So I was browsing through Barton Biggs's book Hedgehogging last night when I stumbled upon the chapter titled, "Once You Have a Fortune, How Can You Hang Onto It?" Now I read this book some years back, but I was browsing through it again as I found it a fascinating read. Anyhow, in the chapter, he points out a major dilemma that many people have upon becoming wealthy, which is how exactly to preserve and enhance your fortune? And in particular, how to preserve it for when an apocalyptic scenario hits, because that's when you'll really need it.
Being wealthy is great and all during prosperous times, but if you're wealth is susceptible to the ebbs and flows of the economy, then it isn't really the security cushion you may think it is. A lot of people discovered this the hard way with the recent financial crisis. One thing I have learned in studying business and economic history is that if you build a fortune, always assume that a major economic or financial calamity could be just around the corner, and think about how would your fortune fare if such a calamity was to hit. For example, if your wealth is tied to the stock market, well a stock market crash could evaporate a huge portion of your wealth. This happens to lots of people everytime there's a crash. If your wealth is tied into a single company, how will that company fare in an economic calamity? Is it a fairly recession-resistant business, or is it a business that does really well in good times, but really badly in bad times? If your wealth is in the banks, well if the banking system comes on the verge of failing, then the government only will bail out up to $250K of a person's money in the system (and if they have to, they can reduce that amount). So if you have $200 million in a bank and that bank goes kaput, the government will preserve you at most $250K.
The perils of putting all of one's eggs into one basket became really apparent with the whole Bernie Madoff affair. Whole families had entrusted him with their entire fortune! Now myself, I do not see how anyone could do this, unless they are utterly clueless about investing. You can have a person who is brilliant and has a heart of gold, and that person could still end up losing one's money simply due to getting taken by surprise in some way by some economic calamity or something. I mean, it happens. So on that alone, one shouldn't entrust one's entire fortune to one person. But it really does seem like a lot of wealthy people are not very smart about money, neither in how they spend it or in the fact that they do not take into consideration that professional investors can lose large sums of their money as well. They also do not seem to take into account that recessions and depressions do occur.
Anyways, back to the book, in the chapter, Biggs talks about how when he was in Hong Kong some years ago, he visited the elderly patriarch of a very wealthy Chinese family. This guy had been a General who fought the Japanese in World War II and the Communists. They got to talking about the perils of preserving wealth in Asia over a century of wars, depressions, inflation, and revolutions. As mentioned, they discussed how paper wealth is all fine and dandy during prosperous times, but that kind of thing is useless when anarchy reigns. Stocks, bonds, paper money, etc...are all worthless if the government collapses. A very good point I think Biggs makes is that at some point, the crap will royally hit the fan again.
In the general's opinion, quality jewelry was about the best way to preserve wealth for when real disaster strikes. He points out that a disaster hedge should be the following:
1) Highly portable
2) Easily hidden
3) Very marketable
People ranging from wealthy Chinese families escaping the Japanese, to wealthy Jewish families escaping the Nazis (both of whose assets were seized), to Marie Antoinette to the czarina of Russia, took jewels with them. The general explained that when the Japanese took Hong Kong in 1941, the local economic system collapsed, and all bank deposits were frozen. The family had lots of rental property in Hong Kong, but the tenants had stopped paying. The economic system reverted to barter. The family did have overseas assets that were intact, but they had no way to get cash out of them. The family found itself on the brink of starvation.
The family survived because the women traded their jewelry for food and protection. Jewelry in particular had great purchasing power then because the Chinese girlfriends of Japanese military men wanted it. The general did not consider gold a very good store of value, as many people often think, because it was not valued in Hong Kong during the Japanese invasion. There was no demand for it. However, this is assuming one has gold in the event of a foreign military invading one's country. Both gold and silver have a good record of being a hedge against inflation. Since gold and silver oftentimes make up a major part of jewelry, high-quality jewelry overall seems to be a good inflation hedge as well (so to any ladies reading, if your man is concerned about the end of the world occurring, tell him that buying you expensive jewelry will make for an excellent store of wealth should a major crisis really occur :) ).
Another example the General gave was what happens if, due to terrorism, the electrical grid is shut down. The modern electronic banking system we have also would then shut down. As a result, paper money might lose its value as a medium of exchange, and jewelry might be one of the preferred currencies. Biggs concludes that he doesn't really see jewelry as being a major asset class for serious money. But for being a respository for some wealth, it makes sense. It is good for when being invaded by a foreign army, for when a major economic or financial calamity strikes (such as out-of-control inflation), or for when a total breakdown of law and order occurs and paper wealth becomes worthless.
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