When I was writing my last book, Family Capital, my objective was to make it appealing – well, tolerable – for people who didn’t care much for investment issues but who knew they really should learn something about them. Adult children, for example. But also spouses, cousins, attorneys, accountants, bankers, trustees and others who needed a working knowledge of best practices in managing private capital, but who would rather chew glass than read an investment book.
I therefore tried to write a book that would read more like a novel than like an investment how-to, on the safe assumption that people like stories better than they like textbooks. The book therefore follows the saga of the Titan family from its earliest days during the Industrial Revolution down to the present. I hoped the narrative sweep of the story would carry people along with it; that, in other words, the story would be the spoonful of sugar that helped the bitter medicine of investment policies go down.
Whether I succeeded or not is anybody’s guess, but I had a constant problem as the book went along. I wanted to keep the narrative going, uninterrupted, so people would keep reading. On the other hand, the real objective was to teach readers about how capital is best managed. I “solved” this problem by inserting author “asides,” set out in black borders, sprinkled throughout the book. Many of these asides begin, “Note what is actually going on here.” I also added a brief summary after each chapter, identifying what the Titans had done right and wrong and what their advisors had done right and wrong.
One thing I didn’t do was to stop and ponder what overall lessons we can learn from the experiences of families like the Titans. There is, for example, no final chapter disclosing the otherwise closely held secrets of succeeding as a wealthy family.
But as I’ve traveled around the world (well, the North American and European parts of it) talking about my book at various conferences and book events, I found that people wanted to know those secrets – and, for that matter, so did I.
And so, loyal readers, here is one of those secrets: families that succeed over many generations do so because they approach the investment process in the same, businesslike way that they approached running the businesses that made them rich.
Which brings us back to “the illusion of control.” If you listen to the Modern Portfolio Theorists, you would learn that having all your net worth tied up in one company is a form of either ignorance or lunacy. Investors, MPT tells us, aren’t compensated for taking risks that don’t have to be taken. Since we could sell our closely held companies and buy 15 or 20 well-selected publicly traded stocks and eliminate single company risk altogether, we are foolish not to do it.
Modern Portfolio Theorists imagine that people who own businesses must lie awake nights in cold sweats, that we suffer from high blood pressure and ulcers and that we gobble Xanax like popcorn. Actually, though, families that own businesses in which their entire net worth resides are perfectly sanguine about that fact. We sleep soundly and have no more anxieties than your median MPT professor. If we want to understand this interesting phenomenon, we must turn not to the finance professors but to the psychology professors, Professor Ellen Langer in particular (see last week’s post).
Langer knows that us business owners are comfortable and happy because we have, at the very least, the illusion that we are in control of those businesses:
* We appear to be using skill. When we first launched our businesses we made every mistake in the books, plus a few that got left on the cutting room floor. Some of us – I’m not mentioning names – even failed the first time around. But gradually we got the hang of it.
* We have manageable choices. When we get to the office every morning we find lots of thorny problems awaiting us. But, thorny as they are, they aren’t unlimited in number or kind and are, at least to some extent, manageable.
* We are in competition. Well, duh, that’s what being in business is all about.
* We are involved in the decisionmaking. I’ll say.
The reality might well be that our businesses will get blasted out of the water by factors far beyond our control: the rise of new, alpha competitors; the emergence of a disruptive technology; a massive fraud committed right under our noses. But it doesn’t feel that way to us. We know our market sectors, our customers, our competitors, our suppliers, our employees. We feel like we’re in control, even if that feeling is actually illusory.
Ah, but then comes the day the MPT professors have been waiting for all our lives: we sell our company and invest the net proceeds in a well diversified portfolio of stocks, bonds, hedge funds, private equity, and so on. And everything promptly goes to hell.
We’ll take a look at that phenomenon, and what we might do about it, next week. Tune in for the thrilling conclusion to “The Illusion of Control.”
Next up: The Illusion of Control, Part 3
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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.