How to avoid going bust like the wealthiest dynasty ever

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Within 30 years of Cornelius’ death, no member of the Vanderbilt family was among the richest in the U.S. And within 50 years of his death, the fortune was completely gone.

When I look at this story, I have to conclude that while Cornelius might have been the greatest capitalist on the planet, he was not a great investor.

Yes, we can lay the blame for the demise of the family fortune on later generations. But Cornelius essentially laid the foundations for this decline with his own hand.


Where Cornelius went wrong

First, practically all of his wealth was tied up in railroad and shipping stocks. He did not diversify across other industries, or across companies. It worked for him personally because he was intimately involved in running and managing these companies. But later, these companies were run and controlled by someone else. And as we’ve shown you before, having all of your wealth in one or two industries can destroy your portfolio if disaster strikes.

And having an entire fortune tied up in shares that can be sold at the drop of a hat made it all too easy for his heirs to say “I want to build this grand house for myself — let’s sell some shares today”. I think this was a key part of the demise of the Vanderbilt fortune. I am convinced that having your entire wealth tied up in shares allows undisciplined owners to react to whims and short-term pressure. Having a mix of assets, that perhaps cannot be sold on the back of a phone call to a broker can guard against short-term temptations and whims. (We’ve always stressed the importance of diversification and have written about how to make sure your eggs aren’t all in one basket, here.)

The second major fault in the Vanderbilt portfolio was that it held very little in the way of hard assets. It did not include much land or real estate. And he owned zero investment properties, mines, or large farmlands.

Yes, Cornelius built a nice house for himself, and had some offices and some commercial space for his businesses. But he never invested in the most spectacular urban growth story of the century. He was running businesses in the financial heart of the country, a city that was growing by leaps and bounds… but he never bought land in New York City for development into commercial buildings. He loved dividends but didn’t see the cash flows that would come from investing in New York’s burgeoning real estate market.

Just think of what the family fortune might have looked like if Cornelius had parked, say, 20 percent of his shipping and railway generated earnings over the years into land and buildings in what has become a pre-eminent global financial centre. (This is something that I firmly believe everyone should do… I can tell you how I’ve done this, and how you can too.)

And an added bonus of real estate would have meant less liquidity. It’s easy to sell traded shares on a whim, but it’s a lot more difficult to dispose of an office tower. Lower liquidity might have prevented such a rapid demise of the Vanderbilt fortune, simply because it would have been more time-consuming and difficult to sell assets.

How things could have gone

Vanderbilt wasn’t the only family dynasty spawned in the 19th century. Two other families I am familiar with built up massive fortunes during this time. And both of those dynasties are still thriving 150 years later. I’m talking about the Jardine family (which co-founded the Hong Kong-based conglomerate Jardine Matheson (Singapore Exchange; ticker: JM), and the Swire family (which founded the London-headquartered Swire Group (Hong Kong Exchange; ticker: 19) conglomerate).

Both of these family companies started out in concentrated businesses – but diversified into a range of different businesses. Jardine started out selling opium, cotton, tea and silk. Today, the company is involved in motor vehicles, property investment and development, food retailing, home furnishings and luxury hotels, just to name a few sectors. There are more.

Meanwhile, Swire started out in the textile trade. Today, it’s involved in property, aviation, beverages and food, marine services and trading and industrial industries.

Real estate also became a vital core business of both companies. Both invested in Hong Kong back when it was a proverbial backwater. Today, it’s the Asian equivalent of New York.

These families did the two things that the Vanderbilts did not. And today, many generations later, both of these families are still worth billions of dollars.

What we can learn from the Vanderbilts

The two things to take away from this story are that diversification and a core of “hard assets” should be guiding principles for all of us – even if we will never come close to mimicking Vanderbilt’s wealth.

With a well-diversified portfolio that includes hard assets like real estate, you can survive just about any crisis… and grow your wealth for years to come.

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