The difficulty of preserving private capital

May 28, 2009

Most of the attention being paid to yesterday’s Ira Sohn conference seems to concentrate on David Einhorn, with his quite compelling idea that a triple-A rating is a curse, and that therefore Moody’s, whose highest praise is to bestow a triple-A rating on a company, is in for a world of pain.

But looking at Mike O’Rourke’s summary of the conference (embedded below), I was struck by comments from Paul Singer, of Elliott Associates:

Singer discussed the rule of law. He noted it is devilishly hard to preserve private capital for a long time. Rule of law is a necessary but not sufficient condition. The color of money can change over time.

This is very true. An enormous number of families have become dynastically wealthy over the centuries; precious few have managed to remain so over many generations, even if they implement harsh and unfair rules like giving substantially everything to the first-born son.

The families which have done very well over the course of centuries — the Hapsburgs, perhaps, or the Rothschilds — carry more than a whiff of helping to write the rules of the game themselves, as opposed to leaving themselves open to the caprice of others. And for all the thought experiments saying “if you put $1 in a bank account paying 1% interest in the year X, it would be worth $Y today”, the fact is that in most cases Y is zero — your money would have been taken from you, in one way or another, by now.

That probably helps explain, at least in part, why Paul Singer and his ilk spend extremely large amounts of money on political lobbying. But it should also be sobering to anybody who thinks that a passive buy-and-hold investment strategy will work over the really long term — not only into your own retirement, but even unto your children’s and grandchildren’s retirement. If you have that kind of time horizon, a whole new set of geopolitical risks starts coming into play — all empires fall, after all, and being in one of those empires when it’s falling can be extremely hazardous to your wealth. Which is maybe why family offices can spend two years searching for exactly the right person to hire.


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