THE BILL BONNER LETTER

The Bonner Family Wealth Blueprint

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The Bonner Family
Wealth Blueprint
hy wealth? Why does it
matter? And why would
you want to burden your
children with it?
As T. Boone Pickens used to say,
“Money is just a way of keeping
score in life.”
Of course, there’s more to life
than just money. So, you could have
a winning money score... and still be
a loser in life. Many rich people are.
Our goal is not to be a loser – not in
money, and not in life.
There are two phases to wealth.
First, we must create it. Then we
preserve it. In this report we’ll deal
with each phase separately.
How to Build Wealth
First, how do you get wealth?
Some of the answer is luck. A child
born in Detroit in 1940 was almost
certain to be better off in the Motor
City than a child born in Mumbai or
Lagos.
But in every culture, in every
place, there are some people who
do much better than average. What
follows are nine wealth-building
principles with nearly universal
application. Then we’ll move on
to the principles that will help you
preserve the wealth you’ve created.
Wealth-Building Principle No. 1:
Private, Not Public
There are people who are
extremely interested and fulfilled
by public life. They get their
entertainment from public sports,
movies, and TV. They get their news
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and information from newspapers
and other public sources. They get
their satisfaction from politics and
public issues. And they invest in
public companies.
All of those things depend
on a general, shared, uniform
understanding of the way things
work... and are supposed to work.
And they leave people with very
similar ideas... very similar views...
and very similar financial pictures.
But what succeeds is not the
general; it’s the particular. It’s the real,
immediate, detailed circumstances
that matter most. That is where the
anomalous, unexpected, underpriced,
and underappreciated advantages
come from.
That’s why we favor things that
are private. Private companies give
you more value per dollar. Private
information sources give you
higher-quality information, details,
and insights. Private family life is
likely to be much more rewarding
than public diversions.
In the financial world, especially,
it is important to favor the private.
You can read in the paper that Beijing
is booming, or you can go and look
for yourself. You can rely on Jim
Cramer to tell you that a company is
a “screaming buy.” Or you can study
its books, strategies, and personalities
yourself.
In the particular, private world,
you can know things with reasonable
certainty. In the public world, you
never know anything at all. There are
no facts, just memes... repeated so
often that they are believed to be true,
but often without verifiable content.
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Also, private is cheaper. The
price for a dollar’s worth of earnings
is typically much higher for a public
company than for the same dollar of
earnings that the company would
produce if it were private.
When you buy a public company,
you often pay dearly for lawyers,
accountants, celebrity CEOs,
finance capitalists, PR agents, SEC
compliance specialists, and much
more complexity.
A private company might change
hands at five times annual earnings.
The same company taken public by a
venture capital firm might go for 20
times annual earnings.
Although you can’t always find
private companies to buy, try to stay
as close to private as possible, often
buying public companies that act as
though they were still private.
Wealth-Building Principle No. 2:
Use Time to Your Advantage
We live in the world. We must
be aware of how it works. The Earth
makes one complete circuit around
the sun every 365.25 days. There
is nothing we can do about that.
Time is ineluctable. Its effects are
cumulative.
In one or two days, nothing
of importance may happen in the
financial world. In 36,000 days,
you’re probably dead. In one or
two generations – say, 50 complete
trips of the Earth around the sun –
everything of importance is likely to
happen.
Although the short-term investor
may ride whatever trend is current, the

prudent long-term investor cannot.
Every trend ends in destruction and
disappointment. The prudent long-
term investor has to anticipate the
end of the trend... and make sure he is
not destroyed by it.
The prudent long-term investor
also has to make sure he’s on the
right side of compounding. He wants
his gains to compound, but not his
costs.
It is extremely important to keep
living and investment expenses
under tight control. Otherwise,
they compound. The cost of money
management and investment
services directly and immediately
reduces the net return on capital.
That’s because over time, returns
regress to the mean. Over the long
haul, the mean return on investment,
in real terms, could be only about
3%. One or two percentage points in
annual costs substantially reduces
your net return.
When your returns fall below
your costs, those costs eat into your
capital. A five-year trend-following
strategy may well support annual
costs of 2%. But over 50 years,
annual investment costs of 2% could
consume an amount equal to the
entire original capital.
Finally, you need to wait for the
“perfect pitch.” Don’t be afraid of
volatility. Wait for prices to get to
bargain levels. By buying at epochal
lows, you have a much better chance
of compounding your gains.
Wealth-Building Principle No. 3:
Produce, Don’t Consume
To grow wealth, you must favor
production over consumption.
