Inherit well, be contrarian, and live for a very long time.
My co-worker Larissa Fernand has composed a series of articles for Morningstar India entitled "Learn From the Masters," which features investment lessons from famed investors past and present. Give them a click! Her accounts are very readable, fresh even when profiling such familiar American subjects as Peter Lynch, Ben Graham, and John Templeton, and on occasion surprising.
Such was the case with her latest installment: Hetty Green, the so-called Witch of Wall Street. As a teen, I read The Guinness Book of World Records cover to cover. Among my strongest impressions was the tale of the "world's greatest miser," who according to Guinness (a source that I trusted with all my heart) was worth millions, but was so cheap that she refused to buy soap and died while having a fit extolling the virtues of skim milk. Yes, that was Hetty Green.
What I never pondered was how she acquired all that money. (Unlike Warren Buffett, who grew up scheming about how to profit from stocks, my financial curiosity was sated by my $1 weekly allowance.) By investing, it turns out. As with many tycoons, Green received a very pleasant head start, inheriting roughly $6 million (accounts vary) in 1865. Over the next 50 years, she turned that sum into something under $200 million.
Growing $6 million into $200 million sounds fantastic; earning 7% per year, as that rate calculates to be, seems considerably less remarkable. Particularly as annual total returns on the U.S. stock market averaged 6% during Green's investment lifetime. What's so special about beating the stock indexes by 1 percentage point?
Better Than It Looks
A few things. For one, as a 1916 dollar was worth barely less than a buck of 50 years before, those gains were real as well as nominal. It's one thing to gain 7% per year before inflation's bite; it's quite another to increase true purchasing power by that amount. If you can accomplish that feat, over 50 years, please let me know.
(For those nostalgic for a time when the gold standard created stability, and a dollar was a dollar no matter what day the sun rose, resist the impulse. The late 19th century alternated sharp bursts of inflation with equally strong bouts of deflation, caused by financial panics and economic depressions. That the dollar ended close to where it started was accidental; this patient had one foot in freezing water, one in boiling, and was anything but comfortable on the whole.)
For another, those returns occurred after taxes, after expenses. Avoiding taxes wasn't difficult, given that the 16th Amendment wasn't passed until 1913. (Nonetheless, before that amendment established the federal government's authority to tax income, the government had experimented briefly with such taxes during the late 1800s.) And, as Guinness' book reminds us, avoiding costs would never be a problem for Green.
Finally, comparing Green's performance with the stock market isn't really germane, because her portfolio was highly diversified, consisting of cash, bonds, and real estate in addition to equities. As those other securities tended to have lower risk and thus lower expected returns than stocks, Green's risk-adjusted performance was outstanding. She achieved speculative returns but with a relatively safe portfolio.