Dec 6, 2017
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If you want to get rich and to pass money to your kids, listen closely to Howard Stevenson. Here’s condensed wisdom from the heart of the investing world delivered with dry humor and charm. Professor Stevenson was a co-founder of storied Baupost Group and helped hire its legendary manager Seth Klarman. He began the study of entrepreneurship at Harvard Business School and eventually became HBS’ biggest fundraiser.
His book “Wealth & Families” gives invaluable advice on how to make money and keep enough of it to hand down to the generations. My personal favorite is illustrated by this quote from the interview:
“Whereas, some of my colleagues were going off consulting ... They were making a lot of money every day, and they go their XKE (Jaguar XKE, a coveted sports car of the era) quite quickly. I went off to places like Lima, Ohio, and I was paid $300 a day, but I got 1% of the company.”
Howard Stevenson was forgoing high current income, and consumption, for the ability to own promising assets that would build his wealth in the long term. This approach contributed to Professor Stevenson becoming rich enough to need a family office to manage his money.
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This dynamic conversation includes:
Transcript:
Sal Daher: Welcome to Angel Invest Boston. Conversations with Boston's most interesting angel investors and founders. I'm Sal Daher, and my goal for this Podcast, is to learn more about building successful new companies. The best way I can think of doing this is by talking to people who have done it. People such as entrepreneur, angel investor, and scholar of entrepreneurship, Howard Stevenson.
Professor Stevenson, Howard, I'm elated for the opportunity to interview you on this the 29th episode of our podcast. Thanks for hosting us at your offices. In this recording session outside our usual studio. This is what's normally called a remote.
H. Stevenson: Well it's not so remote, it's right in Harvard Square.
Sal Daher: That's right. Not too far away.
Howard Stevenson Bio
Howard Stevenson founded the storied Baupost Group, and is the father of entrepreneurial management, at the Harvard Business School. Howard has served on many boards, and his advice is prized by so many wealthy people. He has written extensively on business and social ventures. He has been generous with his time and treasure, towards philanthropic causes in which he believes. It is said that he has raised more money for Harvard Business School than anyone else. There is now a chair professorship named after him at HBS, in recognition of his outsized achievements.
Starting out as a math major, Howard has had a methodical approach to wealth during his entire career. While he measured assiduously the growth of his net worth, he also paid close attention to choosing work that was satisfying to him, and valuable to others. Informed by fear of the “Velvet Rut” that can trap tenured academics. Howard found his own career trail in several industries. By taking astute long-term bets, he has become wealthy enough to need his own family office, though he does not like the term.
In preparing for this interview, I read his latest book, Wealth and Families: Lessons from My Life Journey. Written with his longtime collaborator Shirley Spence. The book is a remarkable document, in that it grew out of another book. A book that he had written for his family, titled: Howard's Journey: Lessons from the Game of Life. This other book was written to impart his hard-earned lessons to his family. The family book was shared with a few close friends, who urged creation of a public version, which became Wealth and Families. Which, is the book we'll refer to in this conversation.
In concluding my introduction, I'd like to read a beautiful blurb of the book by Howard's colleague, Kenneth A. Fruit of Harvard Business School. "It is hard to fathom, even once you've read it. The compactness of the wisdom and insight Howard Stevenson provides in this short book. His perspective is practical, yet enormously synthetic. Don't be confused by the direct "Oh shucks" tone. The simple folksy-sounding analysis of the complex problem of intergenerational wealth, belies Howard's incorporation, and absorption of much more of the magic of mathematically rigorous laws of compounding and diversification. Sprinkling in a foundational knowledge of the tax code and the law. It's that he has in his own mental frame incorporated a sense of people's humanity, their strengths and weaknesses, their goals and actual accomplishments. Based on successfully watching and doing for all these years. The wisest teachers have all along been life's best and most observant students. Howard and this integrative little book that you and your progeny should share, are just that."
That's really beautifully written.
H. Stevenson: Yes, and I didn't even pay him.
Sal Daher: I know. I know those things are tremendous.
How Howard Stevenson Started His Career
As a service to our younger listeners Howard, I'd like to ask a question about how my massively successful guests got started in their careers. Tell us about the choice that confronted you when you completed your undergraduate in mathematics at Stanford, and what you chose.
H. Stevenson: Well it was fairly easy. I discovered when I was at Stanford, there were people who were smarter than I am, love math more, and worked harder. I decided I didn't want to compete with them.
