05/11/11 Beijing, China –
Last week, we discussed the real secret of success. As you knew all along, there is no secret. Hard work over a long period of time pays off – just like compound interest does the job on your savings.
“Compound Effort Over Time,” is how we put it.
The longer and harder you work at something, generally, the more success you have.
But we left an intriguing idea dangling. What if you could work at something longer than a single lifespan? What if you could keep compounding for more than one generation? What if one generation could help the next succeed?
The idea is both self-evident…and shocking. In America, you are supposed to be self-reliant, self-sufficient and independent. You should believe that you are responsible for your own success. You are supposed to be able to do whatever you want to do…and go as far as your luck and pluck permit.
What if it weren’t true? What if your success in life depended largely on your parents and grandparents?
Driving across Baltimore recently we went through a working class neighborhood called Dundalk. Fifty years ago, it was a neighborhood of white, blue-collar factory workers and their families. Men earned good wages at the GM plant…at Bethlehem Steel…in the ship terminals, mills and factories. Women stayed home and raised their families.
And today? The factories are largely gone. Now, men work in lower-paying jobs in the service sector. Women are single mothers. But they’re still in Dundalk.
We have no facts. Just observations and guesses. But fact-finders have already concluded that America has much less ‘social mobility’ than it used to have…even less than Europe’s sclerotic social-welfare states.
Why do people stay in Dundalk? Are they genetically programmed for the lower middle class? Are they culturally suited for low-skill, low-income employment? Are they educationally prepared for nothing else?
Sociologists argue over the causes. What interests us are the effects. For whatever reason, the next generation picks up where the last one left off.
We know that wealth is accumulated over many generations. We know that just by looking around. Our generation did not build many of the edifices we see…nor clear the fields where crops are planted…nor invent the automobile, the aeroplane, the television or the toaster. We inherited those things, and much more besides.
We know too that if you’re born in New York rather than New Delhi, you’re likely to be richer. And we know that if you’re born to a rich family in midtown Manhattan, you’re likely to be richer as an adult than if you’re born to a poor family in Harlem.
And yet, how many people take responsibility for their children’s wealth? How many figure out how to compound their success into the next generation…and beyond?
There are many things that take more than a single generation to accomplish. If you want mature oak trees lining your driveway, for example, you had better think in terms of generations…or start very early. Olive trees can take an entire generation – 35 years – before they produce a decent harvest. Then, they live for centuries longer.
And what about a skill or a reputation? How long does it take to build a reputation as a great beer maker? A great winemaker? A great guitar maker? Or a great banker?
Not years. Generations.
The Martin family started making guitars in 1811. Now, everyone has heard of Martin guitars. The family is still making them.
The Beretta family is still making guns; the business was begun in 1526.
The Rothschilds have been in banking since the 18th century.
The Lemoine family started publishing books in Paris in 1772; they’re still at it too. And the Hoshi family in Japan has been running a hotel for 1,200 years!
Of course, these are rare examples. But there are a lot of businesses that involve delicate judgments, unusual habits, or the kind of specialized knowledge that is very hard to come by in a single generation or learn in school.
Parents mortgage their houses to send their kids to school. But the parent who advises his child to stay in school or graduate school may be doing him a big disservice.
The common belief is that people who get advanced degrees earn more than people who don’t. Statistically, this is true. But it is misleading. It doesn’t mean that any individual who gets a degree or advanced degree will earn more than if he didn’t. All it means is that taking the whole population, average people who have more education tend to earn more than average people who have less education. Doctors earn more than carpenters. Engineers earn more than backhoe operators. But the average person earns an average salary. Obviously, if you want to earn an average salary you are better off in a field where the average is high.
But what about earnings that are not average? What about the fellow who was going to be a doctor…and instead decides to start a business of his own…or goes to work for a pharmaceutical company? Would he be better off with more years of book learning…or more years on the job?
To ask the question another way, would Bill Gates have had more success if he had stayed in Harvard and gone on to law school? We don’t know. But it is unlikely.
To turn to a more common example, what about the child who is destined to enter the family firm? Is he better off spending more time in school or going right to work? Almost every parent would say – ‘let him stay in school as long as possible.’ If pushed to identify the merits of further education, the parent would say ‘it can’t hurt.’
