The Fall of the House of Vanderbilt

William Kissam Vanderbilt was born in 1849. He was the eldest son of William Henry Vanderbilt and the grandson of Cornelius Vanderbilt. At the age of 36, he inherited $55 million upon the death of his father in 1885, a sum equivalent to ~$1.7 billion in today’s dollars. He was one of the richest and most powerful men of the Gilded Age.

Unfortunately, money did not bring William K. Vanderbilt lasting happiness. His marriage to a woman who spent unbelievable sums on multiple ostentatious residences didn’t bring happiness and ended in divorce. He then retired from the family business to pursue a life of leisure before turning fifty. But a life of leisure and travel did not bring lasting happiness either. Upon his return to the United States from one of many trips to Europe, Vanderbilt had the following to say to reporters:

“My life was never destined to be quite happy. It was laid out along lines which I could not foresee, almost from earliest childhood. It has left me with nothing to hope for, with nothing definite to seek or strive for. Inherited wealth is a real handicap to happiness. It is as certain death to ambition as cocaine is to morality.”
“If a man makes money, no matter how much, he finds a certain happiness in its possession, for in the desire to increase his business, he has a constant use for it. But the man who inherits it has none of this. The first satisfaction, and the greatest, that of building the foundation of a fortune, is denied him. He must labor, if he does labor, simply to add to an over-sufficiency.”
— William K. Vanderbilt, (1849-1920), as quoted in Fortune’s Children, p. 357

William K. Vanderbilt is not even close to the most irresponsible of the descendants of Cornelius Vanderbilt. Reading the story told in Fortune’s Children is like watching a massive train wreck in slow motion. Over a period of a half century, the vast majority of the fortune earned by Cornelius Vanderbilt over a long lifetime was squandered by his heirs. Worse than that, many of his heirs led miserably unhappy lives.

The lesson from the book is clear. Leaving money to heirs is a huge responsibility. The first duty is to do no harm. This means properly structuring an estate and using trusts to control the distribution of wealth in a way that will not destroy motivation and enable a lifetime of dysfunction. This is clearly true for the super-rich, but even those leaving more modest estates need to be careful. Paying estate planning attorneys and trust management firms is annoying and expensive, but the alternative is far worse if you care about your heirs.

The Biltmore Estate, pictured here in 1938, was constructed by George Washington Vanderbilt II between 1889-1895. (Photo: Asheville Citizen Times)

Articles

Reality Catches Up by Morgan Housel, August 4, 2022. Premature success can seem like a blessing but is really a curse. “Maybe your portfolio surged during a bubble, your company hit a monster valuation, or you negotiated a salary that exceeds your ability. It feels great at the time. But reality eventually catches up, and demands repayment in equal proportion to your delusions – plus interest. These debts are easy to ignore because they are often repaid in the form of self-doubt and crushed morale. But they are very real, and when you understand their power you become careful what you wish for.” (Collaborative Fund)

Reject the Algorithm by Nick Maggiulli, August 2, 2022. I’ve never been obsessed with optimizing content for algorithms. As this article explains, it is possible to do well without being ruled by the algos. “Following the algorithm pervades our society. It’s when you take a career in consulting or banking because your college classmates did so. It’s when you invest in a new cryptocurrency or tech stock because it’s popular. Ultimately, it’s when you let others shape your life instead of building your own.” (Of Dollars and Data)

This Is The Best Career Decision You Can Possibly Make by Ryan Holiday, August 2, 2022. It makes sense to embrace and highlight what makes you unique. “Peter Thiel has said before that the only kind of business worth making is one where you can have a monopoly. The profits, he said, are in owning an entire market. So it goes with ourselves as individuals. You want to be just another investment banker? You want to be another business writer publishing the same boring books that quote the same boring studies with the same bland covers fighting for spots at the same bland conferences?” (RyanHoliday.net)

Evaluating Information: Find the Signal in the Noise, August 2, 2022. This article highlights seven “tricks” used by Richard Feynman to evaluate information. “In a series of non-technical lectures in 1963, memorialized in a short book called The Meaning of It All: Thoughts of a Citizen Scientist, Feynman talks through basic reasoning and some of the problems of his day. His method of evaluating information is another set of tools you can use along with the Feynman Learning Technique to refine what you learn. Particularly useful are a series of “tricks of the trade” he gives in a section called “This Unscientific Age.” These tricks show Feynman taking the method of thought he learned in pure science and applying it to the more mundane topics most of us have to deal with daily.” (Farnam Street)

The Kingdom or the Crown, August 4, 2022. This is a great essay on the challenges involved in making a business run well while taking the founder out of the critical path. A business that is largely (or entirely) dependent on one key individual is worth much less to potential acquirers. “For some, it’s a question of ego, sure – it’s hard to see the crown on a new head. But really, it’s more nuanced than that. If you start a business with the long term in mind, you also know that there will be a time that the business must be able to run without you, whether you retire, lose interest, or get hit by a bus.” (Permanent Equity)

Jerry Seinfeld, the Lifelong Student of Comedy by Polina Pompliano, July 27, 2022. “For four decades, Seinfeld has stuck to the same routine: Yellow legal pad, pen, and a cup of coffee. He’s a perfectionist when it comes to writing his jokes, some of which may take him months and even years to get just right. “I’m looking for that connective tissue that gives me that nice, smooth link — like a jigsaw puzzle link,” he says. “And if it’s a split second too long, you’ll shave letters off of words. You’ll count syllables.” (The Profile)