I had looked at both law school, and business school, and in my great wisdom I discovered law school was three years long. Business school was two, and I chose business school.
Sal Daher: A math major, you could count.
H. Stevenson: I could count. Even on one hand. And, then I discovered that in fact Harvard gave me a bigger scholarship than Stanford for my continuation. End of story on the career that got me into Harvard Business School. Staying on to teach was another decision, which I think is, I've always loved learning, and what better way to learn than to teach. So, I did that for a couple of years, and then played investment banker with a friend on doing deals for small companies. Then I came back to the business school to do ... Well I came back to tell them I wasn't coming back, and they said, "What are you going to do?" And, I said, "Well I'm going to be a VP of Finance of a real estate company."
That meant that they thought that I knew something about real estate. I'd never read a book on the subject. I never had done anything in the field, and they said, "Do you want to teach the course?" And thought, "What better way to learn?" So, I came back to the business school, started a real estate course, or took over one that was sort of moribund. And, did that for five years. I came up for tenure, and I got tenure, and the Dean told me to do something important. So, I left again.
Fear of the “Velvet Rut” Causes Howard Stevenson to Leave a Tenured Position at Harvard Business School
But, part of the motivation of leaving was that I saw a lot of people in this “Velvet-lined Rut’. That it's very easy when you're successful, to keep doing what you're already doing. But, in fact the only way you can get from doing the wrong thing to the right thing, is probably doing the right thing poorly. And, so you have to learn, and I watch people who run the top of little hill, who didn't want to go down in the valley to try something new.
Sal Daher: This is very interesting. Very, very interesting. I wanted to elucidate a little bit, what was meant by the Velvet Rut. You think that academics tend to perhaps specialize a great deal? Become the most knowledgeable in a field, but are afraid to venture out, where they're not as knowledgeable?
H. Stevenson: Or where there're people who won't think they're as knowledgeable. But, I don't think that's restricted to academics.
Sal Daher: Mm-hmm (affirmative)
Howard Stevenson: “A lot of people are fairly miserable in their job, but they fear change more than they look for the optionality that comes in change.”
H. Stevenson: A lot of people are fairly miserable in their job, but they fear change more than they look for the optionality that comes in change.
Sal Daher: Ah, yes. The optionality that comes in change.
H. Stevenson: And, we can never predict the results of change.
Sal Daher: No. No.
H. Stevenson: So, for me I said, "Look, I can always get a job." I think the dean, at that point was not interested in what I was doing, which was entrepreneurship and real estate. And I said, "Why do I want to work at some place where they don't value what I'm doing?"
Sal Daher: Mm-hmm (affirmative)
After a Sojourn in Entrepreneurship & Real Estate, Howard Stevenson Was Lured back to HBS
H. Stevenson: That led me to work with a private company. Became VP of Finance of a private company. Helped them raise money. Got some control systems in place. A whole bunch of things. So, I had a lot of learning, but after five years the learning went away and I ... The dean had heard that I was dissatisfied, and came and said, "You want to do something in entrepreneurship?" And this was a new dean, and he was a person I knew and trusted, and so I said, "Yes".
Sal Daher: It's a new direction and a new discipline that challenged you at the time. So, you felt that that did not have the risks of constraining you within this rut.
H. Stevenson: Absolutely not, and beyond that I knew that I could leave again.
Sal Daher: There are not a lot of people that would turn down tenured positions at The Harvard Business School. No, that is impressive.
Sal Daher: “There are not a lot of people that would turn down tenured positions at The Harvard Business School…” Howard Stevenson replies: “That's sad. I'm a trustee at Olin College, and they have no tenure. It's amazing what that does, because people are there voluntarily.”
H. Stevenson: That's sad. I'm a trustee at Olin College, and they have no tenure. It's amazing what that does, because people are there voluntarily.
Sal Daher: Yes, yes. That is a remarkable organization.
We're going to talk a little bit now about building wealth. What type of early stage investments have you made, and how have they turned out over time?
Howard Stevenson on Building Wealth: “I've always been experimental, because I don't believe I understand and can predict the future. By the way, when you look that the facts, very few people can.”
H. Stevenson: I've always been experimental, because I don't believe I understand and can predict the future. By the way, when you look that the facts, very few people can.
Sal Daher: That's right.
