A new book argues that even historically wealthy families make painful financial mistakes Who are ‘The Missing Billionaires,’ and what can we learn from them?
When Cornelius Vanderbilt, the 19th-century rail and shipping tycoon, died in 1877, he was the wealthiestman in the world.
Yet, no Vanderbilt family member today can source their wealth to theimmense fortune he left.
“By the 1950s, there was not a single descendant of Cornelius who was a millionaire, let alone a billionaire,” wrote the authors of “The Missing Billionaires: A Guide to BetterFinancial Decisions.”
Co-authors Victor Haghani and James White use the Vanderbilts in their personal finance book to demonstrate how (remarkably) few billionaires today are heirs of old money.
With an ample head start, it would seem that the heirs of fortunes made a century ago should greatly outnumber new-money arrivals on the Forbes list of richest people.
That’s not the case, the authors contend.
So, they ask — what happened to all the billionaires?
“As of 2022, Forbes estimated there are just over 700 billionaires in the United States, and you’ll struggle to find a single one who traces his or her wealth to a millionaire ancestor from 1900,” the authorswrote.
This is despite the fact that if a family with $5 million in 1900 had simply invested in the U.S. stock market and spent at a reasonable rate, that family would have spawned 16 billionaire families today, the authors write. It’s therefore no wonder that so many regular folks struggle when it comes to managing their financial affairs, considering that wealthy families with access to the best resources and advice don’t always get it right themselves.
‘I wish someone else had written this book’
The authors themselves have weathered the consequences of illfated financial decisions.
One of them — Mr. Haghani — lost nearly everything as a founding partner of Long Term Capital Management, which collapsed in 1998, rockingmarkets around the world.
With insights gained from the school of hard knocks, the authors of “The Missing Billionaires” provide a useful perspective on navigating the intricacies of making important financial decisions.
“Thebook is really focused on the ‘how much’ question, rather than the ‘what’ question,” Mr. Haghani said in an interview with the Pittsburgh Post-Gazette. “Not ‘what’ you should buy, but — how much of something you like you should buy? How much should you spend from your savings? How much capital gains do you really want to realize inappreciated assets?
“All of these ‘ how much’ questions are fundamentally questions aboutrisk.”
The biggest blunders in financial planning, at all wealth levels, come when a family’s or individual’s spending, investing and appetite for risk is out of proportion with what they can afford, especially as their life circumstances change.
“It’s really more of a ‘how to’ rather than a ‘what to do’ book,” Mr. Haghani said. “We try to give people a framework for making their decisions rather than telling them what they should do specifically.”
Mr. Haghani suffered a nine-figure loss in personal wealth when Long Term Capital Management
crashed and burned in 1998. In hindsight, he realized, he had way too much skin in the game.
“I was 35 years old at the time, the youngest of the LTCM partners,” he wrote, adding that the fund was returning over 40% per year. “So, it was understandable that I wanted to invest most ofmy wealth in the fund.
“I wish someone else had written this book — or pointed me to the research on which this book is based — and put it in my hands with an admonition to read it and take it to heart.”
‘A lot of them took too much risk’
Mr. White, at age 28, suffered a comparatively smaller setback, but still lost a substantial percentage of his personal wealth through investments in a failed hedge fund that he helped run.
The authors say the colossal failure of LTCM, and Mr. White’s hedge fund, as well as the downfall of many family fortunes great and small, comes down to people getting one thing wrong: Sizing.
The trades that took down LTCM in 1998 were moneymakers over the ensuing years. But the firm was too heavily leveraged to ride out the downturn caused by the financial crisis. Mr. White’s hedge fund investments bounced back, but his firm couldn’t ride out the downturn either for similar reasons.
Experience has shown both authors that even good investments plus bad sizing can result in catastrophic losses.
And bad investments with good sizing don’t have to be devastating.
“The ‘how much’ question is really more critical — and it’s also easier to get right,” Mr. Haghani told the Post-Gazette. “You’re not competing with anybody to get the ‘how much’ question right. You’re just doing what’s right and sensible for you, whereas when you’re trying to make money in the market, when you’re trying to figure out what to buy, you’re in competition with everyone else who’s trying to figure out what to buy.”
As for the Gilded Age fortunes that have gone missing, many of those families also fell prey to making poor decisions in terms of sizing, Mr. Haghani said.
“A lot of them took too much risk in their investing. And their spending was too fixed,” he said. “They got locked into spending. So, their spending got disconnected to their wealth and investments. They took too much risk relative to how they wanted to spendtheir money.”
In other words: They didn’t necessarily make bad investment decisions. The stock market was favorable enough to turn $1 million in 1900 into roughly one hundred billion at the end of 2022, according to the authors. But the heirs made the mistake of sizing their investments poorly. And, to make matters worse, they refused to cut back on spending when they should have.
‘The ‘how much’ question’
“The Missing Billionaires” puts a new twist on books normally found in the personal finance category.
The authors assume readers are familiar with the basics of finance and investing. They waste no time explaining the difference between a stock, a bond or mutual fund; or the importance of paying off credit card debt before investing.
“It’s like the second book you would read about investing and personal finance,” Mr. Haghani said. “We recognize that our book is targeted for a slightly more sophisticated, knowledgeable and experienced investor.”
Mr. Haghani is founding partner of Elm Wealth, a Philadelphia-based wealth advisory firm with $1.5 billion in client assets. Mr. White is the firm’s CEO.
Both men have worked on Wall Street long enough to have a healthy respect for risk.
“Risk matters as much as fees or any other tangible cost of investing,” Mr. Haghani said. “When you’re investing, it’s really clear that fees matter in your investment return. Well, risk matters just as much and in the same way as fees, taxes and other costs of investing as well.”
Investors need to consider what is a good return after fees, after taxes and after risk, he said.
The “how much” question is always there.
And it’s always important.
“So, in every decision you’re making under uncertainty, there’s a cost to the risk that you’re bearing,” Mr. Haghani said. “The gains are good. But are they less good than the same size losses are bad?”