I went to a classy, private, prep-school 60 years ago where many kids were heirs-to-be from filthy rich families. In those days, mere millionaires were considered “filthy rich” (an American Expression!).
Those who put their million or multi-million dollar/pound inheritances into passive investments, or let them be run by family office outfits like Coutts in UK or Bessemer, are broke today. Trust Companies put them into “safe, stress free” net leases and bonds.
If they started out in 1960 with $2 million and a comfortable gross income of $120,000 per year – being around 6% interest on $2 million – they paid around $50,000 per year in income tax. However, they also lost 6-10% per annum, on average, of their annual interest’s purchasing power to inflation.
When interest rates tanked as they did recently in last 10 years, their incomes often became less than the service charges of their trustee banks. Over the years, quite a few AAA rated bonds and money funds went under (defaulted) or became junk bonds. That put a dent in their capital, but it was inflation that went on and on, grinding away inexorably — decreasing their purchasing power.
Think of it this way: A 1st class letter stamp used to be 3¢, now it is what? A dollar?
A nice apartment in Monaco used to be $200,000. Now, the same one is $20,000,000!
Those formerly rich kids who relied on passive investments managed by conservative trustees are now rapidly their depleting remaining capital. They know the money will run out long before their life expectancy comes to an end.
All of those who invested in passive income schemes (with a very few exceptions) are now desperately looking for business or new investment ideas. Some, embracing the PT lifestyle have moved to the 3rd world to save money. They are also hoping that one of the invisible income businesses outlined in PTO 20-20 or something similar will earn them enough money to live on. Because they have been sitting on their butts for so long, they probably don’t have the right stuff to make a success of any business.
The bottom line is that I strongly disagree with anyone who says that for your grand-children, money ina trust fund is a good place to store wealth. If your Grandpa put $2 million in gold, stock funds, bonds or any passive investment 50 years ago, chances are it would have all been used up long ago in funding a very modest lifestyle. Remember, fifty years ago, $2 million was seriousmoney — like $20 or $30 million today. Today $2 million gets you a studio apartment in the Riviera. Back then, the same studio was around $30,000
I confidently predict that $20-30 million (or any amount) in passive investments will erode much faster over the next 20 years than they did over the past 50. Passive investments are emphatically not recommended fort he long term — unless you are looking forward to poverty. Are there exceptions? Of course, there are always exceptions.Your Grandpa might pick a buy and hold stock for you that goes up to stratospheric heights.Could happen. But it is almost as unlikely as winning the lottery.
(Thanks to Lucky 1 for the above comments)
Mr Eurotrash says, “Well said, Lucky1, what you wrote dovetails with my experience.”
My own new motto, having been f**ked in my passive investments, is that I invest in nothing I don’t have my arms into — up to my shoulders. There is an old farming expression that says the best manure for any field is the owner walking them every day.
If you start out believing that there ARE no such thing as passive investments you¹ll do much better than if you think your trustees will manage your money for you. The truth is that trustees manage things with enough prudence not to get sued for doing the wrong thing. That’s why there’s a demand for U.S. treasury, no-yield, soon-to-be junk bonds. Trustees/managers cannot be sued in uncertain times for parking your money in U.S. Treasuries. However that “investment” is sure formula for your trust capital evaporating.
The price for a non-active management of your wealth is steady erosion. This is not always true, but if you start with that belief, you’ll do a lot better than if you think a bank or trust company can manage your wealth and make it grow.
Many rich families have generational spendthrift trusts. The assets are not attachable by creditors of the beneficiary. These actually work to protect against lawsuits, but money management must be left to professionals since you don¹t get the bulletproofing if you’re a managing trustee, too. The answer is for you to be part an “advisory board” (which I sallowed). The trustees are not obliged to follow the board’s recommendations. However, if they do what you “suggest,” and you as a trustee are a part of the board, the trustees can’t be sued for failing to follow the prudent person rule which is what–because of fear of lawsuits– incentivizes them to make conservative, money losing fixed income investments in uncertain times.
If you want your capital to grow in value, then your job one for you is to find opportunities to present to your board of trustees. They can do the due diligence and report back. The days of a fat kindly astute trustee like Sir Blimpton in London–managing and growing your family portfolio for generations is over. And if that’s not totally true, it’s true for you and me.
Q&A With Grandpa
Reader: Are you defining rental property as a “passive investment”?
Grandpa: No, that is a business. With highly leveraged apartments, offices, or warehouses, you must manage and keep on your toes by selecting the properties yourself, buying right, servicing loans, maintaining the property and keeping them full of responsible tenants. Yes, dear reader, you can get very rich doing that.
