Thinking seven generations into the future

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I was reminded yesterday, once more, of the need for a long view.

Louis Basenese of the Oxford Club, wrote yesterday,

It only takes 176 seconds for an untrained pilot to crash a plane if he flies into a cloud. The reason it happens so quickly is simple – the pilot ignores the gauges in favor of natural feelings. And the latter are almost always incorrect.

Today, the Dow was off 346 points. As such, I want to caution against trusting your natural feelings. Or you could similarly crash and burn your portfolio.

So before I tell you what I think’s going on, let me be clear: Don’t act hastily and bail on your investments. Instead, stay the course. . . .

As long-term investors, we needn’t concern ourselves with what the market does from one day to the next. That’s because such a small window of time has little impact on the underlying fundamentals of the companies [we own].

That’s not to say that market volatility won’t send prices in illogical directions. . . . But over the long run, earnings ultimately drive share prices. And if [you have constructed your portfolio properly, you will] find – without exception – that the long-term fundamentals favor higher earnings for each of [y]our positions.

Recall, the very same focus – valuing company fundamentals over market noise – is exactly what propelled Peter Lynch to investment fame. It’s a battle-tested approach.

In sum: Keep the long-term ever forefront in your mind. Day-to-day fluctuations in the market are just “noise.” Even month-to-month and year-to-year shifts are noise . . . if your investment horizon is many years– when you’re investing in a retirement fund, for example.

I want to continue on this financial aspect of the theme for a moment before I get into what’s really on my heart: concerning families and generations.

And let me confess: I’ve always tended to be a nervous investor. The market heads down, and I’m out of there. “Oh, man! We’ve lost 10%! Disaster! Bail out! Go to cash! I don’t want to lose more!”

Over the last several years, however, I’ve been blessed with the steadying hand of an investment advisor with a much more rational view of the world.

Several months ago, he showed me some–what were, for me, shocking–charts of the bull market of the late 1990s.

Here, for example, is the S&P 500 Composite Total Return chart for 1996 through 1999:

S&P 500 Returns 1996-99, Annual

Amazing, isn’t it?

1996: 22.96% return.
1997: 33.36% return.
1998: 28.57% return.
1999: 21.05% return.

But now look at the monthly returns chart for the same period:

S&P 500 Returns 1996-99, Monthly

You’ve got 13 months with a net negative return. One of those months, August of 1998, lost just shy of 14 1/2 percent! August of 1997 lost over 5 1/2 percent! And you have five months with over 3% losses each–36%+ losses if you annualize them.

Those are huge swings to the downside! The stock market was all over the place! Could you have stomached the turbulence? I can assure you: if I had been an investor at that time, I’m sure I would have missed most of the best returns . . . because I would have been out of the market more than I would have been in it! I would have been controlled too much by the short-term view.

But, again, supposing I had had the money to invest at that time, I would have been wrong. I would have been far better off if I had kept the long-term view in mind and held in there for the long-term.

I mention these financial truths because I think the same is true in terms of our families. We need to keep the long-term in view. We need to plan for the long term.

James Hughes has now written two books as a result of a concern he acquired early in his career. He says that in 1974 he was invited to fly to Singapore to talk with a client of his law firm. He wasn’t told why he was to go, but he went, anyway.

The morning after his arrival, he was ushered into the office of his firm’s client. After some chit-chat, the man said,

“Perhaps, Mr. Hughes, you are wondering why I asked that you come halfway around the world to see me?” I confirmed that I was. “Well, we Chinese have a proverb,” he told me. . . . ‘From shirtsleeves to shirtsleeves in three generations.’ . . . I want you to tell me all of the ways families in the West avoid the prediction of this proverb so that my family can avoid it too.” . . .

If you haven’t heard that statement before, Hughes notes that it is a pretty universally recognized problem. One generation acquires wealth from discipline and hard labor; the next generation enjoys the benefits of that wealth, does some good with it, but also adopts an extravagant lifestyle. By the third generation, there is no recognition of the discipline required to maintain wealth. And so the fortune is dissipated before that generation moves off the world stage.

Hughes has set for himself the goal of helping families avoid this apparently almost unavoidable fate.

Two key principles he tries to convey to those who will listen: 1) we need to focus more on human and intellectual capital than on financial wealth; and, 2) we need to drastically lengthen our time horizons when we think of our families.

In his first book, Family Wealth: Keeping it in the Family, Hughes writes:

Families often fail to apply the appropriate time frames for successful wealth preservation. The result is that planning for the use of the family’s human and intellectual capital is far too short-term and individual, and family goals for achievement are set far too low. Time should be measured by the generation. . . . Short-term for a family is twenty years, intermediate-term is fifty years, and the long-term is one hundred years. With increasing life expectancy, I’m tempted to lengthen these periods, but for now they offer reasonable measuring sticks. (pp. 8-9; emphasis added)

In his second book, Family: The Compact Among Generations, written three years later, he girds his loins and says manfully what he didn’t quite have the guts to say in his first book:

A family has two hundred years or more to reach its fifth generation and to go on from there to flourish. And this is the span of the journey toward greatness. Only those families who take the long view . . . will make this journey successfully. (p. x)

And,

Tribes that survive the longest ensure their preservation by practicing what’s called “seventh-generation thinking.” I believe this type of thinking is essential to the success of a family. I define that success as reaching the fifth generation with its bonds of affinity intact, not just its genealogy, and going on from there to become a tribe. (p. 19)

“Consider the statement used by the senior Iroquois elder at the beginning of each meeting of the tribe convened in solemn council,” Hughes urges.

I paraphrase: “As we begin our sacred work of tribal decision-making, let us hope that our decisions today as well as the care, deliberation, and wisdom we use in making those decisions will be honored by and truly beneficial to the members of our tribe seven generations from today, as we today honor the decisions made by our ancestors seven generations ago.”

Such thinking assures the existence of the tribe far into the future and far beyond the lifetime of any living member of the tribe. The elder’s words remind us that building a family for long-term success requires vision far beyond any individual’s lifetime and far beyond the imagination of any one person. (ibid.)

So Hughes, with the aid of the example of the Iroquois nation–not to mention the Basques, the Jews, the Lebanese, the Hakka of China, the Parsis of India, the Yanomami of Brazil, the Masai, the Zuni, and the Navajo– encourages us to look beyond ourselves, beyond our children, beyond, even, our grandchildren. He says we need to look a hundred years into the future. Two hundred years. Five generations down the corridors of history . . . even to the seventh generation.

How far are you looking forward? How big is your vision?

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