Investing in a Culture of Permanence

“The rich never sell.”

A successful real estate investor friend once told me that.

When he said it, I thought that it was one of those things people say that sounds good, but that it probably wasn’t true. Of course, the rich buy and sell real estate all the time, just like everybody else… right? We’ve all read stories down through the years about the multi-million dollar pads being bought and sold for hugely inflated prices, and once sedate neighborhoods being taken over by nouveau riche stockbrokers, lawyers, and bankers.

But he was referring to high-end real estate, and to the “Old Money” rich. And after seven years studying what makes the Old Money rich different from everybody else, I now believe what my friend said is actually right on the mark.

That’s because Old Money successfully creates a culture of tradition and permanence.

This is the most recognizable feature of Old Money … the sense of tradition, of things staying the same… old houses handed down through the generations… classic cars… old clothes… old furniture… old country club memberships… the same old social circles… attendance at revered old schools.

Last month in the Strategic Review, we looked at why families need to stay dynamic, and embrace creative destruction and failure, to stay competitive.

Business-owning families are subject to market forces, just like everyone else. Family members must develop ‘grit’ through learning to deal with failure and sticking with their pursuits in order to be successful.

But when it comes to most of their investments and how they live, Old Money is static and sticks to traditions.

Old Money ignores market forces and fads as much as possible. It buys high-quality assets and sticks with them, regardless what the market is pricing them at right now.

That’s why the ultra-rich do so well during periods of volatility. They don’t sell when prices are low. Instead, they buy, utilizing their capital to pick up high-quality bargains that they can hold for generations.

Multi-generational families maintain a sense of permanence about their assets. The family estate… the beach house… furniture… art and heirlooms… are held for the next generations. They are often deeply engrained in generation-spanning family traditions.

My family has properties on three continents. While it sometimes seems that it would be sensible to sell some of our family real estate. When we sit down and seriously consider selling, no one wants to do it.

These properties are such an integral part of our family culture. We couldn’t imagine being without them. We want our children to be able to enjoy these places, just as my generation has… That’s why we can’t bring ourselves to sell them.

There’s family history attached to these family assets. And there’s a lot of emotion tied up in them. The memories and stories created around these assets help bond family members.

Family members grow attached to these things. And they feel a sense of duty to hold on to the stuff for their children. This is what happens in a family culture that embraces traditions.

Why Old Money Never Sells

Especially when it comes to family real estate, but also businesses and investments, the rich, typically, don’t sell.

Why not?

There are a few reasons…

1. Compound Value

Through maintaining ownership, Old Money is able to gain the benefit of compound returns. The ‘miracle’ of compounding kicks in at the end of the curve, not at the beginning. Only investors who are able to hold on to investments for the very long-term capture the big gains at the end of the compounding curve.

Fidelity Investments did a study of the performance of their clients’ accounts a few years ago. They found that account holders who were deceased or who had forgotten that they had an account out-performed their more alert and active counterparts…

That’s because the average investor reacts to the market. He buys when prices are high… and sells in a panic when prices are low.

The multi-generational ultra-rich do not invest that way. If they did, they wouldn’t stay rich for long.

Long-term real estate holdings also benefit from compounding. Prime real estate that is in the path of development, in an area experiencing population growth, or in an established destination for the wealthy, can increase substantially in value with time.

But an increased value in the market is not a reason for a family to sell a property that has been in the family for generations.

A few years ago, I looked at an old neglected mansion for sale across the street from the beach. Previously owned by a member of the Vanderbilt family, the property was on 6 acres on the island in east Delray Beach, Florida with deep-water boat dockage on the Intracoastal side. For a property that large to come on the market is very rare on the island.

This was not long after the credit crisis, so, the owner was likely in distress. It sold for around $1 million an acre, which was a firesale price. The buyer was a local developer who tore down the old Vanderbilt house, subdivided the property, and built a dozen multi-million dollar houses.

I’m sure you’ve seen the same thing in your hometown. An old family estate that’s been there forever falls into disrepair, and is then sold off.

When family estates are sold like that, it’s often because the family isn’t rich any more. They sell because they have to.

They lost their business or spent too much money… The family fell apart… and the financial need outweighed all the memories and traditions associated with the property.

1. Control Spending

High-quality real estate purchased long ago by family members can serve as a bricks-and-mortar nest egg for families. Housing is one of the biggest ticket items most people will buy in their lifetimes. An existing family home defrays those significant costs. When you have a family home or vacation home, you don’t need to buy another one. This helps control spending.

1. Create Memories

But more than that, family-held real estate provides a place for the family to vacation together and spend time reconnecting. Regular family events there become part of the family culture. When they spend time there, family members develop emotional attachments to family property… and fond memories of their time spent with family there.

Next month my family will gather at Ouzilly, our house in the countryside of central France. We’ve been doing this for almost 20 years. Our friends come and stay. We go swimming in a local river. We have bonfires at night. Everyone has a great time. I want my children, and their children, to have this same magical experience.

That’s why successful Old Money families don’t sell their properties. They leave the family homes to children and grandchildren. They want the property to serve as a touchstone for the family members for generations to come.

Successful Families Maintain Ownership of Their Assets

This is one of the great secrets to staying wealthy…

Old Money families can sometimes be asset-rich and cash-poor. That’s because they don’t sell.

They often live on a small portion of the income from their business and investments.

They don’t want to ‘monetize’ family assets. They sit on their family businesses, real estate, and investments… allowing them to grow in value over time.

When you sell, you create what they call in the advisory business a “liquidity event.” That’s when financial assets are liquid – cash in a bank or brokerage account.

And it’s money that can start burning a hole in your pocket.

When brokers and money managers hear about a liquidity event, their ears perk up and their pupils dilate. They smell blood in the water… It’s the same for luxury real estate brokers, interior designers, contractors… and car, boat, and jewelry salesmen.

Uncommitted cash from the sale of family assets is dangerous. It tempts family members to consume rather than produce. Then the family starts expressing itself through what it buys, not what it creates. That’s when serious overspending can happen.

Old Money knows the danger of selling. Multi-generational families might sell assets that are no longer profitable or are otherwise undesirable.

But they don’t sell high-quality assets that produce a profit, unless they can safely redeploy that wealth into a much better opportunity.

They keep the family homes, even though they can be a pain to maintain and manage.

They don’t sell equity in the family business, even when it might be very tempting to do so. Monetizing equity in the family business is usually a bad idea, even at a “record valuation.” It dilutes and weakens family ownership, threatening control of the family business in the future.

They might speculate and trade with a small portion of their wealth.

But they hold high-quality assets, their core family wealth, forever.

I can only hope that my family will have the wisdom and fortitude to do the same thing over the years ahead.

Family homes and assets help to bond the family together, and strengthen emotional ties. Spending time together at shared family properties is invaluable in helping the family stay unified. It also bolsters the sense of belong, and identity, with the family. A unified family is absolutely critical to holding onto wealth, but also for the health and happiness of family members.