Tuesday, August 12, 2008

Maybe Nest Eggs Really Are "Worthless"

Last month we told you what the founder of The Merrill Anderson Company, an old Yankee, thought about nest eggs: "Chicken farmers can't afford to leave real eggs in the nests. They use fake eggs. Nest eggs are worthless!"

Maybe he had a point. In his 1967 Wall Street classic, The Money Game, George Goodman writing as Adam Smith tells this story:
Mr. Smith said to [his wife and children], "Our family owns IBM, which is the greatest growth company in the world. I invested twenty thousand dollars in IBM and that twenty thousand has made me a millionaire. If something happens to me, whatever you do, don't sell the IBM." Mr. Smith himself never sold a share of IBM. Its dividends were meager, naturally, and so Mr. Smith had to work hard at his own business to provide for his growing family. But he did create a marvelous estate. ***

Mr. Smith died; the IBM was divided among his children. The estate sold only enough IBM to pay the estate taxes. Otherwise the children—now grown, with children of their own— followed their father's dictum, and never sold a share of IBM. The IBM grew again, made up for what had been amputated to pay estate taxes, and each of the children grew as rich as Mr. Smith had been…. They had to work quite hard at their own businesses, because their families were growing and their only money was in IBM. Only one of them even borrowed on his IBM, to get the down payment for a heavily mortgaged house. And the faithful children were rewarded by seeing IBM multiply and grow. ***

The Smiths are now in their third generation of IBM ownership, and this generation is telling the next, "Whatever you do, don't sell the IBM." And when someone dies, only enough IBM is sold to pay the estate taxes.

In short, for three generations the Smiths have worked as hard as their friends who had no money at all,
and they have lived just as if they had no money at all, even though the various branches of the Smith family all put together are very wealthy indeed. And the IBM is there, nursed and watered and fed, the Genii of the House, growing away in the early hours of the morning when everyone is asleep.
IBM truly was an investment colossus in those days. Imagine Google, Apple and Amazon rolled into one. Only the crash of 1987 dispelled the stock's aura of invincibility. (Hope the Smiths didn't sell; by the late 1990s their IBM wealth would have multiplied again.)

The first IBM PC, 1981. Photo via Wikipedia.

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