Franklin's Golden Rule
The Daily Reckoning PRESENTS: Mark Skousen has honored Benjamin Franklin’s 300th birthday by compiling and editing The Completed Autobiography by Benjamin Franklin (Regnery 2006). Today, we offer advice on personal economics, business, investments, estate planning, and charitable giving, all based on the study of a man Skousen considers the most “versatile genius in all of history.” Enjoy.
FRANKLIN’S GOLDEN RULES
Compiler and editor of The Compleated Autobigraphy
by Benjamin Franklin (Regnery, 2006).
“Nothing but money is sweeter than honey.”
Benjamin Franklin made great contributions as an inventor, scientist, writer, and founding father, but he is also offered valuable advice on money matters. His is one of the greatest success stories in American history, and much of his success in philanthropy, community, and public office came from his experience and capabilities in the financial world.
Why pay attention to Ben Franklin? His is the first “rags to riches” story in America. Throughout all his experiences, failures and victories, he built a fortune that was never in jeopardy. By time he died in 1790 at the remarkable age of 84, he was a self-made man, one of the richest in American history. The Autobiography, published posthumously, tells largely how he created his wealth. It influenced millions of Americans, both young and old, who wanted to succeed in life, from Andrew Carnegie and Thomas Mellon in the 19th century, to Warren Buffett and in the 20th century.
In his “Advice to a Young Tradesman” in his famous pamphlet, “The Way to Wealth,” published in Poor Richard’s Almanac in 1758, Franklin wrote, “In short, the way to wealth, if you desire it, is as plain as the way to market. It depends chiefly on two words, industry and frugality; that is, waste neither time nor money, but make the best use of both. Without industry and frugality, nothing will do, and with them everything.”
His most famous pro-saving adage, “A penny saved is a penny earned,” is remarkably profound. How can a penny saved be a penny earned? Assume you earn $100 a day. If you have $100 in your pocket and you spend it, you have to go out and do a day’s work to get that $100 back. Another way of putting it: With $100 in savings, you could take off a whole day of work and still enjoy a day’s income by drawing upon your savings. In sum, saving is a source of earning power.
The more you save, the more earning power you build up. In addition, savings earns interest, which means more earning power, compounded returns.
Franklin preached throughout his life the virtues of “industry, thrift and prudence” as universal principles of success. He made a point of working smart and often working late hours to get ahead. Remember the refrain, “Laziness travels so slowly that poverty soon overtakes him.”
Undoubtedly Franklin would castigate today’s Americans for indulging in undersaving, overspending and excessive debt. “No revenue is sufficient without economy,” he warned. “A man’s industry and frugality will pay his debts and get him forward in the world…. Business not well managed ruins one faster than no business.”
We all know of millionaires who have gone bankrupt. Just because you have plenty of income and assets does not mean you can’t run into financial trouble. Parkinson’s Second Law, “Expenditure rise to meet (and sometimes exceed) income,” occurs all too often.
One of the most difficult things to do is to cut back when you have a setback in income. But retrenching is better than going into debt in order to maintain your lifestyle. When his printing partnership abruptly ended in 1767, Franklin made the difficult decision to cut back consumption (dining at home at only one “single dish”), and urged his wife Deborah to do the same. It kept them out of trouble.
Franklin was also a successful investor. In 1743, at the age of 42, he turned over his printing business to his partner David Hall, receiving an annual income for over twenty years afterwards. He never completely retired, however. He worked for the government as a postmaster and minister to France. Nevertheless, over the years he built up a substantial fortune, and relied on his savings and investment income to pursue a gentleman’s career in science, politics, and community service.
Franklin built his investment retirement portfolio by saving, avoiding debt, placing well-collateralized loans (bonds), and investing in rental properties.
So, how did he manage his money? First, Franklin ignored the doomsayers and profited from his prediction that America was destined to be a great prosperous nation. An incurable optimist, Franklin was always bullish on America, and life in general. At the end of the War for Independence, he predicted, “America will, with God’s blessing, become a great and happy country.” The United States, he said, is “an immense territory, favored by nature with all advantages of climate, soil, great navigable rivers and lakes….[and] destined to become a great country, populous and mighty.”
He was critical of the doomsayers and complainers: “I saw in the public papers of different states frequent complaints of hard times, deadness of trade, scarcity of money, &c.,” he wrote in 1785. “It is always in the power of a small number to make a great glamour. But let us take a cool view of the general state of our affairs, and perhaps the prospect will appear less gloomy than has been imagined.”
In his Autobiography, he told the story of an elderly man who repeatedly predicted economic depression and a real estate collapse in Philadelphia, and warned Franklin to sell his printing house and his real estate holdings. Franklin ignored his advice and prospered. Eventually, he said, “I had the pleasure of seeing him give five times as much for one [piece of land].”
