The right things for rich people to buy
Posted by John Reed on
I recently said here that when people become affluent they frequently buy things which they end up getting rid of because they did not need them and eventually stopped using them, like second homes, cars in excess of the number of drives in the family, boats, etc.
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I also said your home should not exceed 4,000 square feet and the lot upon which is sits should not exceed one acre. Basically, those are the limits of an actual home. Bigger than that in either category is more showing off than living or using. Our house—3,492 square feet—has five bedrooms, master, one for each of our three sons, and a guest bedroom. What is an eight bedroom house about unless you have six kids or you are running a hostel?
.
Anyway, I want to talk here about where the money should go instead. I once got a call from a very famous rich person’ financial guy. I had to agree not to disclose. The rich person wanted to invest in real estate and heard about me.
.
I turned it down. I said the rich person was very popular and that becoming a landlord was certain to destroy that because you have to send out rent-increase notices and evict bad tenants. I also said the person had more than enough money already and I could not imagine what the rich person would do with additional money. Never heard from them again.
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I reflected on what I would tell such a person if I got another such call.
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After you get the normal assets—home in a super expensive neighborhood, nice car for each driver, enough savings to afford expensive vacations and education—I would urge you to turn to risk mitigation, not increased yield on savings.
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Risks are discrete, not some vague amorphous concept. When I try to talk about risk with real estate investors they often dismiss it with “Ah, there’s risk in everything!” or “You could get killed crossing the street!” These people were telling me to shut up about risk and get back to telling them how to make money. They were saying spend no time or effort at all on risk management.
.
I heard that crossing-the-street line so much I wrote an article about it. I got the stats and details on pedestrian motor vehicles deaths. Turns out that is not a random unavoidable event. Crossing the street safely is a skill, not an inevitable event. The people who die crossing the street are disproportionately high on alcohol or drugs, crossing at night, jaywalking, and/or wearing dark clothing.
.
Here are risks generally faced by affluent people: health, fire, car accident, earthquake, tornado, hurricane, depression, recession, inflation, war, riot, crime, robbery, burglary, kidnapping, fidelity risk if you have employees, lawsuit, death, disability, market risk, interest rate risk.
.
I will give some illustrative example, not discuss the whole field.
.
Rich people ought to be doing every single thing that doctors recommend for best health: screenings, vaccines, checkups, exercise, diet, and have solid health insurance. You can’t stop everything. OJ just died of prostate cancer. He was rich from his NFL pension which the parents of his murder victims could not get in court. No one should die of prostate cancer. He should have spent more time and money on prostate screening. (It’s just a blood test and a biopsy but if you do not do it, as apparently he did not, you get your ass killed.)
.
Fire: you need fire insurance to cover fire damage financially. But instead of buying two houses, how about having just one and using the extra money to make it as fire proof and fire safe as possible. For example, restaurants have substantial anti-fire devices at the range and oven. A wealthy homeowner could and probably should get those restaurant standard fire prevention devices rather than just buy a wall fire extinguisher to hang by the door.
.
Car accident: When our oldest started driving, his first car was my full-size Buick station wagon. Lot of steel. It died. So we bought a used car for him—a full-size four-door Buick. Lot of steel. He fell asleep at the wheel going 80 and hit the sound wall going backwards after the gravel shoulder woke him up and he slammed on the brakes. State trooper called me to come get him. He was unhurt. What does he need me? for I asked the trooper. Flat tire the trooper said. So why can’t he put the spare on? The trooper said, “Oh, I guess he could. Seemed like a big deal accident but I guess all he needs to do is change the tire to go home.” I got my son on the phone, told him to get the manual and follow the instructions for changing the tire. He drove home himself.
.
Now, I would make sure not only that the car was a lot of steel four door, would also want all the latest safety features. A lot of the cars at our local high school parking lot including jeeps with open sides and sports cars. I shake my head in disbelief. As an Army officer, I heard of a whole lot of young soldiers dying. Every year at West Point, a recent grad would get killed in a jeep rollover or trying to save per diem on change of station by not stopping at a motel when they should. Every West Point year book of that era had one or two cadets who died after we got our new cars senior Spring—They were always speeding back to West Point just before taps afte spending the evening drinking at Snuffy’s which was just beyond the 15-mile radius inside which we could not drink alcohol. There were a bunch of young WP grads who died on the Autobahn where there is no speed limit. And at the 82nd Airborne Division, it seemed like a car load of young paratroopers would die in the wee hours of Monday morning trying to drive back to Fort Bragg. They were lonely and went back home for the weekend, even though home was Boston or Chicago or New York—well outside the three-day pass limits. And I suspect they all partied until late assuming incorrectly some other member of the group was the designated driver.
.
When a rich man’s kid starts driving, he should buy a big solid safe car with all the latest safety features. Do NOT let the damned kid pick some cool but dangerous car.
.
I have put much money into assets that protect us from hyperinflation. Foreign currency, bullion coins, inventory, forever stamps, and so on.
.
We also have assets to protect against recessions and such. Having quite enough for that protection is a better place for your money than a yacht.
.
