The House That Vanderbilt – How To Destroy Wealth

This may seem like a strange title. Why would anybody want to destroy wealth? But if legendary investor and Warren Buffets business partners – Carlie Munger – has taught us anything, it is always to invert.

Inverting a problem is to solve it backwards rather than forwards.  Rather than asking, “What’s the best way to keep wealth?”, we should ask ourselves , “What’s the best way to lose wealth?” That way we can we can avoid all the things that lose us money.

The Vanderbilt’s provide a classic example of how fortunes can be lost. The book written on them, Fortune’s Children: The Fall of House Vanderbilt, is well worth a read.

The Rise and Fall Of The Vanderbilt Empire

Cornelius Vanderbilt, better known as the commodore, was a self-made multi-millionaire (or billionaire in todays terms). In his younger days, Cornelius had little interest in school and thus worked with his father operating a ferryboat between Staten Island, New York, and Manhattan. After working as a steamship captain, the commodore went into business for himself in the late 1820s and eventually became one of the country’s largest steamship operators.

In the 1860s, the commodore shifted his focus to the railroad industry, where he built another large empire and helped make railroad transportation more efficient and widespread. Over the years, Vanderbilt gained a well-earned reputation for being fiercely competitive and ruthless, and a businessman you did not want to cross paths with. He once wrote a letter to a team of business partners who he felt had wronged him, saying only, “Gentlemen: You have undertaken to cheat me. I won’t sue you, for the law is too slow. I’ll ruin you.

This tough work ethic and dog eat dog business style led Cornelius Vanderbilt to become the worlds richest man.

So when Cornelius dies on January 4, 1877, it was no surprise that his family circled like vultures hoping to get a piece of the estate.

At the time of his death, Cornelius was worth a reported $100 million (close to $3 billion in todays terms).

The Commodore was of the belief that splitting the family fortune would lead to ruin, so he left a majority of his wealth – $95 million – to his son William H. Vanderbilt. At the time of this bequest, $95 million was more money than was held in the entire U.S. Treasury.

This seemed to be a good decision. Over the next 9 years, William doubled his father’s fortune to nearly $200 million through proper management of the businesses he inherited.

But the death of William in 1985 would cultivate the seeds of folly that would lead to the fall of House Vanderbilt. The inheritors of the fortune were ill prepared at being proper stewards of their vast inheritance or in ensuring the financial security of the Vanderbilt generations to come.

After William Vanderbilt’s death, it seems that the financial shackles were let loose. The heirs to the family attempted to to solidify their place in noble society by spending vast sums of money on parties, yachts, country homes and Manhattan mansions.

The level of spending was so outrageous that the vast majority of the Cornelius Vanderbilt fortune was squandered within 30 years of his death, and by 1907, no member of the Vanderbilt family was among the richest in the U.S. Within 48 years of the Commodores death, one of his descendants died penniless.

When 120 of Vanderbilt’s descendants gathered at Vanderbilt University in 1973 for a family reunion, not one of them was even a millionaire.

The family fortune was lost lost within three generations. As the famous saying goes – it takes a generation to build it, a generation to maintain it and a generation to squander it.

So how did the Vanderbilt’s lose one of the greatest fortunes in American history? How did the Vanderbilt’s go broke? Here is a list of how to destroy wealth and lose a fortune

1. Never Buy Income Generating Assets

This is the greatest financial sin committed by the Vanderbilt’s. As long as you have the passive income coming in, you can spend that amount. But the moment you start touching your capital and not replacing it, you are standing on dangerous territory and playing with fire.

2. Spend Like No One Else

The Vanderbilt’s were over extravagant in their spending habits. After all , they did live in the Gilded age. It was the period of over indulgence and outdoing one another. In their quest to spend like no one else, the Vanderbilt’s owned 9 mansions on fifths avenue, sunk a yacht and then immediately ordered a new larger one and threw a party that cost $ 5 million!

3. Having No Liquidity

We all know Vanderbilt’s had a lot of assets, so how could they become poor. The answer lies in when you sell an asset. In some instances due to ones own bad financial choices you can become a forced seller and sell your most prized assets at deeply discounted values.

The clearest examples of this was the Vanderbilt vacation home known as Marble House in Rhode Island. Marble House cost $11 million to build in 1892, which is equivalent to roughly $300 million today.

However, during the heart of the Great Depression in 1932, Marble House was sold for a price of $100,000, or less than 1% of its price to build!
Again in 1945, a collection of the very best foreign paintings that money could buy – which were purchased for more than $2 million  – were sold for a total of $323,195.

No matter what you think an asset is worth, if you are desperate for cash, it is the buyer who dictates the price and terms. So have ample reserves so that you aren’t forced to sell assets during a downturn. This is why an emergency fund is so important, you don’t want to be a seller of stocks during a market crash. You should have ample liquidity so you can be a buyer and dictate terms in these situations. This is why investors did well buying stocks did well during the financial crises.