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January 2007
It’s a bird, it’s a plane, it’s a 15th century banker…?
Ask any child what superhero they would most like to be and you’ll get typical responses like
Superman, Spiderman and Wonder Woman. Most kids dream about having some sort of
superpower; the ability to fly, indestructibility or superhuman strength. Often children will dress
up as their favorite comic book hero. I can remember my brother adorning a Batman costume,
including a Bat-cape and Bat-mask. Unfortunately for me, my choice for superhero was not as
popular as most other children. In fact, most people have never heard of my hero, nor are they
necessarily fond of his superpowers. But I assure you, my superhero is the coolest, and his
superpowers are real. His name is Jacob Fugger. Let me introduce you to him, and his two
arch enemies: greed and fear.
Jacob Fugger was born into a moderately wealthy family in Northern Germany in 1459. He had
an appetite for learning and developed a knack for business. He helped in the family weaving
operation early in life and took over the business in his early teens. Once in charge, he
expanded the business into trade and banking. Through clever acquisition, he secured all of
Europe’s rights in the mining and trading of silver and copper. He also built an extensive
network of real estate and was renowned for his generosity to the arts and to educational
facilities. His wealth grew tremendously and in 1519, he bought the Roman Emperorship for
Charles V. By the time of his death in 1525 he had amassed a fortune of 5,100,000 guilders. In
today’s figures that’s over a quadrillion dollars (that’s a one followed by 15 zeros). That’s
22,000 times more than what Bill Gates is worth today. This is why Jacob’s contemporaries
nicknamed him Jacob “The Rich”.
That Jacob had unfathomable wealth is obvious, but this is not why he’s my superhero. He’s
my hero because of the way he governed his wealth. He realized early on that managing
wealth is difficult and that he needed a system to follow to ensure his fortune was looked after.
Here’s the principle he devised in managing his possessions:
“Divide your fortune into four equal parts: stocks, real estate, bonds and cash.
Be prepared to lose on one of them most of the time. During inflation, you will
lose on bonds and win on cash and real estate; during deflation, you will lose on
real estate and win on bonds, while your stocks will see you through both periods,
though in a mixed fashion. Whenever performance differences cause a major
imbalance, rebalance your fortunes back to the four equal parts.”
Jacob Fugger’s wealth principle, which is his superpower, was the essence of simplicity;
he divided his fortune into four equal parts, with two of the four parts being “financial”
assets (stocks and bonds) and two being “real” assets (real estate and cash). His focus
on monitoring performance differences and periodically rebalancing his fortune obviously
served him well and has been a model for other wealth managers for generations.
Can modern investors learn anything from Jacob Fugger? To be sure, his
approach of dividing his assets into different categories would appear to be nothing
more than common sense. And the old saying “don’t put all your eggs in one
basket” must surely predate Jacob the Rich.
But if his approach is held as common sense, it also requires uncommon discipline to
implement. His advice to “be prepared to lose on one of them most of the time”
indicates a rather steely emotional makeup that many investors are hard pressed to
imitate. And his advice to rebalance the portfolio “whenever performance differences
cause a major imbalance” is obviously much easier said than done. That’s because it
involves selling the investment that has done well recently and putting money back into
the asset class that has underperformed.
Just like Batman’s Joker, or Spiderman’s Green Goblin, all superhero’s have a nemesis.
In Jacob’s case, his archenemies are greed and fear. Greed rears its ugly head when
we chase performance of the latest and greatest investment (i.e. high tech stocks in
1999, oil and gas companies in 2005, etc). Fear emerges when we listen to financial
propaganda in newspapers and on TV and from well intentioned friends with doomsday
financial advice. By following Jacobs principle these enemy’s are neutralized. The end
result of listening to Jacob is avoiding the extreme high’s and low’s of investment returns,
which in the investment world is known as volatility. Volatility is what keeps you up at
night, worrying about your nest egg.
So what does this mean for your portfolio this year? The markets in Canada, US and
overseas all fared well in 2006. Your portfolio with Stewart Financial has increased
steadily and continues to show low volatility. However, bonds, which are the “safety net”
portion of your portfolio, had a tough year. While their returns have been in the
acceptable 4-6% range, they are no longer generating the 8-11% returns, like they were
from 2002 to 2005. So if we follow Jacob Fuggers advice (as we should), what are we to
do? Our advice is to take some of the money invested in the areas which have
performed very well (stocks) and redeploy it to bonds. The result of this will be more
stable returns over the long run. As we talk over the next few months, I will discuss this
with you individually in more detail.
I’m glad I could introduce you to Jacob and his superhero advice. While following him as
my hero did not win me many friends on the playground, it did teach me something
about being an objective money manager. Plus, I heard somewhere that Superman was
terrible at math. And that’s just something a superhero should be good at.
All the best,
Duncan Stewart, MBA, CIM
[email protected]
Jacob Fugger the Rich
1459 - 1525
p.s. For those that have asked, I complete my Certified Investment Management Analyst
(CIMA) designation at the end of this month. The final step of this degree is a week at
The Wharton School of Business at The University of Pennsylvania January 20th to 28th.