Poor families get together and
discuss what they saw on TV or what
they found when they went shopping.
A rich family gets together and
discusses new business ventures.
Rich people do not read novels;
they write them. Rich people do not
shop at retail outlets; they own them.
Rich people do not follow their broker’s
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investment recommendations; they
draw on many different sources to
form their own opinions and their
own decisions.
Productivity is at the center
of wealth creation. The difference
between wealth and poverty is the
output – and retention – of what is
produced during the available time.
Wealth-Building Principle No. 4:
It’s Capital That Counts
Wealth is more important than
cash flow.
Poor and middle-class people
are chiefly concerned with income.
And outflow. “How much is that per
month?” they ask. It is cash flow that
matters to them. They calculate it
carefully... worried their cash flow
will dry up before they do.
The rich look at it differently.
Partly because they can. Partly
because they know that cash flow is
a dead end. True wealth is the ability
to not have to worry about cash flow.
For many rich people, wealth is
the ability to live on little income.
Once you own the house you want
to live in... and the car you want to
drive... and you’ve finished school...
you don’t need much income.
What you should really care
about is capital growth. And you
should care about it even before
you have substantial capital to care
about. Forget the cash flow.
Ask yourself: Will this activity,
this investment, this business, this
career help me build capital? Or will
it just give me enough cash flow to
live on? If it doesn’t lead to capital
growth, do something else.
Wealth-Building Principle No. 5:
Beta Is Boss
Beta – the returns the market
delivers – is much more important
than alpha – the returns investors
look for in excess of market returns.
Investment pros talk about
“seeking alpha.” They mean
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choosing individual investments –
usually stocks – that they hope will
beat the averages.
Sounds easy enough. In practice,
it’s impossible to do this consistently
over a long time. What matters more,
for most people, is being in the right
time at the right place.
Being in Detroit at the start of
the automobile boom in the 20th
century, for example, was a lot better
than being in Kolkata. But there is a
time for everything. Detroit peaked
out in the ‘60s. Then, it was time to
move on.
Likewise, there’s a time to be
in stocks... and a time to be out of
them. Getting that decision right is
the single most important thing you
can do to build wealth.
Take the last century. It was
a great time to be in California
property and New York equities.
Where are the best places to be in
the 21st century? That is what you
need to figure out.
Wealth-Building Principle No. 6:
Don’t Be Afraid of Illiquidity
Often, the best investment is one
you can’t get out of easily.
This is a provocative point. It is
the opposite of what most investors
look for. They want liquidity. You
want solidity. They want to be able
to get out, like checking out of a
hotel without even visiting the front
desk. You want a long-term lease
that is hard to break. Warren Buffett
expressed a similar view in a Fortune
magazine interview in February
2014:
Owners of stocks [... ] too
often let the capricious and
irrational behavior of their
fellow owners cause them to
behave irrationally as well.
Because there is so much
chatter about markets, the
economy, interest rates, price
behavior of stocks, etc., some
investors believe it is important

to listen to pundits – and, worse
yet, important to consider acting
upon their comments.
Those people who can
sit quietly for decades when
they own a farm or apartment
house too often become frenetic
when they are exposed to a
stream of stock quotations and
accompanying commentators
delivering an implied message
of “Don’t just sit there – do
something.” For these investors,
liquidity is transformed from the
unqualified benefit it should be
to a curse.
Avoid this curse. Look for
investments that are solid, but
hard to get out of. This allows
compounding to work its magic.
It’s why farms are so attractive.
They cannot be easily sold. They
do not blow away or disappear.
They tend to go up in price, along
with the general economy (and
more specifically, the agricultural
commodity market).
Wealth-Building Principle No. 7:
Keep It Simple
A person with a PhD in finance
may understand a “leveraged butterfly
straddle hedged with put options on
EM bonds.” But most people will not.
Over time, simplicity pays. It
reduces costs (remember, small fees
negatively compound just like small
gains positively compound). As was
made clear in 2008, complexity has
a habit of blowing up. Simplicity is
more likely to endure the cycles of
markets and human competence.
Family fortunes tend to be built
around business models. Timber.
Mattresses. Candy. Guns. The best
business is so simple, it doesn’t take
a genius to run it.
This is related to another
insight: Good businesses with poor
managers are more robust than bad
businesses with great managers.
Managers can be changed more
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easily than business models.
Wealth-Building Principle No. 8:
Never Die Completely
If you’re not all dead, they can’t
bury you. Your goal as a wealth
builder is to never die completely.
Avoid concentrating your
investments in a single position.
This is particularly true of positions
that are presumed to be “safe.” Often,
investments believed to be the safest
are dangerously overbought.