The Lonely Office Is Bad for America by Peggy Noonan, July 28, 2022. Peggy Noonan is right about the atmospherics of deserted offices and downtown districts. It feels like a societal decline. The sense of energy and shared purpose cannot be fully replicated over Zoom. “I don’t want to see office life in America end. The decline in office life is going to have an impact on the general atmosphere of the country. There is something demoralizing about all the empty offices, something post-greatness about them. All the almost-empty buildings in all the downtowns—it feels too much like a metaphor for decline.” (WSJ)

CEOs Ditch Kinder Approach as Economy Shows Signs of Chilling by Chip Cutter, August 3, 2022. The ultimate test of the staying power of remote work will be when the economy goes through a period of high unemployment. Many CEOs want offices restored. “Many CEOs disliked remote work from the beginning and are tired of hiding it, advisers and executives say. Privately, some CEOs have said the prospect of an economic downturn will give them greater license to order their employees back into offices. On earnings calls with investors in recent weeks, executives also have emphasized their abilities to hold down costs or dust off tactics used in prior economic downturns, if necessary.” (WSJ)

Mental Models for Parents by Ana Lorena Fabrega, July 29, 2022. “People are like bars of soap: the harder you squeeze, the more likely it is to slip away. In the same way, the more we’re pressured to do something, the less we want to do it. We might enjoy running, but as soon as our PE teacher makes us run, it feels miserable. Psychologists call this reactance. Humans naturally want choice and autonomy–and that goes for kids too. If you really want your child to do something, but they continue to fight against you, ask whether you’ve given them a choice at all.” (Fab Fridays)

Travel Note: View from the Peak by Frederik Gieschen, August 5, 2022. It is often more satisfying to take the difficult option. “While wandering around aimlessly, groups of tourists caught my eye. They were veteran hikers with tanned faces and worn boots who carried trekking poles and even rope. They made a beeline towards the mountain and slowly ascended the slope, methodically placing their feet among the loose rocks, before reaching the ridge that led to the peak. As I watched them turn into dots barely visible against the sky, it dawned on me that I had it all backwards. I let technology lift me up effortlessly. The cable car to the peak was a shortcut. A bag of potato chips, all empty calories. In comparison, their arduous climb was like a home cooked meal.” (Neckar's Minds of the Market)

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Podcasts

Behind The Memo: I Beg To Differ, August 5, 2022. 24 minutes. In this brief podcast, Howard Marks discusses the thought process that went into his recent memo, I Beg to Differ, which I wrote about at some length when it was published last month. “He explains why investors seeking to outperform need to think differently, be exceptional, and be prepared to look wrong – even when they’re right.” (Oaktree Capital)

Will Thorndike - The Power of Long Holding Periods, August 2, 2022. 59 minutes. Transcript. “Will Thorndike is author of The Outsiders and host of 50X. We cover the hallmarks of great compounders, how the best serial acquirers deliver outsized returns, and what he's learned about developing conviction.” (Invest Like the Best)

Andrew Wilkinson: Entrepreneurial Insights, August 2, 2022. 1 hour, 15 minutes. “Businessman and investor Andrew Wilkinson has made a successful career out of channeling his entrepreneurial spirit, but he knows that sometimes that energy can be a double-edged sword. On this episode, Wilkinson goes in-depth on the lessons learned from a career that’s seen him build a business empire of nearly 40 companies, but also why he’s had to re-calibrate his personal goals after struggling to find happiness in the summer of 2021.” (Farnam Street)

Dogfish Head Craft Brewery: Sam and Mariah Calagione, August 1, 2022. 1 hour, 20 minutes. “Sam and Mariah Calagione started dating in high school, and have been on a wild ride ever since. Their biggest, craziest adventure? Founding Dogfish Head Brewery and forever changing the landscape of American craft beer. From the moment Sam started home-brewing in his NYC apartment, he infused his beer with unusual ingredients like cherries, maple syrup, roasted chicory, and licorice. When he and Mariah officially launched Dogfish Head in 1995, it was the smallest brewery in America’s smallest state. 24 years (and countless pints) later, it was acquired by the Boston Beer Company for $300 million.” (How I Built This)

Gerd Gigerenzer on How to Stay Smart in a Smart World, August 1, 2022. 1 hour, 8 minutes. Transcript. “IBM's super-computer Watson was a runaway success on Jeopardy! But it wasn't nearly as good at diagnosing cancer. This came as no surprise to Max Planck Institute psychologist Gerd Gigerenzer, who argues that when it comes to life-and-death decisions, we'll always need real, not artificial, brains. Listen as the author of How to Stay Smart in a Smart World tells EconTalk host Russ Roberts why computers aren't nearly as smart as we think. But, Gigerenzer says, human beings need to get smarter in order to avoid being manipulated by people who use AI for their own ends.” (EconTalk)

Berkshire Hathaway’s Q2 Earnings Release

Berkshire Hathaway will release second quarter earnings later this morning. I am planning to type up some notes on the results this weekend assuming that I have something to discuss beyond what appears in standard news coverage. It will be interesting to see how the media interprets what is certain to be a large decline in the market value of Berkshire’s equity portfolio. Accounting rules mandate that quarterly fluctuations in the equity portfolio must be reported as a component of net income. This has confused reporters and market participants many times in the past.

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Rational Reflections

Weekly Digest - August 6, 2022