But maybe it can hurt.
People learn, no matter where they are and what they do. So, the real question is, where are they likely to learn more…or which kind of learning will be more valuable?
Book learning has a value – especially in the sciences. But if the hypothesis of “Compound Effort Over Time” is correct, it may be more valuable to begin early accumulating the instincts, experience and hunches that prove so valuable in real life.
Plus, time spent in school may not only be less productive…it may be counterproductive. Much of what is taught – depending on the discipline – is not knowledge at all. It is nothing more than intellectually fashionable claptrap which later proves to be completely false. Imagine the poor family that sends a child to an Ivy League school so that he may get a degree in economics or finance. Then, it sends him to a business school so he may deepen his understanding of the subject. By the time the kid finishes school, the family has spent nearly $300,000 on his education.
Then, when his studies are finally completed, he comes back and applies the latest theories of finance to the family fortune. Had he arrived on the scene in 2005-2007, for example, he might have loaded up the family with a portfolio of mortgaged-backed derivatives, in order to earn higher yields from ‘safe’ investments.
He might have applied Modern Portfolio Theory too…like the geniuses running Harvard’s endowment…and wiped out half the family fortune.
Or maybe he would turn his education to the business itself. You can imagine him telling dad and the old-timers that there were new and better ways to do things…and that they should be trying to ‘maximize shareholder value’ by leveraging the firm.
The old timers would shake their heads.
“No… Debt doesn’t seem like a good idea…” they would say.
Or, “Hmmm… Something doesn’t seem right…”
But asked to explain why they were reluctant to put the new learning to work, they would have a hard time arguing the point. They would only have hunches and habits, the accumulated wisdom of decades; it wouldn’t stand up for long against the mathematical proofs offered by the young MBA!
Finally, the old guard would give up:
“Well, I guess you’re right. We can increase our return on equity by borrowing money… I guess that makes sense.”
And it did make sense – for a while. In 2006, the firm might have been more profitable than ever…and maybe even have bought a corporate jet and begun expanding into new markets.
“Well, I guess Sonny was right,” the old man could say to himself. “It is a new era.”
And so, the firm – like Lehman Bros. – that had done business successfully ever since the War Between the States, loads up with debt. And then, when the next major cyclical downturn comes, it goes broke!
Julius Caesar never earned an MBA. Nor did Cornelius Vanderbilt. Or Henry Ford. Or Andrew Carnegie. Or practically any of the great successes of business and financial history. MBAs hadn’t been invented!
Caesar learned his trade by following in his father’s footsteps. His father showed him how to be a praetor, a senator and governor of an Asian province. Caesar learned how to talk to people. He learned how to think. He learned who he could trust. His father made the introductions. His father set the pace. Then Caesar was able to step into his father’s footsteps, and keep on walking.
Caesar did not start from nowhere. He did not start with nothing. He started off where his father left him. He launched his career with the capital his father gave him – skills, reputation, experience, money, and contacts.
One of the many under-rated legacies a parent can leave a child is a good reputation. Trust can take generations to build. We trust Mr. Martin to build guitars because his family has been making them for many, many years. We trust Mr. Ford knows how to make cars and Mr. Hershey knows how to make chocolate.
“The thing about doing business in China,” said a man sitting next to us on the plane, “is that it can take a very long time to build up trust. And without it, you’re lost. They don’t trust you. So they won’t treat you very well. That’s how they protect themselves, by cheating you first.”
Trust reduces the cost of doing business. Less need for lawyers and contracts. No need for insurance, bonds and hold-backs. That’s one reason ethnic groups tend to prefer to do business internally. They understand one another. They know what to expect. They know who they can trust…and how much.
Even in well-known, open careers such as filmmaking, banking and politics, trust, contacts and ‘brand’ awareness are extremely important. It’s tough to break into acting or politics, for example, but it’s a lot easier if your parents had already opened a breach in the wall. The number of people in the trade today whose parents and grandparents were also in it prove the point; there are far more of them than would be predicted by pure chance. Of course, it’s easy to see why. The children know how the business works; outsiders don’t. They have the contacts; newcomers don’t. People in the business trust them to know what to do and how to do it. So, it’s much easier to gain entry for someone such as Angelina Jolie (father: Jon Voigt), Michael Douglas (father: Kirk Douglas), Jeff Bridges (father: Lloyd Bridges)…or dozens of other well-known political figures.
