Creating wealth during one’s career involves a significant amount of risk, particularly when it comes to owning businesses. Choices must be made with limited and often incomplete information. In addition to perseverance and hard work, individuals with considerable wealth might attribute a large part of their success to a few very good decisions that outweighed a few really bad ones. At the Berkshire Hathaway conference in 2013, Warren Buffett admitted that despite owning 400-500 stocks over his lifetime, he’s made most of his money on just 10 of them. He built on this theme in his most recent letter, stating: “In some cases…bad moves by me have been rescued by very large doses of luck.”
Morgan Housel’s book, The Psychology of Money, describes luck and risk as two closely intertwined forces that, combined with individual effort, dictate outcomes. He also refers to people who become too comfortable taking on too much risk attempting to quickly recreate their past successes. In the most extreme examples, Housel recounts stories of centi-millionaires who went from riches to rags overnight. As such, he reminds his readers that the skills required to stay wealthy are vastly different than those needed to get wealthy. Humility, frugality, and a healthy dose of skepticism reappear as core tenets and characteristics of those who build and maintain their wealth over time.
As stewards of our clients’ wealth, we wholeheartedly agree with this narrative and these tenets. Since our founding in 1989, many market fads have come and gone, and massive amounts of wealth destruction have occurred for those who replaced rational thinking with an unrelenting desire for more. Coleford has always worked from the premise that our job is to provide rationale thinking, rather than letting emotions dictate decision making. This is why we employ a prudent, long term, conservative approach which experience shows is the best way to compound wealth over time. Housel likens the power of compounding to planting oak trees: “A year of growth will never show much progress, 10 years can make a meaningful difference, and 50 years can create something absolutely extraordinary.”
As such, our strategy does not rely on predictions of when the next recession will come, what sector will outperform others or pure luck. Instead, we employ a healthy dose of skepticism-laced analysis to find businesses that prioritize the return of capital to shareholders over the return on capital, irrespective of market conditions. Staying wealthy requires a different mindset, one that Coleford admires and applies dutifully in performing our duties.
Capitalism is hard. But part of the reason… is because getting money and keeping money are two different skills.”
– Morgan Housel –