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.
From Lead to Gold
However--and here is the catch, as well as the secret--her investments looked to be anything but safe at the time. Her first large investment was in "greenbacks," currency that the United States had printed during the Civil War to finance the military. From Green's perspective, those were obligations guaranteed by a large, successful nation. Viewed another way, they were but paper certificates, offering meaningless "guarantees" from a country that was debt-ridden and war-torn.
That second view wasn't entirely wrong; the post-war U.S. could have chosen to shatter investor confidence by pocketing the proceeds. It was a possibility--but not a very likely chance, given the country's desperate need for capital inflows. The U.S. had been similarly positioned after the Revolutionary War, and as is now sung, was persuaded by Alexander Hamilton to make good on its obligations. It did again following the Civil War.
Such was Green's method:
1) Find securities that had true, ongoing value.
Favorites were cash or bonds issued by the U.S. government; corporate debt secured by pledged assets; or real estate that yielded cash, such as hotels, office buildings, or land that had mineral rights. Common stocks were acceptable if she believed that industry (for example, railroads) to be sustainable.
2) Buy when others are selling.
Green believed that which boomed would eventually bust--if not literally into bankruptcy, then figuratively in the sense of losing much of its market value and being disliked by most investors. Then she would swoop. "There is no great deal in fortune making … all you do is buy cheap and sell dear," she stated. In that, she presaged Ben Graham's metaphor of Mr. Market, who constantly makes business offers, never at the same terms. Green, like Graham, was willing to wait.
This approach, critically, requires liquidity. It does no good to see a bargain, caused by a market panic, and then be unable to buy it because the only way to raise the cash is to sell other assets into the panic. (Worse yet is to be forced to sell such assets by being leveraged, and receiving a margin call.) Green would always have cash on hand, ready to supply capital when it was least available and most desired: "When the 1907 crash came, I was one of the very few who really had it. The others had their securities. I had the cash, and they had to come in droves."
3) Sell when others are buying.
This is the corollary of the previous point. Although Green is often and justly compared to Warren Buffett, she differed dramatically from Berkshire Hathaway's chief in disdaining buy-and-hold investing. While Buffett famously has stated that his favorite holding period is "forever," whatever Green bought she intended to sell. Ideally, sooner rather than later--because that meant that her investment had appreciated rapidly, not slowly.
Walking the Walk
Those principles, of course, are simpler to write than to do. Green was adept at distinguishing between buggy-whip businesses and those investments that were only temporarily impaired. Those who cannot tell the difference cannot emulate Green's approach, because they will net too many fish that die. As for selling high and buying low, we all acknowledge that logic. But who was selling Microsoft at $58 per share in 1999 and buying it a decade later, when it was $15? Few indeed.
So, while Green certainly serves as an investment role model, she is not the easiest of mistresses to emulate. She was unusually subversive, willing to flaunt social norms and to accept the disapproval that befell. Most people cannot be that contrarian. But perhaps we can take a small lesson from her experiences and become a bit braver with our own contrarianism. Just one notch? Can we pledge that?
Oh, and while we're at it, we'd also better plan on sticking around for a while. Making very big money generally requires year after year of making modestly big money. That is an ability that Ms. Green amply demonstrated during her time, and which Mr. Buffett has shown during ours.
Or, I could have spared you the effort of reading these 1,000 words, and instead shown the secret to becoming rich in a picture.
John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.