H. Stevenson: We've always tried to invest in places where, in the early stage, I prefer to invest when people have some revenue. Because, it points to the fact that there is somebody that's willing to have a cash-ectomy performed on their wallet.
Sal Daher: Mm-hmm (affirmative)
H. Stevenson: We like to be broadly diversified. I'm not trying to guess what's going to be in the next public market.
Sal Daher: You prefer companies that are post-revenue? That are ...
H. Stevenson: Post revenue.
Sal Daher: Earning, okay.
H. Stevenson: And ...
Sal Daher: In a growth stage?
H. Stevenson: In a growth stage, where they need the money to ... If it's in biotech, I prefer something where the scientific risk is out.
Sal Daher: Mm-hmm (affirmative)
H. Stevenson: But the market risk is still there. The best investment I ever made was in a company that had a really stupid business plan. But, the people were fantastic.
Sal Daher: Yes.
Howard Stevenson’s 400x Investment in a Company with a “Stupid Business Plan”
H. Stevenson: They were in an industry that I thought was very interesting. I thought that what they were doing in that industry made no sense. Over a couple of years, they morphed, and that's probably returned 400 to 1.
Sal Daher: Oh, the 400 to 1 return that everybody's looking for, to pay for the rest of the portfolio.
H. Stevenson: Yes. But ...
Sal Daher: Which company was that?
H. Stevenson: It's a company called Asurion.
Sal Daher: Asurion.
H. Stevenson: And, they are very quiet, I'm still invested.
Sal Daher: Yes.
H. Stevenson: They're doing very well. One of my friends, who's a noted venture capitalist, turned them down because the business plan was too stupid. That's been one of the worst decisions he ever made. Whereas, one of the other venture capitalists that put a little money in, it's the best decision he's made in his life.
Sal Daher: I know, those kinds of investments are few and far between, and when you turn one of those down, it's hard to live it down.
H. Stevenson: You have to live life forward, you can't live with regrets.
Sal Daher: True, true, true, but I think there is some room for learning.
Howard Stevenson’s Four Criteria for Investing
H. Stevenson: I think the thing that I've learned is. I have four criteria for investing in companies I know and love. Is the person honest? Because, if they're not honest they'll screw you some way.
Sal Daher: Oh yeah, that goes without saying.
H. Stevenson: Now how do you figure out if they're honest? Well, there're two ways: 1. You know them. Or, 2. One of my favorite questions is, "Tell me about the sharpest deal you ever did?"
And, it's amazing what people will tell you. One guy told me how he cheated the IRS. And you say, "Well if they can send you to jail, and I can't, and you're still willing to do it, I think I know something about your value system."
Sal Daher: That is remarkable, that is remarkable.
H. Stevenson: The second criteria, that I like to use in investing is: Are they nice? By that I mean, are they looking out for somebody other than themselves?
Sal Daher: Mm-hmm (affirmative)
H. Stevenson: I've had experience in start-up or early stage investments, where the entrepreneur takes care of themselves really well, and the early stage investors not so much.
Sal Daher: Left hold the proverbial bag.
H. Stevenson: Well, or holding nothing.
We have one that just went public, and I think compared to my investments, I'll make 10 cents on the dollar, even though the company was successful. And, I went through three or four rounds, and I discovered what the person was.
But, trying to figure out are they nice, that means talking to people that know them. Looking at past decisions. I've had investors ... Or, I've had companies where we lost all the money, and they gave me stock in the next venture they did. Which is a good sign that they are nice people.
Sal Daher: Yeah, that is a nice sign, yeah.
H. Stevenson: The third element is: Are they curious?
Because if you believe that the future is impossible to predict, then anybody who thinks they know the future absolutely, is not looking around the corner. I go back to my example of the best one we ever did. They had a bad plan, but they were curious, and they said, "Where can we serve this group of customers, with a very profitable notion?" And, they found it.
Howard Stevenson’s Portfolio Returns; Warren Buffett-Like
And the last is: Are they smart? Because, this is a very complicated field. Now you ask how we've done. We've been doing it for about 25 years, since I sold down some of my position at Baupost, and left active management. I was the president for the first eight years. We probably return 17% or 18%. Probably 12% without the real big winner.
Sal Daher: Mm-hmm (affirmative). So, a little bit ahead of what Baupost has done in the same time?
