Hi All,
It’s no surprise that the US is currently in the process of massive social change. We are currently seeing the decline of old style US auto and banking industries; along with the rise of internet and technology companies. What this suggests is that for investors, the processes of change and renewal should be kept in mind when deciding what to buy.
Specifically, Nadav Manham over at Seeking Alpha has a great write up of David Cannadine‘s The Rise and Fall of the British Aristocracy. Cannadine charts the financial fate of several of Britain’s landed aristocratic families. In some cases, these landowning families were wiped out in the course of three generations. What were the factors that distinguished survival from failure?
1) Taxation. Cannadine argues that families on the border of real wealth were pushed into poverty by taxation rates. Those that were not in marginal economic shape were able to survive the increases burden. This is a very important point as you can do everything right when trying to build wealth, but if you taxes wipe out that wealth you are back at square one.
2) Diversification. Aristocratic families that sold off their land and diversified into real estate development or equity investments did better than those who stayed fully invested in agriculture. After 1880 England experienced a protracted downturn in the price of agricultural commodities. This shattered the prospects of families who had failed to diversify.
So what does this mean for you?
First, it strongly suggests that you might want to stay away from old legacy businesses. A classic example are outfits like General Motors, Chrysler and Ford. Their business model is predicated on cheap oil and easy credit. In some cases they failed to put enough money into Research and Development and in others they purposely stifled innovation. A combination of high oil prices, lack of product diversity and the recession is going to put Detroit out of businesses.
Second, avoid investments that are subject to heavy taxation. For example, a lot of internet bases businesses aren’t subject to the same level of taxation as some brick and mortar outfits. In a tough economy, tax favorability could be a deciding factor in the success or failure of a business venture.
Check out Manham piece.
Best,
James
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