If you flip through channels and see television programs that try to stereotype and chronicle the daily life of the wealthy, the focus will likely be on the assets that do not generate cash flow, and are generally illiquid. You see the wine collections, chilling in a specially created basement room that functions as a private lair. You see the fancy schmancy art purchased at auctions through Sotheby’s lining the hallway walls. You see the autographs of Joe Dimaggio, Paul McCartney and other assorted Beatles, and maybe a letter signed by President Kennedy somewhere in there.
The problem with these depictions is that they create the illusion that the wealth-building process is about art, collectibles, gold, rare wins, and other items that do not generate cash flow for their owners until the goods get sold. It corrupts the story of wealth-building by suggesting that it is wise to take money you earn from your job and plow it all into metals, art collections, fine wine, or whatever.
Instead, the arc should be this: you take money from your day job, you purchase cash-generating assets, and once you reach a point where your cash flow greatly exceeds your annual income (say, you have $10,000 coming in each month while you only spend $5,000 of it), then you can dabble in owning collectibles, precious metals, or whatever it may be as personal investments.
The problem is that the “shiny object” portion of a portfolio gets all of the attention, and people mistake it for the primary cash generator that makes the wealth creation possible in the first place.
Take someone like billionaire Fayez Sarofim. When people study the details of his life, they get caught up in the glossy details: he is an immigrant from Egypt, he’s known as “The Sphinx” in his social circles, he left his wife who was an affluent heiress with movie-star looks to marry a chain-smoking woman that regularly got so drunk at parties that she collapsed (and then subsequently divorced Sarofim to marry a released felon that stole computer equipment from Compaq). And most notably, he owns a famous artwork collection.
The chief prize in his estate is this El Greco painting from 1570 called “The Crucifixion.” It’s worth countless millions, and has no doubt appreciated sharply since he purchased it.
People look at his art collection, and quickly reach the conclusion that this is how Sarofim builds wealth. The truth is much different: the art collection is a byproduct of the wealth that he builds.
People have no interest in studying how Sarofim gets the money in the first place that enables him to build so much wealth. Although he does not get into specific numbers, he has disclosed that he has owned giant blocks of Coca-Cola, Philip Morris International, Nestle, Procter & Gamble, ExxonMobil, IBM, and Wal-Mart for the past forty years. He might be the biggest buy-and-hold blue chip investor on the planet—not even Warren Buffett can claim that he has been sitting on giant ownership stakes in seven blue-chip corporations for the past forty years. From an investing standpoint, Fayez Sarofim is like a character that sprung forward to life straight out of the research of Wharton Professor Jeremy Siegel (who argued that holding the best companies in the world, through thick and then, is the best way to build wealth because it combines high returns with obviousness—i.e. everyone in the world is capable of figuring out that Coca-Cola is an excellent company).
Sarofim has other tools up his sleeve; he runs an asset management firm so that he can receive 1-3% annually for putting client accounts into ExxonMobil and Philip Morris International and holding for 25+ years. He owns almost $1 billion in Kinder Morgan (KMI) alongside Richard Kinder himself, making him one of the pre-imminent oil tycoons alive today.
But people don’t focus on that stuff. They don’t write articles about the fact that Fayez Sarofim is a rich son of a gun because a $100,000 investment in Coca-Cola stock held for 43 years is now worth $18 million. They don’t talk about the fact that Fayez Sarofim owns massive amounts of Philip Morris International, which is possibly the best blue-chip investment in American history; since 1970, the old Philip Morris has turned $100,000 into over $383 million (not a typo, the old Philip Morris has truly been as great at building wealth as Warren Buffett himself). They don’t talk about how a $100,000 stake in ExxonMobil purchased in 1970 would be worth over $44 million today. But these things are the story of Fayez Sarofim’s life—it is the blue-chip stocks held for extraordinarily long periods of time that allow him to indulge in the art collection for which he is famous; the cash flow from productive businesses is what allows him to pay his bills for his homes, and deposit the large dividend checks in his account so that he can buy art on a regular basis.
If you are serious about building wealth, and you have a penchant for Bruce Springsteen autographed guitars and Rembrandt paintings lining your bedroom walls, the arc of your life shouldn’t be: make money from work, and then buy those collectibles. Instead, the arc should be: make money from work, buy assets that predictably drown you in cash, and then use the surplus to indulge your passions. A stock that pays a dividend, a bond that pays interest, or a piece of land that pays you rent builds you wealth while you own it—it regularly gives you cash to deploy. When you enter the world of collectibles as investments, they function as liabilities until you sell them—you have to keep them clean, you might get them insured, you might have to get security for the item, and so on.
Incidentally, I don’t think it is wise to own a singular possession that constitutes a large portion of your net worth because the object will end up owning you instead of you owning it. If your net worth is $100,000 and $70,000 of that net worth is tied up by a 1927 New York Yankees baseball signed by Ruth, Gehrig, Meusel, Hoyt, Lazzeri, Combs, Pennock, and Moore, then you are going to obsess over that baseball. It will consume your life, and agony is the right word to describe how you might feel if it got destroyed. Getting emotionally attached to objects like that is no way to go through life. However, if you are generating $100,000 per month from cash dividends, bond interest, and rental payments, then the value of that baseball is something that you could easily replace in one month after paying your taxes. It would bum you out if something happened to that baseball, but it would not consume you if you have the resources to easily replace it.
That’s why I don’t like it when the financial media attaches on to the “shiny objects” that an affluent person owns; it does not tell the right part of the story. When it comes to this type of stuff, you need to be like Warren Buffett when he visited the estate of the newspaper scion William Randolph Hearst and got upset when the tour guide kept going on and on about the sculptures he owned, finally blurting out that he wanted to learn how Hearst got his wealth, not how he spent it. When rich people are profiled, the wrong part of their life story is often told. Fayez Sarofim’s success is not about art—that’s a passion of his that is a shiny distraction. It’s the exorbitant collection of cash-generating assets that he has accumulated over the course of his life that tells of his success.
If you capture nothing else from my worldview when you read my articles, I hope it is this: The arc of your life should go: labor, cash-generating assets, and then collectibles. Don’t go straight from labor to collectibles. In many cases, they suck up cash flow because you have to defend the expensive item you purchased; they act as a liability until you choose to sell. The sustainable cash flow is the most important part of these life stories, yet it usually gets neglected because people see it as the “boring part.”
(As an aside, if you have thirty minutes to spare, you should read about the life of Fayez Sarofim during the 1990s. It is a riveting tale that takes turns that are almost incomprehensible to believe, and Skip Hollandsworth’s writing style will make you feel like you are reading a short novella penned by F. Scott Fitzgerald during the Roaring 20s. It’s probably the most intriguing story not known by most Americans, unless you happen to live in the Houston area or are a particularly aware student of big-name investors. See here: http://www.texasmonthly.com/content/cant-buy-me-love )
Originally posted 2013-12-29 12:27:57.