Go overboard on management of all the risk you face if you can afford to do so. That, not excess homes and cars and boats and land is where your greater than average net worth should go.
.
.
I also said your home should not exceed 4,000 square feet and the lot upon which is sits should not exceed one acre. Basically, those are the limits of an actual home. Bigger than that in either category is more showing off than living or using. Our house—3,492 square feet—has five bedrooms, master, one for each of our three sons, and a guest bedroom. What is an eight bedroom house about unless you have six kids or you are running a hostel?
.
Anyway, I want to talk here about where the money should go instead. I once got a call from a very famous rich person’ financial guy. I had to agree not to disclose. The rich person wanted to invest in real estate and heard about me.
.
I turned it down. I said the rich person was very popular and that becoming a landlord was certain to destroy that because you have to send out rent-increase notices and evict bad tenants. I also said the person had more than enough money already and I could not imagine what the rich person would do with additional money. Never heard from them again.
.
I reflected on what I would tell such a person if I got another such call.
.
After you get the normal assets—home in a super expensive neighborhood, nice car for each driver, enough savings to afford expensive vacations and education—I would urge you to turn to risk mitigation, not increased yield on savings.
.
Risks are discrete, not some vague amorphous concept. When I try to talk about risk with real estate investors they often dismiss it with “Ah, there’s risk in everything!” or “You could get killed crossing the street!” These people were telling me to shut up about risk and get back to telling them how to make money. They were saying spend no time or effort at all on risk management.
.
I heard that crossing-the-street line so much I wrote an article about it. I got the stats and details on pedestrian motor vehicles deaths. Turns out that is not a random unavoidable event. Crossing the street safely is a skill, not an inevitable event. The people who die crossing the street are disproportionately high on alcohol or drugs, crossing at night, jaywalking, and/or wearing dark clothing.
.
Here are risks generally faced by affluent people: health, fire, car accident, earthquake, tornado, hurricane, depression, recession, inflation, war, riot, crime, robbery, burglary, kidnapping, fidelity risk if you have employees, lawsuit, death, disability, market risk, interest rate risk.
.
I will give some illustrative example, not discuss the whole field.
.
Rich people ought to be doing every single thing that doctors recommend for best health: screenings, vaccines, checkups, exercise, diet, and have solid health insurance. You can’t stop everything. OJ just died of prostate cancer. He was rich from his NFL pension which the parents of his murder victims could not get in court. No one should die of prostate cancer. He should have spent more time and money on prostate screening. (It’s just a blood test and a biopsy but if you do not do it, as apparently he did not, you get your ass killed.)
.
Fire: you need fire insurance to cover fire damage financially. But instead of buying two houses, how about having just one and using the extra money to make it as fire proof and fire safe as possible. For example, restaurants have substantial anti-fire devices at the range and oven. A wealthy homeowner could and probably should get those restaurant standard fire prevention devices rather than just buy a wall fire extinguisher to hang by the door.
.
Car accident: When our oldest started driving, his first car was my full-size Buick station wagon. Lot of steel. It died. So we bought a used car for him—a full-size four-door Buick. Lot of steel. He fell asleep at the wheel going 80 and hit the sound wall going backwards after the gravel shoulder woke him up and he slammed on the brakes. State trooper called me to come get him. He was unhurt. What does he need me? for I asked the trooper. Flat tire the trooper said. So why can’t he put the spare on? The trooper said, “Oh, I guess he could. Seemed like a big deal accident but I guess all he needs to do is change the tire to go home.” I got my son on the phone, told him to get the manual and follow the instructions for changing the tire. He drove home himself.
.
Now, I would make sure not only that the car was a lot of steel four door, would also want all the latest safety features. A lot of the cars at our local high school parking lot including jeeps with open sides and sports cars. I shake my head in disbelief. As an Army officer, I heard of a whole lot of young soldiers dying. Every year at West Point, a recent grad would get killed in a jeep rollover or trying to save per diem on change of station by not stopping at a motel when they should. Every West Point year book of that era had one or two cadets who died after we got our new cars senior Spring—They were always speeding back to West Point just before taps afte spending the evening drinking at Snuffy’s which was just beyond the 15-mile radius inside which we could not drink alcohol. There were a bunch of young WP grads who died on the Autobahn where there is no speed limit. And at the 82nd Airborne Division, it seemed like a car load of young paratroopers would die in the wee hours of Monday morning trying to drive back to Fort Bragg. They were lonely and went back home for the weekend, even though home was Boston or Chicago or New York—well outside the three-day pass limits. And I suspect they all partied until late assuming incorrectly some other member of the group was the designated driver.
.
When a rich man’s kid starts driving, he should buy a big solid safe car with all the latest safety features. Do NOT let the damned kid pick some cool but dangerous car.
.
I have put much money into assets that protect us from hyperinflation. Foreign currency, bullion coins, inventory, forever stamps, and so on.
.
We also have assets to protect against recessions and such. Having quite enough for that protection is a better place for your money than a yacht.
.
Go overboard on management of all the risk you face if you can afford to do so. That, not excess homes and cars and boats and land is where your greater than average net worth should go.
.
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