Of course, that could be said of almost every career and every business – whether it is plumbing or haberdashery. One generation lays a foundation. The next can build on it.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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I’m afraid I really don’t agree about the misinformation you heard on an airplane. Here in China, like anywhere else, trust need to be built gradually. And people can be protective sometimes when there is not yet a trustworthy relationship, but Rome is not built in one day!
BTW, hope you enjoy your trip in China
It’s hard to improve on that, Mr. Bonner. Amen and amen.
Usually, one generation builds the wealth, the next builds on top of that, and then the “aspiring artist” grandson shoots heroine in some Soho loft.
The best opportunities in business can come from a “legacy business” that has recently changed generations and pulled away from tested practices. Restaurants are the first to go this route, the rich son or daughter of a restaurateur usually makes a very, very poor restaurateur. They come in for 10 minutes to raid the till and then leave.
This is what’s so sad about the TBTF Bailout! The worst thing about the 2009 bailout is that so many legacy businesses up and down the chain, which should have closed shop, are still there, with the legacy kids raiding the tills.
Of course govt. has its legacy kids as well.
And what if species could give an advantage to other species
I’ll comment on the value of a college education at any level from undergraduate to PhD. Essentially you are gaining some level of training/knowledge that is at the expense of you, your family or your government. But it is not usually at the expense of your employer. So a year of college does not have to equal a year of on the job experience. This gives the college graduate an edge. Also, college, regardless of it’s educational value, serves as a filter which makes it easier for companies to select employees. The knowledge part of the deal is largely irrelevant.
But interesting point on accumulated wisdom versus “new and better ideas”. Martin guitars was almost wiped out by new and stupid ideas. The son that took over for his wayward dad revived the company by going back to the old craftsman’s approach. Proves your point, sort of. Not sure wisdom is all that transferable.
Mr Bonner,
I met a man once who had inherited his business from his father, and whose son was successfully taking over his business. I said to him, “That’s unusual. You don’t often hear of third generations successfully running the family business. It happens. Just not often.”
He said, “Let me show you the secret.”
He went into his office and came out with a gnarled tree branch as thick as an arm, which had been knotted. To be clear: the wood had been tied in a knot.
“Wow!” I said.
“You understand, of course?” he asked. “This branch was knotted when the tree was still a sapling, when the branch was alive and soft and pliable.”
He explained that his father had handed down the branch to him, and he had given it to his son. Preparation of the next generation begins from birth.
So I agree with your thesis, one hundred percent.
Great Article.
Our entire generation stands on the shoulders of previous generations.
Today is the best time in history to be born. Tomorrow will be even better.
Start investing for your future and that of your kids. 5 years, 20 years and 50 years will go by whether you invest or not. You’ll be glad you did. Kid’s too.
I have been an admirer of your work for years and I believe that this is one of the most profound and least understood concepts which you have brought to light.
We are more like our parents than most people care to admit. The sooner that we as parents understand that, whether we are carpenters or tech business moguls, the better off our children will be.
Thanks again for your insights!
The problem with education is that is can provide a false sense of entitlement especially for the son of a taylor who becomes a doctor or the son of a bricklayer who becomes a banker. They may realize one day that they should have followed in their father’s foot steps instead of trying to be something they have only learned of from school. The formal education may not be enough for them to rise up the ranks in the medical or banking profession to a level that satisfies them. They may have been better suited to a career like their father and grandfather had. The problem is that industrialization ruined many noble occupations of the past and made them obsolete and replaced them with “office work” of some sort which many a person finds boring,mundane and downright dehumanizing unless they rise to the top of the Corporate Ladder and are able to call the shots and run the show. Very few MBA’s are able to achieve this level and most toil in obscurity and with great frustration. The worst is when their employer fails and they are cast aside with little to show for years of honest and loyal work for this now defunct or merged organization. They don’t prepare you for this in MBA school because it wouldn’t fill the seats with new candidates willing to pay $50K per year to attend these overpriced program.