Second, Franklin continued to live frugally, even during his retirement, which meant occasionally he had to cut back (as noted earlier).
Third, limit your speculative opportunities, so as not to jeopardize your entire portfolio with so-called “guaranteed” investments. You are bound to make mistakes. Franklin made many.
Fourth, diversify your holdings and limit your risks. Franklin made it a point of having a wide variety of income sources, so that a loss in one would not destroy his entire portfolio. In addition to earning income from his role as minister and postmaster, he maintained 7 or 8 rental properties; earned interest-bearing bank accounts in Philadelphia, New York, London and Paris; investing in common stocks such as the Bank of North America, which paid a sizeable dividend; and occasionally loaned funds at interest to individuals and institutions.
His sizeable interest and rental income from bank accounts and real estate saved him from several severe financial setbacks during his years abroad.
In 1767, while colonial agent to England, his long partnership in the printing business ended. “A great source of my income was cut off,” Franklin wrote, forcing him and his wife to become more frugal in their spending habits. He limited himself to a “single dish” when dining at home.
In 1772, there was a banking crisis in England, but Franklin survived unscathed. “I only hazard a little using my credit with the bank….Being out of debt myself, my credit could not be shaken by any run upon me.”
In 1774, Franklin suffered the most serious blow to his finances. As a result of the Hutchinson Letters scandal (where he sent confidential letters among British officials to America, where they were published), Franklin was vilified in England and fired from his job as postmaster and colonial agent, which amounted to a loss of £1,800 a year in income! Frugal living and their sizeable savings and income properties saved them from certain disaster. Late that year, his devoted wife Deborah died, and he was forced to return home.
Franklin wrote and rewrote his last will and testament several times before passing away in 1790. His will is quite interesting, and I reproduced it in The Compleated Autobiography. Before he died, he engaged in some estate planning, such as arranging the transfer of his son William’s farmland in New Jersey to his grandson (William, who as a royalist opposed Franklin during the American Revolution, received nothing in his father’s will).
In his will, Franklin made a long list of his real-estate properties, bonds (loans), shares, cash, books, printing equipment, and other assets. His will describes Franklin’s “fine crab-tree walking stick, with a gold head curiously wrought in the form of the cap of liberty,” which he gave to George Washington, and the picture of King Louis XVI surrounded by 48 diamonds, a gift to Franklin when he left Paris. He gave the diamond-studded picture to his daughter Sally on condition that she not remove the diamonds. Within a few years, she and her husband removed all of them to pay for a long trip to Europe!
According to the Wealthy 100, a ranking of the 100 wealthiest Americans of all time, Franklin was worth at least $150,000, a considerable sum in those days.
One of the most interesting aspects of Franklin’s will is the creation of a fund in Boston to finance young artisans. During his lifetime, Franklin engaged in all kinds of fundraising activities for public causes, and gave liberally from his purse. But here he created a fund with 1,000 pounds, whose interest would be used to fund the education of young people. The fund continued until recently. Franklin was living proof of Poor Richard’s saying, “Great almsgiving lessens no man’s living.”
It is estimated at nearly 50% of Americans die without a will. Don’t let it happen to you. And when you do your estate planning, be creative like Franklin. The next time you update will, look for novel ways to give away money to your relatives, and favorite charities. Surprise some people!
Remember these final words from Poor Richards: “A long life may not be good enough, but a good life is long enough.”
Near the end of his life, Franklin told friends that he wanted to be remembered for “living a useful life,” rather than “dying rich.” It turns out that he was known for both!
Mark “Be Free” Skousen
for The Daily Reckoning
May 18, 2006
We thank Dr. Skousen for his insights into Franklin’s fascinating life and writings. The Compleated Autobiography by Benjamin Franklin, compiled and edited by Dr. Mark Skousen, is published by Regnery and now available at the link below. It isn’t often that you get a chance to buy a first edition of a book written by a founding father for only $18.45. It won’t last long. Buy it today!
Mark Skousen is the editor of Forecasts & Strategies, now celebrating its 25th anniversary, and it remains one of the most successful investment newsletters in the nation. For more information, see here:
Nothing lifts I.Q.s more than a property boom.
America’s real estate bubble has created a whole nation of geniuses…people who think they are smart because their houses have gone up in price. And the smartest of them weren’t content to merely watch prices rise; they took advantage of them by leveraging themselves into more and more expensive properties.
But now stocks are beginning to wobble. The Dow dropped 214 points yesterday and leading it down were the building stocks. What they are telling us is that the great bubble is over.
“I have a neighbor who asked me for financial advice,” said a speaker at yesterday’s investment conference. “But I don’t want to give him advice…so when he asks me if property is still going up, I just smile and say ‘maybe.’