H. Stevenson: Yes. I guess I look at it, and I say, when I've done the analysis ...
Sal Daher: Probably a lot higher beta.
H. Stevenson: Yeah. It's actually interesting, I've divided things into five categories. Stuff happened, I don't use the word stuff when I'm talking about this.
Sal Daher: Yes. I understand.
H. Stevenson: That was a ... The guy got a pancreatic cancer soon after we invested. The Tanzanian government it over, because it was too profitable, and they wanted their cousin to own it. And, you can go through some, but there weren't a lot of those.
There was the wrong on the bet category.
Sal Daher: Mm-hmm (affirmative)
H. Stevenson: It was a good bet, but it didn't work. And, I think in a lot of what we're doing, you've got to differentiate between, is it a good bet, and did it work?
Sal Daher: Yes.
H. Stevenson: Because, on a high variance bet, it's not going to work out all the time. But, one of the things we always try to do is say, "What are we betting on? What are the three or four conditions we're betting on?" And, then sometimes they're not going to work.
Sal Daher: Mm-hmm (affirmative)
H. Stevenson: Then there is, we made it safely through. Then there was a few good things happened. If you take the bottom three categories, I think we got about 7% out of that total pool because ...
Sal Daher: Wow! Well that's not bad, yeah.
H. Stevenson: When you're post revenue, in some ways you don't ... You're not going to lost everything.
Sal Daher: No, no.
H. Stevenson: But one of the interesting ...
Sal Daher: I've had at least one post revenue company that lost everything, because they were so highly leveraged. That's the thing, if they have revenue, there's a temptation to borrow.
H. Stevenson: Yeah, but I think that one of the things about it is, that if you're working with the right people, they are ready to say, "It's not working". Then they turn their task to getting something for the company. Instead of, as some people are, they'll just throw the dice, until they run out of money. Somebody who's nice and curious, is probably going to spend some time saying, "It really isn't working, is there some way we can salvage something for us, and the investors?"
Sal Daher: Yeah, that really is remarkable wisdom.
H. Stevenson: Then some good things happened. Largely that was when somebody else wanted it worse than we did.
Then there's the wows, and there are probably five wows. The one I told you about is by far the biggest one, but there were quite a few that returned 30 to 1.
Sal Daher: Wow.
H. Stevenson: And you say, "What field were you in?" They were all over the lot.
Sal Daher: Wow, so no specialization?
H. Stevenson: No specialization.
Sal Daher: Interesting. I was having a conversation with a young venture capitalist yesterday, who is a part of MIT angels. He says, "I'm very specialized in biotech. Everyone, of these deals I can see all the problems with them, and solve them and so on." And he said, "I don't understand how you can make money, without that level of specialization." The answer for me at least, is that I'm investing much earlier than he is. So, my judgment isn't really based on knowing exactly what the industry is, and so forth. It's much more based on character, and so forth. The sort of thing that you're talking about. That is what makes it possible for you to be investing. If, you're investing early enough. The remarkable thing is that you're investing in post revenue, and you're still making those judgment calls based on character, and making money. Which is tremendous.
H. Stevenson: I think that part of it is that nobody knows the future, no matter how many PhDs you have.
Sal Daher: Mm-hmm (affirmative)
H. Stevenson: In the biology field, I've had people present things to me. They say, "This is absolutely unique." And, I walk back to my office, and I get a business plan, that if I just crossed out the names, it would be the same.
Sal Daher: It would be the same, yes.
H. Stevenson: So, my belief that you have a unique upside. Just think, even Uber. How many examples are there of Uber?
Sal Daher: That's right. The ones that failed, there were many of them, and Lyft, which is still extant. But the reality is that, ideas are a dime a dozen, and execution is very, very hard.
H. Stevenson: One of my favorite stories about this is, in 1993 and the personal computer is coming out. We said, "There's got to be a role for this in home accounting."
Sal Daher: Ah.
H. Stevenson: We found a guy from Procter and Gamble, because we knew you'd need marketing.
Sal Daher: Mm-hmm (affirmative)
H. Stevenson: They'd written a software. It was good software. It worked fine on the apple. Unfortunately, not on the PC. And, it started literally within a week of Quicken.
Sal Daher: Ah!
H. Stevenson: So, you look and you say if I took two business plans, look at the resumes of the people, I couldn't tell the difference.
Sal Daher: No.
