Sunday, February 2, 2014

Easy Come - Easy Go

Really interesting NYT article about a "1 Percent Divorce," but really about a scion of two big real estate families (Macklowes of New York on her side, and the Swigs of San Francisco) who apparently has managed to lose almost everything (!).

"Mr. Swig had reached this lofty perch the old-fashioned way: inheritance. He is the grandson of Benjamin Swig, who, with a Depression-era business partner, Jack D. Weiler, began building a real estate dynasty. At its peak, Swig holdings included stakes in the W. R. Grace Building in Manhattan, dozens of office buildings from San Francisco to Washington and the luxury Fairmont Hotel chain.

'I saw the greatest opportunity of a lifetime, and bought every single property I could possibly buy,' Mr. Swig later told The Real Deal, a magazine. He said his downtown bet was either going to make him look really good 'or it was going to make me look really foolish.'"
This story touches on some important themes. Reversion to the mean in wealthy families. Hindsight bias, critical of practices that would be praised if they had worked:
"Today, many real estate experts say Mr. Swig stayed too late at the party and paid steep prices for many of his buildings. He also personally borrowed from banks, private investment firms and others to fund his stakes.

'During the boom, from 2003 to 2006, he was riding high,' said Jonathan Miller, a real estate appraiser and consultant. 'But he was still doing deals as the damage was already starting to occur in the market.'"
If it had worked, if the rally had kept going long enough, the articles would be praising his foresight and bravery in levering up to the moon and buying properties.

That is the problem with a lot of business hagiography (like The Outsiders, review forthcoming) - a large proportion of people who get really rich speculate on assets with all the leverage they can muster. But not every leveraged speculator gets really rich!!

What do you want to maximize? If you want to simply maximize wealth (which would mean that you oddly do not have diminishing personal utility from wealth) and you can't or won't invent something new, you'll have to use insane leverage and probably go bust at least once.


Taylor Conant said...

More Howard Marks. The family's wealth revert to the mean because they started out at a multiple-standard deviation condition that was unlikely to be replicated in future periods, ie, starting a real estate empire during the Great Depression.

Anyone who STARTED anything during the Depression and survived was almost bound to get rich.

CP said...

Good call, I should have mentioned the Howard Marks accident of birth theme.

Steve Sailer said...

Thomas Piketty would assume that a family that got rich through taking his risks would shift to a wealth-preservation low risk strategy. Of course the nature and nurture within the family inclines the scions to gamble just like their ancestors. Some get really rich others, others get wiped out.