“I’ve watched him over the last few years. He bought one condo before it was built. He flipped it and bought another one. And then, he bought a whole bunch of them. To him, the secret of getting rich seemed so obvious. All you do is buy beachfront condo at pre-construction prices…and then flip them to someone else. And when he asked me about it, I’d just say, ‘Well, I don’t know how much longer this boom is going to continue.’ He must have wondered what was wrong with me. He was making a fortune. I just didn’t get it.
“But the last time I saw him, he told me that the condos he bought aren’t selling like he expected. I wish I could tell him ‘I told you so,’ but I never told him anything.”
There must be millions of real estate speculators, concentrated in the hot markets on both coasts, in similar situations. They’ve stretched to buy. Now they’re stretched to keep up with maintenance, taxes, condo fees, and interest payments. Their neighbors bite their tongues. “I told you so,” they itch to say.
Don’t worry, say the experts. The boom may have peaked out, but there should be a soft landing.
“I’m not so sure,” continued our speaker. “People say the property market can’t collapse, because houses are tangible and people have to live in them. They compare housing to dot.com stocks, for example. The stocks can fall 90%…or even disappear. That doesn’t happen with housing.
“No, it doesn’t happen the same way, but a much smaller decline in housing prices can have a much bigger impact on people like my neighbor. Let’s say prices go down just 10%. That’s not much. We could expect at least a decline of that much. But a lot of people don’t have 10% equity in their houses. They’ve bought with zero-down mortgages – or maybe 5% – never expecting to have to pay off those mortgages.
“Instead, they were counting on price increases, either to refinance or to sell. If they are forced to pay a mortgage greater than the value of the house, they are going to be in big trouble. And a lot of them aren’t going to make it.”
What can you do to protect yourself? If you have a house you don’t intend to hold for a long time, this may be your last chance to sell at near-peak prices. Otherwise, all you can do is to put your money where a U.S. housing collapse won’t hurt it.
Yesterday’s speakers had a number of ideas: Japanese real estate, Icelandic bonds, oil and gas companies, rare coins and other collectibles…and gold!
“Gold is not really going up because it is becoming more valuable,” said John Doody, editor of Gold Stock Analyst. “It’s going up because the dollar is becoming less valuable. And that’s a trend that is not likely to stop anytime soon.”
John showed us a chart.
“Look at this. Gold has gotten ahead of itself. It’s way out of its channel. It looks as though you can expect a correct back to $650 or so. That would be a good thing…it would allow the gains to consolidate and set the stage for another big run-up. How high will it go? I don’t know. It could go to $1,000 without any trouble. But if it goes to $3,000, a lot of other things are going to be going wrong.”
More news from The Rude Awakening…
Eric Fry, reporting from Manhattan:
“We believe we deserve our earnings, by virtue of the fact that we worked hard to produce them. But the politicians believe that they deserve our earnings, by virtue of the fact that they have already spent them.”
More views from Bill Bonner and Addison Wiggin…
*** “Inflation’s rising toll on consumers,” reads a headline from the Christian Science Monitor.
High energy prices and rising interest rates are, of course, taking a toll on consumers. And now, “everyday items” have risen “more than expected.” The article reports:
? The pace of home-mortgage applications is down 15 percent, compared with this week a year ago, as “for sale” signs stay up longer in a slowing home market.
? Half of Americans have changed their vacation plans to stay closer to home, according to an Associated Press/Ipsos poll out this month.
? Prices beyond the gas pump are also edging up. The “core” consumer price index (CPI), which excludes volatile food and energy costs, surprised analysts by jumping 0.3 percent last month, according to a government report Wednesday.
The economic climate has become increasingly challenging to consumers: ” ‘an economic a gray zone’ where the pace of economic growth may be slowing even as the threat of inflation remains in the foreground.”
*** One helpful reader posted this review of Empire of Debt at Amazon.com:
“Bonner and Wiggin are a-holes. Not because everything they say is wrong but because they seem to take glee in trashing America, its government, and its people. No person, place or thing is perfect, but these guys would have you believe their observations and pronouncements are, while us poor masses don’t know our A’s from a hole in the ground.
“Before anyone buys this book do a little research on Comrades Bonner and Wiggin; their various business’s, web sites, newsletters, etc. Put a few facts together and see how much you trust these two yahoos then. After that anyone who buys this book and believes all the garbage in it, and tries to preach it, is probably an a-hole also.
“On the other hand if you have always wanted to be an a-hole then this is a good place to start.”
If nothing else, dear reader, we’re providing a valuable public service.
*** The above instructions come at an opportune time. As you may recall, we’ve purchased ad space on the back of a bus circling the Capitol Building and in 10 of the metro stations serving the DC metro area.