H. Stevenson: One is wallpaper, and the other is a fortune.
Sal Daher: Quicken, they managed to establish a process for developing a product. Which was really, tremendously impressive.
H. Stevenson: That, but I think they may have gotten into Staples slightly before we did.
Sal Daher: That's all part of the product development process.
H. Stevenson: Yep.
Sal Daher: The product is developed enough, that Staples can distribute it. As a matter of fact, I'm trying to think of who it is that I interviewed recently who has the founder of Quicken as his ...
H. Stevenson: Scott Cook?
Sal Daher: Scott Cook, yes is his idol.
H. Stevenson: Mm-hmm (affirmative)
Sal Daher: I think it came out in the podcast.
H. Stevenson: Yeah, a P&G guy. He's not a technology guru.
Sal Daher: Well, he's another P&G guy, because you guys were backing a P&G guy as well.
H. Stevenson: Yes.
Sal Daher: Well I'm in the process of writing ...
H. Stevenson: HBS guy too.
Sal Daher: HBS guy. Well I'm in the process of writing a check right now to P&G, J&J, HBS guy. So, I hope it's going to work out.
H. Stevenson: I can guarantee you won't know until it does.
Sal Daher: I know. That is absolutely true. That is absolutely true.
Howard Stevenson on whether Entrepreneurship Can Be Taught
You've done a lot of research, and given all your business experience. This is a tough question. Do you believe there are certain personality types that are more conducive to entrepreneurship, or can it just be taught to anyone? Bill Aulet, thinks it can be taught.
H. Stevenson: Can I answer no, to both questions?
Sal Daher: Absolutely.
H. Stevenson: Well, in the old days before I started to work in entrepreneurship, there were people who said, "Well, they've studied it carefully and you need ... Being a first born helps, because 44% of the entrepreneurs are first born." Failing to notice that 44% of the population is first born.
There were other deep studies of locusts of control, and other things. It turns out to be nonsense. I don't think that there's a personality type. Because, if you're going to run a cable television company, you could be the wallflower at the accounting convention.
Sal Daher: Right, right.
H. Stevenson: If you're going to run a promotion based ... Look at Steve Jobs’ personality. I mean ...
Sal Daher: Absolutely.
H. Stevenson: I can go through Ken Olsen.
Sal Daher: Mm-hmm (affirmative)
Howard Stevenson’s Definition of Entrepreneurship
H. Stevenson: You look at the great entrepreneurs, and if you can find a single personality type, I think you've got a flawed test. So, I would reject that. On the other hand, I don't think that you can teach entrepreneurship to anybody. What I always thought we're doing when we're trying to teach entrepreneurship. Is if you take the students who come to Harvard Business School, they're opportunity driven. And, as you may know, I tried to define entrepreneurship as the opportunity beyond the resources you currently control.
Sal Daher: Yes.
Sal Daher: No.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Mm-hmm (affirmative)
No, really the problem of information, and the fact that it's broadly disseminated, and people who have local information have an advantage, over someone coming from the outside. That is broadly recognized. I see the point that you're making, that you think that what the academic experience can do, is inspire people with models.
Sal Daher: That have, through cases and so forth. They can get people thinking, "I can do that." Which is a little bit of what I hope to do through this program, with angel investing. Is, to get people saying, "I don't have to be Mark Zuckerberg, to invest as an angel. I can be a guy who has built a business, who's got some experience and so forth. And, I can probably help some young person who's building a business."
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Ah, okay.
Sal Daher: Yeah. The ability to learn from other people's experience. It's a lot cheaper than learning from your own experience.
Sal Daher: My first interview with Michael Mark, who's founded several companies as a technology founder. And, he said he had invested in more than 200 startups, and he could think of one business plan that went according to plan, Progress Software. All the other ones necessitated pivots.
Sal Daher: Absolutely.
Sal Daher: That's right.
In your book I think you quote Eisenhower saying, "Planning is everything. Plans are nothing."
Sal Daher: So, going through the process of planning, you develop understanding. Even though things don't work out as you expect, at least you know a little bit about the lay of the land. So that when things change, you can regroup and do an informed approach.
Sal Daher: Ah.
Sal Daher: I've seen a lot of those, yeah.
Sal Daher: In those situations, one trick that I've learned from some of my colleagues in Walnut Ventures is, give them a little time. If they're at the beginning of the race, don't tell them that you're going to invest with them. Give them three months, and then see where they are, in those three months. See how much progress they've made during that time. They've told you everything about where they are now. If, in three months they're still telling you the same things, and they have competition, so that they're not very good at implementation. So, they're not going to get anywhere.
