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In a previous post, I commented on how the fall of the Vanderbilt dynasty is instructive that even with all the money in the world, people can still be enormously unhappy.

In this post, I want to comment more on the reflections regarding personal finance and dynasty wealth after reading “Fortune’s Children: The Fall of the House of Vanderbilt“.

Given that the book is a fantastic account of the characters that inherited insane amounts of wealth and how they blew it all in a generation or two, I learned some things and here are my thoughts on holding on to wealth, should you choose to do so.

1. Don’t Marry an Idiot and Don’t be One

Too many of the Vanderbilt children married spouses that were only interested in their wealth. Commodore Vanderbilt’s sons were only too happy to let their wives try and outspend each other by building mansions and ridiculous summer homes at costs that were astronomical.

The cost of building these mansions was not just the problem. The costs of running the mansions were astronomical because of the number of staff needed to for such a huge place.

Sadly, even those that recognised that their would-be spouse was merely after their money wasn’t spared. Consuelo Vanderbilt, daughter of Alva Vanderbilt, was married to some nobility in England because her Alva had illusions of grandeur about her descendants becoming royalty. The irony is that the noble family that Consuelo married into were running out of funds to maintain their estates in England and needed Vanderbilt money.

The funny thing is that there are similar stories across the Vanderbilt family so I can safely conclude that it doesn’t matter if you have all the money in the world, people who don’t understand money will find some way to spend it all.

2. Dynastic wealth is made from market power and requires diversification

Commodore Vanderbilt made his money largely by being one of the few operators in the market – first in the ferry industry in New York and then in the railroad business.

If you want to amass great wealth in a lifetime, it’s necessary that you own assets that have some sort of dominant market power. It was the same for Bill Gates and in case, you want to use Warren Buffett as an example of someone who’s been in a competitive business all his life, I like to point out that while insurance and managing funds is a fairly competitive business, he’s always stressed the importance of owning businesses that have a moat. If that’s not market power, then what is?

The thing about businesses with market power is that they don’t last. In the Vanderbilt case, the law quickly caught up to busting monopolies with the Sherman Anti-Trust Act and the Great Depression quickly made sure that asset values and incomes fell. Those who were still spending freely quickly found that they had to make deep, deep cuts. Revenues from the passenger service also fell as motorcars started becoming more affordable.

The issue with dominant players is that the market will always find a way to reduce prices either through the use of new technology or new competition. It’s hard to fight against these forces and therefore, the Vanderbilts should have been working hard at gathering a diversity of assets rather than spending freely.

3. Accumulate Assets, Not Junk

While the Vanderbilts were huge collectors of art, prized horses, and other things, the problem is that when you have all the money in the world, you tend to bid too high for these “assets”.

That makes them junk.

The Vanderbilts didn’t accumulate all these things based on a reasonable analysis of the store of value or appreciation in the value of these assets. Neither did these assets throw off any income. They just did it for the “appreciation of art” or to show who had more money or “better tastes”.

This meant that when it was time to sell these assets in order to either pay off debts or to maintain their lavish spending, these “assets” were sold for cheap. Even the mansions sold for much less than they were built. The only thing upside was that the land the mansions were built on were sold for much more than they were purchased because the land was situated in a prime area.

Is Dynastic Wealth even necessary?

At the end of the day, perhaps a better question is whether passing hundreds of millions or billions of dollars down to people who haven’t earned it a good thing?

I’m beginning to think that perhaps Buffett was right in saying, and I paraphrase, that he would leave enough for his children to do something but not so much that they would have nothing to do.

After all, look at the lives of various monarchs and emperors around the world. The royal families in England or Thailand have so much money that their descendants do nothing unless they choose to. Their lives are pretty much a PR exercise to make sure that the public in their respective countries still support them.

But the main thing is that dynastic wealth robs them of simple human activity. Japanese princesses have to give up their royal status if they marry a commoner and guess what, they then have to be taught how to do stuff like go grocery shopping.

I really think I’m leaning with Buffett on this one. Enough money to do something but not so much that I don’t have to do anything.

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