Monday, 6 May 2019

Investing is an active game

Cornelius Vanderbilt, known to his contemporaries as the Commodore, was once the richest man in the world. He started his life at the bottom and worked his way up. His business empire started with one passenger boat and he went on to own a large steamboat business. Later he diversified into the railroad business and owned the New York Central Railroad by 1867. He passed away in 1877, leaving more than $100 million, which was more than the money that was held by the US Treasury at that time). His last words to his family were, ''Keep the money together.''  Even today, there is the Grand Central Terminal, a Vanderbilt building still standing in New York City that carries the legacy of the great businessman.

Interestingly, within a period of 50 years, one of the direct descendants died bankrupt. The history of the Vanderbilt family is extremely instructive at many levels.

Other than the obvious reasons of prudence in managing costs and expenses and living within one's means, you also learn that no amount of wealth can be perpetuated forever if the custodians do not value money. When you know that no new money is going to come in then you need to value what you have much more. It does not matter how much money you have to start with. Unless you save more than what you earn, wealth will erode.

The most logical action to take for enduring wealth is to invest in businesses which earn high returns on capital and does not blow up doing so. Wealth creation and wealth preservation are not mutually exclusive. The best way to preserve wealth is to create it in the first place. Owning a business is the best and most efficient way of doing so.

As an investor, one useful way of thinking that I have used is to think of myself as a person with a small bag of money who is going around allocating that to different people in order to get a reasonable return. I visualize that I am getting into a partnership with the promoter of the company for some time and get a return from the business. If the business stops doing well after some time, I take my money back and then get into a partnership with another promoter. 

This line of thought forces me to think about the quality of the promoter whom I am partnering with, long-term dynamics of the business, the strategy the business is following and also ensure I am tracking the progress of the business. It also helps in preventing too many knee-jerk reactions to purely market-related events.

This means that even if I am invested in a very good company, I still need to continuously monitor it to ensure that it is doing exactly what it had promised and planned to do. If there are deviations, I need to understand why and what actions are being taken to course-correct. Investing is not a passive game. We have to be constantly vigilant and keep an eye out for what is happening.

P.S. If you want to read more about the Vanderbilt family, you can pick the fascinating book, "Fortune's Children: The Fall of the House of Vanderbilt" written by Arthur T. Vanderbilt.

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