The Best Due Diligence Is Time
Sal Daher: Absolutely.
Sal Daher: No, no it's not. It's not.
How Baupost Got Started and How Investing Wizard Seth Klarman Was Hired
Howard, I'm very curious to hear the story of the founding of Baupost. Hiring of Seth Klarman. For those listeners who do not know of Seth Klarman, think Warren Buffett a quarter century younger.
Sal Daher: Yeah.
Baupost was founded because, Bill Poorvu had sold WCVB, or was selling CVB, and I had worked with him quite a bit. And, Jordan Baruch ...
Sal Daher: Bill Poorvu, fellow professor at the Harvard Business School.
Sal Daher: Who had been owner of the television station, WCVB channel 5, here in Boston.
Sal Daher: A part of it, yeah.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Okay, okay.
Sal Daher: Okay.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: You can put it in somewhere.
Sal Daher: At least cash the checks.
Sal Daher: Right.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: The industry was not highly developed at that time.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right, right.
Sal Daher: But what is it that you saw in Seth, that set him apart?
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Absolutely, yeah.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Mm-hmm (affirmative)
Sal Daher: No, no. Mm-hmm (affirmative)
Sal Daher: Yeah.
Sal Daher: Exactly, exactly.
Sal Daher: But the idea of patient investing, of buying things that are deeply underpriced, and holding them until they are, not fully valued, I know you always sold early. But, until other people begin to have an interest in them, that is something that's attracted me to him. Because, it's a lot similar to what my partner and I did in emerging markets. We were always early, buying stuff at incredibly cheap, and selling into the market as it began. People made a lot of money buying stuff off of us. And, the same thing with Seth Klarman. So, how did you detect that? That quality in him.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Ah, okay.
Sal Daher: And, given the composition of the investors, the original investors. They were a small number of people, who had a long-term outlook. They had a much healthier attitude towards the market, than a lot of people have today. Because if you're a young, rising fund manager, you live or die by your last results. In your ...
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right, right.
Sal Daher: Right.
Sal Daher: That is wonderful. That's something Warren Buffett complains says his secretary pays a higher tax rate than he does.
Sal Daher: In this case, even the secretary is paying a high tax rate.
Sal Daher: A low tax rate, I should say.
Sal Daher: Because, she is benefiting on the ... Or he, in the ...
Sal Daher: That's really laudable. I have great admiration for the firm that you helped put together, and its outcome is really impressive.
Sal Daher: So it's Baruch.
Sal Daher: Auerbach.
Sal Daher: B A
Sal Daher: A U
Sal Daher: And, S T of Stevenson.
I think it happened with a piña colada somewhere on the Caribbean.
How Howard Stevenson Shops for Cars
Sal Daher: Howard, I find the way you shop for cars, particularly instructive. Please elaborate.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Yeah, you might overpay a little bit for a car, but your kid will learn.
Sal Daher: That's interesting, my father-in-law used to do that with his children. He used to give them, when they went to college, the money for the whole year. Give them one check and say, "Here, you've got to pay tuition, your cost of living, everything." Of course, he was overseas in Argentina, and they all came here, and it all worked out. But, sometimes it goes wrong. My dad had a cousin, who when he was away at a university, his family sent him money for the year, and he took the money, and he gambled.
Sal Daher: So, he didn't have any money for tuition, or anything like that, and then he was afraid to go back home, when everybody else graduated, because he still hadn't studied.
Sal Daher: Absolutely.
Sal Daher: There are guardrails, yeah.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Yeah, so they're highly incented to do that. And, it's consonant also with your idea of having the children be brought in early on wealth, brought in early on responsibility for money, and so forth. Which unfortunately nowadays, children really don't have much of a sense of that, of responsibility with money, and so forth. They don't work, they don't make their own money. At least in my experience, children in America work a lot less, than they used to 20, 30 years ago.
Sal Daher: Yes, absolutely.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Yes.
Sal Daher: That is really beautifully said.
Now what advice would you give a young person about building his or her own wealth?
Howard Stevenson’s Advice for How Young People Can Build Wealth
Sal Daher: Ah.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: So, you looked towards building assets?
Sal Daher: Instead of building income, necessarily?