Often risk-averse investors
believe they can escape harm by
focusing their investments in these
“safe” areas. This is referred to as
“diversification,” but it is not about
simply spreading money around.
You don’t want to simply toss seeds
around to see which ones grow. You
want to carefully plant different
seeds in different places.
Look for investments that are
not tightly correlated with each
other. Each one must have a logic of
its own, with enough upside to make
it worth the risk.
When you have several positions
like this, you might be wrong about
one of them. But you won’t be wrong
about them all. So, you’ll never
completely die.
Wealth-Building Principle No. 9:
Be an Eccentric
When you think of eccentric
people, you tend to think of people
who are strange, weird... or even
mentally unbalanced.
But there’s no way to build a
fortune – except by luck – unless you
are in some ways a bit eccentric. The
reason is simple. Most people are
not wealthy. Most people never will
be. Only a few are wealthy. They are
doing something different. It takes
an unusual person to do unusual
things. To most people, they will
appear a little eccentric.
Jeff Bezos, worth $20 billion, is
determined to deliver packages via
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drone, even though most experts
think it is foolhardy. Peter Thiel, a
cofounder of PayPal, is investing
heavily in floating cities.
Abe Hirschfeld made the bulk
of his fortune in New York City
parking garages. He wasn’t afraid of
controversy or eccentricity.
He bought the New York Post out
of bankruptcy, writing a $2-million
check on the spot. After the paper
lampooned its new owner with a
front-page story – titled “Who Is
This Nut?” – he kissed the editor.
The controversy boosted the
paper’s circulation so much that he
was able to sell it 18 days later, to
Rupert Murdoch, for an undisclosed
amount... rumored to be many times
Hirschfeld’s investment.
On trial for tax fraud in 1999,
Hirschfeld told Jewish jokes to the
jury... and got off. He gave each
member of the jury $2,500 as a
“reward.”
He once told a reporter, “Any
person that achieves things and
accomplishes things is a little crazy.
Perfectly sane people you only find
in an insane asylum.”
He has a point. Well-adjusted
people form the great mass at the
middle and low end of the wealth
pyramid. At the top are people who
think differently, act differently,
and are sometimes regarded as a bit
strange
Most people who are rich may
be rich by chance. If so, they will
probably become poor in the same
way. You do not want wealth to be
a matter of chance, so begin with a
simple insight: You can’t do what
most people do and expect to have
substantially different results.
So, we have to do something
different. But what?
Many of the principles above
answer that question. But it is
important to realize that what
you do MUST be different... and
that there is substantial social and
psychological pressure for us to fall
in line.

Many people are simply not
capable of resisting this pressure.
When the stock market goes up, and
all their friends and relatives are
talking about how much money they
are making, they will want to buy
shares, too. And when it crashes, the
unconventional approach – buying
at the bottom – will be the last thing
they want to do. “Everybody knows
the stock market is going nowhere!”
An eccentric spirit helps in many
different ways. You resist the appeal
of doing what everyone else is doing.
Everyone says you need insurance,
for example. You don’t. Everyone is
betting heavily on U.S. bonds. No
need for you to do the same thing.
Substantial wealth is rare. It
needs a robust, independent spirit
to create it.
How to Hold on to
What You’ve Got
Now comes the hard part:
holding on to what you’ve got...
There’s a lot of new money in the
world. It comes. It goes. People make
it. Spend it. Lose it. One generation
has it. The next doesn’t. One person
makes it. He dies. The money moves
on.
Money that endures – what’s
often called “old money” – is
different. It has different attitudes.
Different habits. Different ways of
doing things. It even looks different.
According to the stereotype,
new money drives a fancy car. Old
money drives an old car. New money
wears expensive clothes. Old money
wears an old sweater. New money
buys a flashy new McMansion.
Old money lives on an old estate
or farm. New money buys hedge
funds and products that sap wealth
through fees and commissions. Old
money sticks to simple investments
in businesses it knows and stocks it
understands.
The popular image of fusty old
money is probably more accurate
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in the Old World than in the new.
Old-money families in France and
Britain, for example, learned to be
discreet. Mostly because it paid.
The French tend to hide wealth
and dodge the wealth tax. You
rarely see a real luxury car on the
streets of Paris. And when you do,
it is usually owned by someone who
lives in Switzerland, Germany, or
Luxembourg.
In Britain, old-money families
have developed their own style...
their own chic... featuring 20-year-
old clothes and beaten-up Land
Rovers. Asked about their wealth,
they pretend to have forgotten
all about it. “Oh... oh... yes...
that,” they stutter in apparent
absentmindedness.