On the other hand, when you passively invest in other people’s real estate deals you will usually lose. For instance: You buy a red ribbon deal from a developer. He contracts to rent out your units — guaranteeing you 10% a year. He takes 50% of gross rents for running the property as syndicate manager.
Is that a good deal? Sorry, no! Not usually. That is almost a sure loser. The typical development is managed well until all the units are sold off. Maybe the developer sticks around while the management contract is highly profitable. Then, the promoter usually goes on to his next deal and the co-owners are left to squabble over a dwindling pool of rental income. Who will advance the money for needed repairs and upkeep. Who will manage. Who will collect the service charges? The answer is “nobody.”
There are other passive investments like real estate investment trusts or net leases at (these days) a 4% return. They are like any corporate bond: a gamble. In the WW1 era, safe, respectable bonds were almost all “traction companies;” urban street cars and such. By the depression of 1930-39, all such bonds were in default. All bus and streetcar companies and railroads, too, were bankrupt. They were taken over by municipalities or creditors. The passive investors lost 100% of their fortunes.
If you look at the Dow Jones stocks of 75 years ago, there are none of the same stocks on the list, and of those removed, very few survivors. The list is constantly changing and being upgraded, just like a mutual fund. Thus the charts you see depicting profitable investments the “stock market” are a fictional construct. You would have had to follow the Wall Street Journal picks and re-balance several times a year to have the same results as the Dow-Jones Industrial averages. These days it is much easier because there are “index funds” that will track the results of any stock market sector. However, there is no sure-fire way to earn money consistently and without a huge risk.
INVESTING AS A BUSINESS
You can make a business out of being an investor. A friend of mine managed other people’s money for thirty years. He visited companies, watched charts, and had the rare knack of trading profitably for himself and his customers. Gor thirty years he averaged 30% a year in dollar denominated compounded profits – well outpacing inflation. Then, around 1990, he eased off, got into passive investments, and now as of 2011, he is down 70%. He got lazy and the Midas touch was lost.
Poor feller, he’s barely surviving on the .05% annual income net after taxes from his last $30 million.
If you just sit on your butt, sometimes by accident and with lots of luck, you will make money in some passive deals. With AAA real estate, when the lease expires, if the local values went way up, your net worth went up too. But by the nature of things, hotels, office buildings, and apartments depreciate; they become economically obsolete. In other words, they become worthless.
What about those red ribbon, off-the-plan, direct from developer deals? As often as not, the developer defaults or the loan is foreclosed. You as a passive investor end up with an empty bag. It has happened to me several times.
The world’s most successful developers–a family from Canada — for a long period of time were on top of the game. Eventually they built the biggest office building in Docklands, London. Its failure took them and all their investors down with them. The bigger they are, the harder they fall.
Donald Trump? There’s a joke. Everything he touches turns to mud – as far as his investors are concerned. But he is like a dealer. The dealer creams any profits off the top. In the long run, his passive investors are almost always screwed.
The point we want to make is that passive investment is for suckers. The suckers are the same people who believe in getting a job or winning a lottery.
If you want to get rich, you simply find a need and fill it, i.e. have your own business or profession where your expertise or talent can be monetized.
You can take 10¢ worth of sand and make beautiful blown glass like Murano of Venice does. Sand! Then you add your labor and skill.
Every day you make infinity on a little investment. Better yet you design and hire others to do the work. You sell 10¢ sand as a chandelier or sculpture for $10,000. You do it over and over again every day.
Your profits beat holding any stock or gold. Even if gold were to double in fiat money value every year, which it won’t obviously, you make less than in your own business.. You can more than double your investment every day making sand into glass or words into “how to “ books.
NOBODY EVER GOT RICH ON PASSIVE INVESTMENTS.
Can we agree on that?
Famous investors: Soros, Buffet, and long before them, Bernard Baruch, made serious money speculating on stocks, currencies, gold, etc., but they were anything but passive. They did a lot of work, looking for underpriced stuff. During their successful periods, they sold out at the first sign of trouble. More importantly, they gambled mostly with other people’s money and they took profits but didn’t usually share losses.
Want to make money in securities? Become a trader or a Goldman Sachs partner (a wheeler dealer), not a Goldman Sachs passive investor. Muammar Gaddafi recently gave Goldman several billion Euros to manage. Goldman lost it all in a few months.
Need ideas on PT type businesses you can start with little or no money?
Read this book: INSIDER SECRETS
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