Sal Daher: And in time these assets will generate income, but you weren't looking about income today.
Sal Daher: Yes. And, another thing that is mentioned in your book. You emphasize very clearly that a house, is not an asset.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Well yes, if you have been reliably producing 16%, 17% returns every year, it makes sense to borrow at 3% or 4%. That is remarkable. So, I really like that advice. Concentrate on building assets, and think about high income leads to high expenditures. That reminds me of a story of Mitt Romney.
Mitt Romney & a Young Colleague on Spending
Sal Daher: This is after he had had his initial success. He was with Bain Capital already. A young associate got his first bonus check and he went out and he bought a fancy sports car, and he gave Mitt a ride. Mitt was famous for beat up station wagons. Are you familiar with this story?
Sal Daher: I'm not going to ask, who got the higher grade.
Sal Daher: I know, no. But, anyway ... So, the young partner said ... Is driving Mitt around, and Mitt was very impressed, he says "Geez, I wish I could afford a car like this." And the young associate said, "Well, Mitt you're worth hundreds of millions of dollars. You can afford this." And the kid didn't get the sense that Mitt didn't think he could afford the fancy sports car. This young kid with his first bonus check goes out and blows it on a fancy car.
Sal Daher: Yeah, I know. That's the darned thing with Mormons, you can't get them drunk.
But I think it's also what behavior you're modeling for your kids.
Sal Daher: Right.
Sal Daher: That is very wise, very wise.
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Coming up next, we will be shifting to managing your wealth. A matter about which Professor Stevenson has deep experience. However, before we do that, I'd like to take the opportunity to thank listener, SewNow, who left this review on iTunes. "Definitely worth a listen. The series is full of very useful information. It is clear to me that Sal has put a lot of effort into it." SewNow, you have done your part to support the podcast. We bring stellar guests like Professor Howard Stevenson. We come to you free, with no schlocky ads, and professional sound, and you can help by following the example of SewNow, and leaving a review on iTunes. The listenership is growing with every episode, breaking records. It's something like 10% or 15% every month, that they're growing now. That growth combined with more reviews, will eventually cause the iTunes algorithm to start featuring the show. Thus, your review is critical to us. Thanks
"Most of the wealthy people I know, are better at making money than managing it."
Howard, in your book Wealth and Families you state, "Most of the wealthy people I know, are better at making money than managing it." Please take this opportunity to elaborate on taking on the responsibility of managing your wealth.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right, right.
Howard Stevenson’s Journey in Investing Began by Reading Graham, Dodd & Cottle in 1961
Sal Daher: Not a bad start.
Sal Daher: Absolutely, absolutely, yeah.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: It is, it is.
Sal Daher: And, taxing because you will inevitably have reverses.
Sal Daher: And people have the attitude that if they ever lose any money, they've failed. But the goal is not to never lose money. The goal is to grow over time.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right.
Sal Daher: Right.
Sal Daher: Right.
Sal Daher: Mm-hmm (affirmative)
"I was smart that I recognized the quality of the people. But, whether it was coming out at 2X or 400X, wasn't in my control."
Sal Daher: Right, right.
Sal Daher: Right.
Sal Daher: Right.
Sal Daher: Right, right. That is pretty deep. Very good.
I guess we talked about this a little bit, but could you go a little bit more into hiring the professional help you need, beyond the financial planner and CPA. When someone starts to accumulate significant wealth. Give us some hints. This is well explained in your book, but maybe give some teasers, that will lead people to look in your book for a really well-developed approach to it.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right, right, right.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right, right. In contrast to the process that you went through when you're setting up your family foundation. The Stevenson Family ...
Sal Daher: Charitable ... No, no, not the trust but the one for managing the funds of the family and ...
Sal Daher: Right, right, but you had quotes from ...
Sal Daher: From various people, and they were just absurdly high. So, you brought your son into it, and then you hire people to do particular chores, and so on and so forth. So, you don't have a lot of high overhead of a normal family office.
Sal Daher: No, no, there's not a lot of overhead.
Sal Daher: It's extremely functional, very functional.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Who's recommending, that's right.
Then if you're trying to go out to the rest of the world, it requires a lot of due diligence. It's probably going to be expensive.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Still you're probably much more involved in the management of your wealth, than most people who are comparably wealthy. Perhaps also, because you know so much more. I think that, that is certainly a great lesson here.
