a payphone for the use of guests at his country pile at Sutton Place in Surrey. Would he pay up to secure his grandson’s freedom ?
At the same time as we were enjoying Trust, we also started reading Fortune’s Children, which bears the subtitle The Fall of the House of Vanderbilt. It makes for a rollicking read. It also confirms the truth in that old saw, “shirtsleeves to shirtsleeves in three generations”.
That is to say, when any great fortune is made, its founder typically starts out from scratch in a hardscrabble sort of way. The second generation typically enjoys the fruits of that founder’s labour and oversees a benign deterioration in the health of the business. By the third generation, the fortune tends to be dissipated. The third generation is back in its shirtsleeves again.
Wealth is a transitory condition. Even gigantic sums of it do not equate to permanence, as the history of the Gettys and the Vanderbilts makes crystal clear. (There is therefore, in a sense, hope for all of us.) One of the particular problems with even modest wealth today is our unique macroeconomic backdrop – over 50 years into an unprecedented experiment with unbacked money (dating back to the 1971 Nixon shock, which dismantled the Bretton Woods fixed exchange rate regime), and over a decade on from the start of a global financial crisis which ushered in the most extraordinary period of monetary accommodation in world history.
As we sometimes quietly tell prospective clients, now is in many respects a lousy time to be wealthy. (This holds especially true for the benighted people of Britain, toiling under a Marxist ‘government’.)
Quite seriously, when we meet new clients, we often wish we could have been with them some months prior, so that if they could have asked us whether it was appropriate for them to wind up or sell on their business and retire, we could give them just one word by way of response: “Don’t.”
Billy Vanderbilt represented the second generation of that storied family, his father’s favourite son. He gained no especial benefit from what he inherited. Arthur T. Vanderbilt II takes up the story:
“By his early sixties, he was tired and worn out. “The care of $200,000,000 is too great for my brain or back to bear,” he confessed to his family. “It is enough to kill a man. I have no son whom I am willing to afflict with the terrible burden. There is no pleasure to be got out of it as an offset – no good of any kind. I have no real gratification or enjoyments of any sort more than my neighbour on the next block who is worth only half a million. So when I lay down the heavy responsibility, I want my sons to divide it, and share the worry which it will cost to keep it.”
There is, of course, also a world of difference between a living business and a heap of cash. The living business compounds a monetary return almost effortlessly. But the heap of cash is inert. To earn any kind of return it must be transformed into various kinds of things, all of which come with some degree of risk.
Which is why, for the last ten years at least, our hypothetical and somewhat redundant advice to any ageing entrepreneur or businessperson would be to delay retirement if at all feasible, to avoid converting one’s life work into that inert heap of cash.
Both the financial situation and the political situation seem more than usually fraught today. Although interest rates are finally starting to normalise, there are already signs that a market kept alive by years of overly easy money is now starting to fray at the seams. A generation of investors schooled to believe in variations of the infamous “Fed put” are, perhaps naturally, salivating like Pavlov’s dogs at the prospect of yet more of the same on any broad market weakness.
We are not so sanguine. Perhaps those of us who can still remember the stagflationary 1970s are suffering from overmuch recency bias. We suspect not.
Similarly, our politics does not inspire much hope. To reiterate, the economic position of the UK is threatened by a globalist administration that displays its hatred of humanity on a daily basis. The same holds for much of the EU, notably in Germany, formerly an economic powerhouse but now a much diminished force flirting with self-imposed energy suicide. At a global level, unconscionable amounts of government debt seem to be ushering in some form of new monetary system right before our eyes.
So much for the problems. What about solutions ?
We revert, again, to our friend Tony Deden, a fund manager based in Zurich who, we believe, has as much understanding of capital preservation as anyone alive today:
“For those of us who are intent on protecting our capital, this is not the time to be either doubtful or irresolute as to the right thing to do. Furthermore, it makes no sense to rely on financial assets, markets, consensus opinion, the promises of well-meaning folks or the wishful expectations of the many. On the contrary, this is a time for conviction and boldness. Our overriding aim, as I have described earlier, is to focus exclusively and fiercely on independence, scarcity and substance. To do so, we need to make a wholesale change in how we think about everything.
“The crisis everyone is talking about—yes, the one that is about to unsettle the world we have known for so long—is one that starts and ends with leverage, unsustainable debts, insolvent governments and insolvent banks. It is a crisis of money, money substitutes and money-related activity and assets. Consequently, the destruction of credit, the ‘deleveraging’ everyone talks about, and the ensuing impoverishment in terms of money, need not in any way destroy the physical capital employed. Some of this capital is useful and sustaining; in other words, it has economic value.
“Most financial and investment professionals fail to make the crucial distinction between what is economic and what is purely financial. In fact, everything is measured by the same ruler and counts as if it were the same. We have become accustomed to seeing higher asset prices, more money and greater financial activity and counting it all it as desirable growth. As a consequence, we have long been used to viewing our investments as a means of ‘making money’ rather than with the eyes of owners intent on accumulating capital and productive assets.
“For the sake of conviction and boldness, I see our investment practice forward having just two simple and distinct pillars: first, ample liquidity, and second, a collection of permanent and productive assets to which we can add opportunistically.”
We now view the investible universe as essentially comprising two very distinct types of assets. One is value investments – high-quality companies, run by principled, shareholder-friendly managers, where the shares of those companies are available, for whatever reason, at a meaningful discount to their inherent value. We especially value real assets, including those relating to the monetary metals, gold and silver, and broader commodities, given the ongoing currency debauchery and likely inflationary future ahead.
The other, which is a type of portfolio insurance, is price momentum strategies, such as systematic trend-following funds. In a sense, this latter type of trading vehicle is almost an autopilot which has a good chance of performing when it really gets tough out there, and when most other types of assets fail to deliver.
These two strategies are almost chalk and cheese – but that’s the whole point of prudent diversification. We like to think even Cornelius Vanderbilt himself would have approved. Capital preservation, in real terms, is not just the main thing – it’s just about the only thing that matters.
(We recently interviewed Tony Deden on our ‘State of the Markets’ podcast. Interested readers can listen here and on a variety of podcasting platforms.)
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
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