In the U.S., almost all money
we see or hear about is new. It’s all
Americans think and talk about.
They are proud of it. Proud of
making it. Proud of spending it, too.
Old money, on the other hand, is a
bit of an embarrassment.
Even within national cultures,
every family is different. Each has its
own sense of style. Each spends its
money its own way. Different things
matter to different families.
But one thing always separates
old money from its parvenu
neighbors: time. Old money has
a greater appreciation for it. Old-
money families know it takes time
to turn a new-money family into an
old-money family. You can give all
the money you want to families. But
if the family is a new-money family,
it won’t hold on to the money for
long.
That’s the story with virtually
every lottery winner or sports or
entertainment star. Typically, their
money is just too restless to stay put.
The lucky lottery winner is
immediately surrounded by bad
advisers, bad opportunities, and bad
friends. None of them can be trusted
or relied upon. And within a few
months, the money itself packs up
and leaves.
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An old-money family spends
decades learning how to preserve
and grow its wealth. There are just
three critical preservation principles
for lasting family wealth...
Preservation Principle No. 1:
A Family of Finance
The hardest part is the family
part. An old-money family is
different from a new-money family.
The most obvious difference is that
it has money that has lasted for
more than one generation.
Most families cannot hold on to
substantial money for more than
a few decades – at most. So the
old-money family must be doing
something different. And the major
difference is its view of, and use of,
time.
If you want to have an old-
money family, you have to use time
to instill the values, attitudes, and
habits of old money. Most important,
your family’s attitude toward money
must be different from that of other
families.
First, it must be willing to delay
gratification. It must be willing to set
aside some of its money in the hopes
of some indefinite payoff sometime
in the indefinite future. That is not a
quality that comes naturally.
Also, the idea of money that does
not belong to any one person... not
even to the person who earned it... is
foreign to most people.
In the U.S., old money is
considered almost reprehensible.
Warren Buffett argues against it. He
says members of the “lucky sperm
club” are poor capital allocators. He
wants higher taxes and more gifts to
charities – as though government
and charity bureaucrats were better
capital allocators!
Old-money families must regard
the “family money” as different
from personal money. It must be
considered a legacy, not a windfall.
Like a great-grandmother’s piano, it
must be protected and passed along,

not consumed. Each generation
should see itself as the custodian of
the family wealth, not the heirs to it.
And shame on the generation that
lets it slip away! Second, old-money
families usually have a sense of
themselves – of the role they play...
of their place in society... of their
mission – that keeps them all facing
in the same direction. As my son
Will often reminds us, successful
multigenerational families need
to know who they are and what
they are trying to do, as a family.
Otherwise, they drift apart. Third,
a family must use time to build the
institutions needed to “keep it in
the family.” Not every member of
the family will agree with every
other member all the time. Problems
arise. Troublemakers come into the
picture. Conflicts erupt. Like any
group, an old-money family must
have ways of resolving differences.
It must have ways of discussing
disagreements... and ways of settling
disputes.
These can be formal or informal.
A family can have a Family Council,
such as we have. Or it can just
have a tradition of gathering for
Thanksgiving and talking things
out. But if it has no means of getting
together to settle disagreements,
conflicts will pull it apart.
Preservation Principle No. 2:
Get the Law on Your Side
You also need time to put in place
the legal structures that allow you
to hold on to money for more than a
single generation.
Most people concern themselves
only with their own property and what
happens to it when they die. But a
successful old-money family will have
a strategy that goes beyond a single
generation. It will have a master plan.
This usually involves complicated
trust documents... and working with
trustees. They need specialized wills
and estate plans, too. These things
are part of what we call the “hard
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structures.” They give your wealth
a lasting legal basis that protects it
from generational transfer taxes and
intra-family squabbles.
These hard structures are also
complex, expensive, and time-
consuming. But without them, your
personal money never becomes
family money.
New money stays new. To be “old,”
it has to be owned by something that
lives longer than a single lifespan. A
trust is one method often used. Or
you could use a corporation. But if
you use a business structure, you
still have to transfer ownership of
the business from one generation to
the next.
However you structure it, you
will need a lawyer, a plan, and time.
Not only do you need time to put an
appropriate structure in place, you
also need time to learn how to use
it. The details of trusts, wills, and
estate planning take time to master.
And you’re not the only one in
the family who must learn how to
work with them; the next generation
must also feel comfortable and
competent with the hard structures
you’ve put in place.
