Compounding Inherited Wealth Ain’t Easy Street

I grew up in the Great Depression, our family renting in the East Bronx. Pop owned a tailor shop in Harlem and we barely got by. But, I was lucky. 

Pop wanted me to be musical. So I chose the alto sax and got lessons in a second floor music school on 125th Street. My sax cost $35, and pop paid it down, a buck, weekly. In the thirties, Mayor LaGuardia then developed several special high schools like Bronx High School of Science,  Stuyvesant and Music and Art which I was admitted to and flourished there. 

I’m pushing 94 and have managed in the financial world where I’ve operated for over 60 years. Made my way managing capital, mine and other people’s money. Hard  work, but It’s time to give it back. Very difficult to give away money and make it work. I’ve chosen medical sciences and the arts, specifically, contemporary art and opera. 

To make your capital work, you watch how recipients implement grants as you specify and no ego trips. This covers museum directors, hospital and university presidents. You must teach younger family members how to be hands-on operators of capital entrusted to them.

In the good ole days, 1950’s and sixties, operating in the market was pretty simplistic. The corporate world was a bunch of white shirted men who ran U.S. Steel, General Motors, DuPont et al. Business cycles were simplistic then.  Management would invariably overexpand their business at the top of a business cycle. 

The FRB would witness all this and then hike interest rates to create a recession which would invariably force cutbacks capital spending. Then, the country would start a new recovery cycle that could run several years. 

Long ago,  a handful of growth stocks emerged during the stop and go economic settings. Polaroid, Xerox, Coca-Cola, Merck et al. Buffett got started in the fifties with stocks like American Express and the banks. Xerox and Polaroid carried me for more than a decade.  Then the Japanese caught up and put them away. 

I’m a skeptic when it comes to the huge, trillion dollar wealth assets managed by our banks. They all employ the simplistic pie chart methodology. It comes down to a 60-40 percentile division of funds in equities and fixed income categories. This is beginning to change as some operators go to a 50/30 ratio with the remainder available for more venturesome sectors. 

But, all such so-called active management is dangerous. First off, banks are paying an additional management fee to outsiders which comes out of clients' capital. Secondly, holding a 40 percent position in bonds has proven dangerous and costly to clients. Treasuries can get rapped for 10% to 20% in times of inflation. It happened some years ago. 

There is no magical, highly conservative investment construct good forever. I own a bunch of 10-year Treasuries which yield 4.3%. Prepared to hold them to maturity, even if inflation escalates to over 5% next couple years.

There are countless families in the country where serious wealth has accumulated over generations. I’m sure most feel comfortable with their bank-run portfolios,  but they are delusionary to believe they’re being conservative and nearly risk free. 

Lest we forget,  big banks practically destroyed themselves in the 2010-’11 financial disaster. Lenders wrote mortgages with no asset value backing. Lehman is gone and and so is Merrill Lynch. Buffett scored big by saving Bank of America with a preferred stock infusion. 

I bought B of A’s listed preferred then in single digits, par $25. Those who inherit wealth and get called on to manage  family foundations as well, need to be activist investors as well as wise grantors of capital. Passivity spells a death spiral.  

What struck me about this chart on market sector returns is wide disparity of performance. Energy declined while healthcare rose 28%. Industrials rose 10%, but utilities a snappy 25%. Tech rose over 20%, but telecommunications faded to 1.9%. Anyone overweighted in energy and industrials underperformed. Buoyant sectors like healthcare and Technology made my year. 

I’ve advised my children to put half their capital assets in 30-year Treasuries and the remainder in an S&P 500 or NASDAQ 100 Index fund. Never get too fancy. Some 10% to 25% in NASDAQ is OK. But if your entry point is wrong, you could drop 25% and take 10 or so years to catch up.