The Burden Of Capital
Having money is such a burden, say rich people. Because you
have to figure out how to preserve it…and what to do with
it after you die.
“I was lucky,” I quote myself from yesterday’s letter.
Thanks to the collective wisdom of the credit industry of
the ’60s and ’70s – I passed through young adulthood with
neither credits nor debits.
Neither a borrower nor a lender was I. I had neither money,
nor debt. I could not be accused of wasting the family
fortune – for there was nothing to waste. I was free from
the burden of wealth.
But my children may not be so lucky. Their father tries to
make life easy for them…and may end up making it much
And if he does not ruin himself by following his own
investment advice…or impetuously running off, penniless,
for the purpose of mixing his genes with those of a French
cocktail waitress…he may even leave a farthing or a sou
after he is gone. The bequest will be announced in his Last
Daily Reckoning, to be read solemnly in the presence of an
estate lawyer and an IRS agent.
I may even suggest that my executor hire a few women to
come and weep openly and dramatically, as if they missed
It was Doug Casey who first described rich investors such
as Warren Buffett and George Soros as “idiots savants.” The
term applied, said he, because these men were geniuses at
making investment profits but almost complete imbeciles
Yesterday’s International Herald Tribune brought further
evidence that these titans of investment are midgets at
“Some 120 wealthy Americans, including Warren Buffett,
George Soros and the father of Bill Gates,” says the IHT
news article, “are urging Congress not to repeal taxes on
estates and gifts.”
The father of Bill Gates was so agitated by the prospect of
letting his fellow Americans decide for themselves who gets
their money that he organized a petition effort against it.
Signers include Soros, a few Rockefellers, and Ben Cohen,
founder of Ben and Jerry’s ice cream company.
Mr. Buffett said he did not actually sign the petition
because he thought it did not go far enough. He said he
believes it would be a “terrible mistake” to stop taking
away accumulated savings after death. It would be, he said,
like “choosing the 2020 Olympic team by picking the eldest
sons of the gold medal winners in the 2000 Olympics.”
I will try to help you make sense of that remarkable
statement, dear reader, by pointing out that making money
is a game to Buffett. He has far more money than he can
ever spend. Or that his children can ever spend.
Economists point out that the more you have of something,
the less each additional unit is worth to you. A hungry man
really appreciates his first hamburger. A 10th hamburger is
welcomed only by a person with an eating disorder. This is
called the principle of declining marginal utility.
Every additional dollar made by Warren Buffett has a
marginal utility near zero. It is just the sport that
interests him, not the money. As Bunker Hunt once put it,
“money is just a way of keeping score in life.”
Well, according to the most recent Forbes ranking, Warren
Buffett is the 4th highest scoring person in the nation.
In Buffett’s view, making money is just a game. The
government is like a referee, who makes sure that all the
contestants start the race at the same time and from the
Government employees, of course, are not impartial referees
at all. They’re in the race too. Their goal is make sure
that they emerge the big winners.
One way or another all savings end up in someone’s hands.
Either they go to the children of the people who did the
earning and saving…or they go to someone else’s children.
Buffett imagines a pure meritocracy…where all players
begin with the same grubstake and where all wealth is
distributed to the people who earn it. “You have mobility,”
he says, “so people with talents can be put to the best
use. Without the estate tax you in effect will have an
aristocracy of wealth, which means you pass down the
ability to command the resources of the nation based on
heredity rather than merit.”
Existing capital can either be destroyed…or passed along
to the next generation. It cannot be earned – because it
was already earned, by the previous generation. The only
question is whether the people who built the fortunes
should have the right to decide who gets them…or whether
someone else decides.
Buffett’s world exists only in his imagination. People
start out in life with different talents, different
handicaps, different burdens…and very different
attitudes. Their challenge, though, is always the same – to
make the best of things.
My poor children. I can already see the corrosive influence
of unearned wealth. Rather than set his hand immediately to
a career, my oldest son intends to backpack around Europe
this summer…following his graduation from college. I paid
his tuition and supported him during his college years, so
unlike so many young Americans, he has no college loans
weighing upon him.
Sophia, too, is searching her soul and the Internet to try
to find something to do with her life. The poor thing.
Should she work with the destitute in India? Or spend a
year on a dude ranch, earning a pittance but getting an
entirely different experience?
I had no such cares or concerns when I were her age…I
merely had to find the best paying job I could, which
turned out to be painting radio towers. It paid more than
$5 an hour as I recall – because it was almost unbelievably
tedious, dumb and dangerous. All day long I would climb
around on steel girders, hundreds of feet off the ground,
dipping my mitted hand into a bucket of paint which was
hooked to my belt. Then, I smeared the paint on the rusty
metal with one hand while I held on to the swaying tower
with the other.
Many college boys were attracted to the work by the pay,
but few actually stuck with it. One, a large blond football
player, climbed up the WBAL TV tower in Baltimore with me
one morning – his first day on the job. After a while, he
looked down, and froze with fright. He held onto a girder
with both arms and refused to move. We thought about
leaving him up there…like a cat up a tree, we figured
he’d eventually come to his senses and come down.
On the other hand, if he didn’t come down, we’d have to
deal with him, probably in even worse condition, the next
morning. Finally, a supervisor and I managed to pry his
hands loose and escort him down.
The work was miserable, but the money was good for a summer
job in 1968.