Preservation Principle No. 3:
The Actual Wealth
Finally, an old-money family
needs to have some money. And this
money needs to be the collective
property of the family... including
members of the family who haven’t
even been born yet. It needs to be
handled differently from regular
money. It can’t be spent, except
under special circumstances.
Instead, it must be protected... and
made to grow.
Most people invest for
themselves. They want to be sure
they have enough money to retire.
Or to buy a house. Or to live well.
This sets in motion both an attitude
and a method. Retirement, house
buying, consumption – all have time
limits. There is no point in investing
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your money in something that won’t
pay off until the need has passed.
That is why most investors
fear volatility... crashes... and bear
markets. You might put your money
into the U.S. stock market now, for
example. Stocks are not cheap. You
could look for dividends and capital
gains over the next five years... and
hope the market doesn’t crash.
If you’re lucky, prices will
continue to rise and you can cash
out at a profit, with plenty of money
for your retirement. But a crash is a
threat. You weigh the danger against
the reward. You take your chances.
If you are investing for the
long term, on the other hand, bear
markets are no longer a threat. They
are a certainty. (According to market
historian Russell Napier, the average
investor will likely encounter a
bear market every three years. And
every 13 years, it will be particularly
mean.)
Again, time is the crucial
difference. Time is a family’s
staunchest ally and its greatest
enemy. It makes it possible for
families to build bigger fortunes
than a single generation could
accomplish. Compounding starts
slowly. You go for years before
it really kicks in. And then, after
decades, it has a fabulous effect.
This is the key to old money:
using time as a helpmate while
neutralizing its insidious effects. In
the short run, as the example above
illustrates, compounding barely
helps; in the long run, it can make
you a fortune. In the short-run, time
brings threats; in the long run, it
brings opportunities. In the short-
run, costs eat up a little of your
money; in the long run, they can eat
up nearly all of it.
Threats become opportunities: If
you are investing for five years... or
10 years... you put your money into
a diversified set of assets and hope
that a crash or bear market doesn’t
reduce the overall value of your
investments. In the 20th century,

the real annual return on U.S.
equities was negative for 35 of those
100 years. In eight of those years,
the negative returns exceeded 20%.
The new century won’t be the
same as the old one. But if we accept
the cyclical nature of the markets, if
you live long enough, bear markets
are not a risk, but a certainty. This
gives the investing Methuselah
an entirely different investment
strategy from the ordinary person.
The typical investor has no
choice. He has to “put his money
to work.” He buys his stocks,
commodities, real estate, or bonds.
He hopes not to get caught in a
freakish crash. Old money, on the
other hand, knows that it cannot
escape crashes and downturns. So
it turns the threat into a benefit: It
waits for once-in-a-lifetime buying
opportunities to come along.
Old money takes its time.
It figures out where it wants to
invest. Then it waits for the market
– the collective, often emotional,
judgment of millions of short-term-
oriented investors – to provide an
entry point. As they say on Wall
Street, money is made in the buying.
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But you can only buy at a once-in-a-
lifetime price if you are either very
lucky... or if you are willing to wait
with plenty of cash “ammo.” Old
money can wait.
Small gains add up; so do small
costs. In the short run, a hedge
fund can be an extremely profitable
investment. In the long run, it is
more like a “compensation system”
for fund managers.
There are two reasons for this –
both of them functions of time.
In the short run, a fund manager
could have a streak of good luck... or
a profitable insight. It would be well
worth paying him “two and twenty”
to participate. In the long run, he’s
likely to have bad luck, too... and
bad ideas. You don’t want to pay him
2%... or anything... to be a part of
it. He’ll take 20% of any gains. He’ll
leave you with 100% of the losses.
And still take his 2%. This is the
“heads I win, tails you lose” system
of Wall Street.
Which reminds me of the other
reason: Over time, costs compound
as well as earnings. Take a fixed
amount of capital. Allow a fund
manager to take out 2% a year. Over
five years, he has taken out a little
less than 10%. But over 50 years... he
has taken out most of it!
Over time, investment
performance tends to regress to the
mean. And that’s not a high level.
Maybe 4%... maybe 6%. Take off a
single percentage point, and you
have greatly reduced the long-term
performance of your portfolio.
Over time, small costs are
insidious. They add up. They
negatively compound, just as
numbers compound on the positive
side. The typical investor doesn’t
have to worry about them; he will be
out of his positions before the full
power of compounding catches up
to him.
But you have to work hard
to squeeze out small costs –
commissions, fees, taxes (which are
not so small), and other costs. Then
our investments can compound to
their full potential. This is how you
put time to work for you, rather than
against you.
That is how you preserve the
wealth you’ve built.