Saturday, August 8, 2015

The Thin Green Line

This morning at breakfast I started reading still another book. This one is titled The Thin Green Line. The author, Paul Sullivan, writes the “Wealth Matters” column for the New York Times. I didn’t make it through the first chapter before he grabbed me with something I just had to share. If you are a reader of this blog you have heard it before and Lord willin’ you will hear it again.

In his capacity as an employee of the New York Times, Paul Sullivan was invited to attend a meeting of the Tiger 21 Investment Group, although the Tiger 21 Club would be a more accurate description. Tiger 21 has 200 members. Each of them must have a net worth in excess of $10,000,000 although some of them are worth hundreds of millions or even billions. They each pay a membership fee of $30,000 a year to meet with other members of the club for lunch. At these lunches they agree to critique each others’ investment portfolios, no holds barred. As though he was one of the members, the author opened up his financial life to some of the wealthiest men in America.

He described the experience as being the mole in a Whack a Mole game.

The author was not criticized for his investments, but for living an excessively extravagant lifestyle given his salary and his plans for the future. He was also criticized for a failure to properly evaluate future risks. All of these men are thinking in terms of decades. Paul Sullivan owes a beach condo. He was told in no uncertain terms to dump it immediately. The ongoing costs of this luxury were simply out of sync with his financial goals. Sullivan protested that he was underwater on the condo. He owed more than he could obtain in a sale. He was told to lower the price and get rid of it. Even if he lost $20,000 or $30,000 on the sale he was told that he would be better off in the long run.

These men think, LONG RUN. It is one of the keys to life on the high side of the thin green line.

The author was criticized for not having adequate insurance. Sullivan and his wife both had life insurance, but not enough. He was told to buy cheap term insurance. He was encouraged to buy disability insurance. Even though this product is expensive, the men at the table told him that disability was five times more likely than death during his working years.

The author was astonished and if one reads between the lines a little annoyed that he was pilloried by Tiger 21 for not giving enough money to charity. He didn’t seem to want to hear this lecture from a man who was a former slum lord.

In general the men at the luncheon did not believe that Sullivan was properly considering all the risks he was facing. They didn’t consider his career as a journalist as all that stable. They didn’t think he was properly evaluating the future costs associated with raising his children.

The men of Tiger 21 didn’t think Sullivan understood the difference between being rich and being wealthy. Michael Sonnenfeldt tried to explain the concept. “What’s seen is the money they made, but what’s unseen is the choices that they have made. It’s what allows them to continue to be wealthy. It’s more about taking a very long view with all the potential negatives that we all fear.” From this experience author came to understand that there was a thin green line erratically jumping up and down as it crossed a chart recording the passage of time. Those who were truly wealthy, whether they were a retired school teacher living on his pension or a billionaire living in the Hamptons; were living on the high side of the line. They had enough. This is what I term financial freedom. A man could be rich and still be living paycheck to paycheck. He would never be wealthy.

It turns out that the men at the table all came from humble beginnings. None of them were born with silver spoons in their mouths. Sonnenfeldt tried to explain to Sullivan the importance of opportunity costs, what he termed optionality. When Sonnenfeldt and his wife were Sullivan’s age they lived in an OK apartment. Their neighbors, another young couple, spent $25,000 fixing up their apartment! $25,000 increasing the value of another man’s property! This young couple carpeted the walls. I remember the 1970s, they probably used shag carpeting. Sonnenfeldt noted that today this couple still had a nice lifestyle, but it was now considerably more frugal than in the days of their youth. Such a lifestyle, described by Sonnenfeldt as “extravagant bordering on foolish,” pretty much guaranteed that their former neighbors would end up somewhere below the green line.

The author left that day a sadder and hopefully wiser man. He was forced to consider the difference between what he needed and what he could afford. He was forced to consider the cost of his current plans, like renovating two of his bathrooms, not only today but the effect of that expense on his future, the future of his wife, and the future of his children.

After two decades as a business journalist, Paul Sullivan’s lunch with Tiger 21 gave him an entirely new perspective on life and money and the subject for a new book.

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