Sal Daher: Yes.
Sal Daher: It is.
Sal Daher: That's right.
Sal Daher: Exactly, exactly.
Sal Daher: Ah. He's not buying the first three years, he's buying 15, 20 years out.
Sal Daher: Right.
Sal Daher: Which most people are not interested ... Oh no, that's ...
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right, right.
Sal Daher: Yes. Mm-hmm (affirmative)
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right, right. Now that is a ...
Sal Daher: No, you don't.
Sal Daher: And, consistent growth over time.
Sal Daher: Yes.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Ha.
Sal Daher: Mm-hmm (affirmative) because ...
Sal Daher: Because serving your customer well is what assures continued growth, continued profitability over the long term, and not just the short bursts in the first few years.
Sal Daher: Something's got to float the boat.
Talking to Your Kids About Money
Sal Daher: Yeah. I really like your approach to letting kids know about family wealth and bringing them up early, and so forth. As a matter of fact, I love that little exchange at the HBS that I attended. A gentleman of advanced years, after you explained that you have to let your children know early on said, during the question and answer session, "So how do you think I should tell my children?" And you looked at him and said, "Looking at you, I think it's a little too late."
Sal Daher: I know, it's just ...
Sal Daher: Right.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Yes.
Sal Daher: The imagination.
Sal Daher: Gallops way ahead of reality, yes.
Sal Daher: Yes, yes.
Sal Daher: Yes, yes.
Sal Daher: So, your job is to explain the consequences of the choices they are making. So, that they make decisions in a way that makes sense. And, they can make the tradeoffs. There's nothing in life that's not a tradeoff.
Sal Daher: Right.
Sal Daher: It's a case study method.
Now please explain your thinking behind tracking of your family's total wealth, rather than your own net worth. I found that quite valuable.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Yes, right, right.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Yes. You care about your whole family, except your Uncle Sam.
Sal Daher: Oh! Listeners, I forgot to tell you. Howard's book has cartoons. Here's one. Dogbert is sitting behind a desk talking to Pointy Hair Boss under the caption, "Dogbert Financial Advisor"
Dogbert: You should invest all your money in diseased livestock.
Dogbert continues: It would be unwise to invest in just one sick cow, but if you aggregate a bunch of them together, the risk goes away.
Dogbert concludes: It's math.
Pointy Hair Boss replies: Suddenly I feel all savvy.
Kindly distinguish between a herd of diseased cows and real diversification.
Sal Daher: Right.
Sal Daher: Yes, yes.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right, right, right.
All under written very poorly to a certain sector of the economy. Likely to lose their job and certainly ...
Sal Daher: All at once.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Oh, wow.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right.
Sal Daher: Yes.
Sal Daher: Oh, yeah.
Sal Daher: Yeah ...
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right.
Sal Daher: That's right.
Sal Daher: Yeah, yeah. They're swinging the index now.
Sal Daher: At one point, I remember Apple was 3% of the market cap…
Sal Daher: Of the S&P.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: So, that sets up our last question here.
In your HBS talk, you mentioned starting your professional career when blue chip stocks like, Nabisco sold at four times earnings. Today, cyclically adjusted price earning rations of the S&P 500, is closing in on 30. How does one manage one's money when all investments, not just the S&P 500, but all investments are priced to perfection?
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Yes.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right.
Sal Daher: Mm-hmm (affirmative)
Sal Daher: Right.
Sal Daher: Yeah, exactly.
Sal Daher: Everything has duration, not just bond, but stock.
Sal Daher: Okay, so cash and structure.
Sal Daher: Howard Stevenson you've been most gracious to have us to your office, and to answer our questions. I'm sure our audience will find your deeply considered advice as valuable as I do.
Sal Daher: It's been great fun, it's been great fun.
I thank our listeners for tuning in, and remind them to please go to iTunes, and leave a review. Listeners with critiques, or suggestions, are welcome to write me at Sal@angelinvestboston.com. I should also mention that we also hold in person events. If, you want to be made aware of those events, please go to Angel Invest Boston, and press the Sign Up button.
This is Angel Invest Boston. Conversation with Boston's most interesting angel investors and founders.
I'm Sal Daher.
I'm glad you were able to join us. Our engineer is Raul Rosa. Our theme was composed by John McKusick. Our Graphic design is by Catherine Woodman-Maynard. Our host is coached by Grace Daher.