Yet, without the hot breath of financial necessity on the
back of my neck, combined with youthful recklessness, I
probably would have preferred to do something different.
I would have backpacked around Europe, for example.
And maybe that would have been for the better.
February 16, 2001
*** The Dow rose 95 points yesterday. The Nasdaq went up
61. It was a pretty good day for investors, marked by a
comeback in the familiar big name shares. GE, GM, MSFT,
AMAT, CSCO were all up.
*** Ciena went on stage and said it expected to double
revenues this year. The stock rose 20%. But investors who
buy Ciena at these prices are almost sure to get
*** Advancing stocks beat out declining ones – 1635 to
1435. And there were more than 10 times as many stocks
hitting new highs as new lows.
*** Most investors are taking moderate losses so far this
year. Investor’s Business Daily’s index of leading mutual
funds is off 2.5%.
*** And the Dow has gone nowhere in the last two years.
But so far, few investors are defecting from the mass
illusion of easy wealth in the stock market.
*** Where’s Mr. Bear? Since the end of the year, he seems
to be taking it easy. But I doubt we have seen the last of
this wily creature. As Art Sandberg put it in Barron’s,
“the market always finds a way to disappoint and make us
all look stupid.”
*** Why hasn’t the fall taken place, yet? “I see only one
logical answer,” says Gary North “…unbroken investor
optimism. Investors are treating any slide in the stock
market in much the same way that consumers treat reductions
in their income. They regard it as temporary.”
*** The price of gold plunged $4.30. You may recall that I
found gold rather fetching in yesterday’s letter. It is
even more fetching today. Newmont, though, went up.
*** When gold goes down, the dollar goes up. The euro
slipped down to 90.39 cents.
*** Mark Rowen, an analyst at Prudential Securities, cut
his target price for Amazon.com to only $9. This caused the
stock to tumble nearly a dollar on Wednesday – to $13,50.
But yesterday it came back – to $14.50. Of 26 analysts,
only 3 have sell ratings on the ‘River of No Return’ stock.
*** 78% of college students now have credit cards – up from
67% two years ago. The average balance is also up – to
$2,748…almost $1,000 more than two years ago.
*** Students, it turns out, are among credit card
companies’ best customers. They borrow freely…and take a
long time to pay off their balances – at usurious interest
rates. “It’s a disincentive for credit card companies to
have smart customers,” said Ed Moore of Edelson Financial
*** “A back of the envelope calculation reveals,” writes
Daily Reckoning contributor David Tice, “that turning our
current -0.8% savings rate back to zero would slice a cool
$56 billion a year off consumer spending. That’s the
equivalent of half of the Wal-Marts not ringing up a dime
for a year. Taking the savings rate back to the 3.3% level
of 1998 would slash $230 billion. That’s a complete
shutdown of Wal-Mart – times two!”
*** Rick Ackerman recently passed on to me some charts,
authored by Joe Ehardt, that show how dramatically the
personal savings rate in the US has fallen. I’ve had them
posted to the Daily Reckoning web site. Have a look…
*** $28 billion was spent online last year, $10 billion
more than ’99 and about $20 billion more than ’98.
*** California is a mess, says the Economist. The lights
are going out. Water is in short supply. Hollywood is going
on strike. And Nicole and Tom are splitting up. [There is
no point to this note…I just thought you should know what
is going on.]
*** “We haven’t had any gratuitous sex in the Daily
Reckoning in a long time,” my colleague, Addison Wiggin,
*** Well, how about this: Celera has been in the news a lot
lately. It announced that the genome project was more
manageable than first believed and its stock shot up 15% on
Monday. Then, on Tuesday, investors asked the obvious
question – so what? – and clipped it for a 9% loss.
*** “Most analysts,” says a Red Herring report, “expect
Celera to hit $90 this year, more than double Wednesday’s
price of $43.60.” Either the analysts or Red Herring are
idiots. If they really believed that they would be putting
every penny they could borrow into Celera shares and the
price would have already hit $90. The stock may go to
$90…or to $9. But whatever expectations the market has
for the stock are already built into today’s price.
*** Michael Milken says he thinks biotech is under-funded.
But Celera has $1.1 billion in cash…about 40% of its
entire $2.8 billion market cap. So the question for
investors is: what are the odds that Celera will be able to
use that cash to transform itself from a research outfit
with minimal revenues and huge losses into a real, profit
making business worth $2.8 billion? If the odds are 50/50,
investors should be willing to pay about $20 for the stock
– an amount which then needs to be discounted for the time
it will take Celera to reach its objective. If the odds are
more like 1 in 10, which is what I would guess, you should
wait until the stock sinks below $4 before you think about
*** But what’s this got to do with sex? Well, when I write
the Daily Reckoning I take it upon myself to explain all of
life to you…at least all of it that I can figure out
between 8 am and noon each day. So, I won’t hold back from
the mysteries of human reproduction. It turns out that most
of the gene sequence is rubbish. They are “mere remnants of
genes that were left behind by prehistoric viruses eons ago
and have been passed down in increasingly degenerate
condition from human generation to generation,” says the
International Herald Tribune report. Genes have been a
refuge of squatter parasites and opportunistic micro-
organisms forever. Sex, according to one hypothesis, allows
animals to reproduce without copying the same gene
sequence…leaving the parasites with a constantly moving