On Monday we’re sending a crew of folks down to DC with pamphlets and bumper stickers. The sticker resembles a Washington DC license plate and proudly sports the vanity plate Squanderville.
We’re going to be accompanied by a film crew. Hopefully our helpful readers instructions will find their way into a documentary on debt…a sort of “how-to” on self-aggrandizing agitation.
*** Earlier this week, we were staying at the Inn at Perry Cabin in St. Michael’s, on Maryland’s Eastern Shore. It is a small world. The Inn is a delightful small hotel owned by the Sea Containers Corporation, which owns a chain of luxury hotels around the world, including the Windsor Court in New Orleans and the Cipriani in Venice.
Its headquarters are in the same building as our office in London. Alas, nothing fails like success. A recent article in the Financial Times told us that the parent business may “no longer be a going concern.” Auditors were examining the books to find out if the company is bankrupt. Go figure.
*** We breathed deeply and tried to take it in. We stared. We wondered.
For half a century, we lived in America, but now, on this trip through a corner of it, everything seemed familiar…and strangely foreign, too.
Nothing is nothing, until you turn it into something. Even the sights and sounds of Middle America are nothing more than information without a theory. We have one theory: the U.S. has been in a credit bubble for the last five years. We saw the results of it in some places: hundreds and thousands of new houses outside Annapolis, Baltimore, Pittsburgh, Reading.
On Kent Island, there are rows of new condominiums. A country is built, transformed, shaped during a credit expansion. It is probably a matter of luck when it happens to coincide with decent architectural fashions. What goes up during a credit expansion lasts far beyond the credit cycle; future generations have to live with it. Americans were lucky so much building took place before the ’29 crash. Architects still had some taste and style. They were lucky, too, that their pre-’29 cities were not destroyed in the war. Post-war architecture did more damage than bombs. Paris was spared, but Caen was not so lucky. Blown up by the allies, Caen was rebuilt by architects under the influence of Le Corbusier; it is a disaster.
In America, the housing that went up after the war was cheap and ugly. Later, in the ’70s and ’80s, it was not as cheap, but quite as low and repulsive. Now, it is being replaced by the new housing of the 21st century, which, though not great architecture, is at least an improvement on what went before.
But out in the hills of West Virginia and western Pennsylvania, it is as if the credit bubble never existed. The houses are about as dreadful as they have been for the last 50 years. Typically, people let a respectable ’20s-era house fall to ruins and pull a mobile home up in front of it. There they live in comfort and degradation; charm and dignity are as absent from their lodgings as from a dentist’s waiting lounge.
We sucked hard at the air…to try to understand. America has never been a place with much culture, but the standards of everyday life seemed to have slipped even lower than we remembered them. In vast sections of the country, people don’t seem to care what they look like. The motels and restaurants are shabby. The food is often tasteless. These are not hard, ambitious, critical people; they are nice, doughy, contented folks.
Mush is the stuff of Middle America. People are soft and mushy. They dress in shorts, T-shirts, and running shoes – clothes that yield, rather than insist. The starch has gone out of their clothes, their finances, and even their conversation. They address each other with greetings as soft and sweet as Krispy Kreme.
Their heads are full of mush, too. We listened to a talk radio show as we drove down the Pennsylvania Turnpike. The issue was immigration from Mexico.
Milton Friedman clarified the whole business years ago, the show’s host recalled. “You can’t have open borders and a welfare state at the same time,” he remarked. “If you do, you’ll be overrun with immigrants and your welfare system will go broke.” But this insight was lost on the mush brains. Anyone who really believes in democracy should have to listen to talk radio; a few minutes of listening to callers bellyache would cure them. These were people who shouldn’t have been allowed anywhere near a telephone, let alone a voting booth.
Callers ranted about “protecting jobs” or “protecting our way of life.” We looked around. In some of the towns we went through, we wondered why they would want to.
Pressure is mounting to seal the borders. The Chinese sell things too cheap. Mexicans work too cheap. Besides, the Mexicans don’t speak English. In West Virginia, we saw whole towns that were almost abandoned – Thomas, West Virginia, for example.
When the mines shut down, there was not much left. The shops are empty. Windows are boarded up. Old houses are for sale for as little as $20,000. It could use some Mexicans.
“A person could live very well here,” said Elizabeth. “Property is cheap…and some of it is very pretty.”
We were looking out at a valley with green pastures, a swift-running river, old forests, and a white clapboard house. Yes, you could live well – as long as you didn’t care about restaurants, museums, shops, and the other amusements and refinements of civilized life.
But then, we were surprised. We went into the only restaurant still open in Thomas. The place was practically deserted, but there, in the corner, was a bluegrass band practicing for Saturday night entertainment. In a minute, our toes were tapping. The fiddlers sawed away, and the sounds of Appalachian mountain music filled the room.
We were enchanted.