Wealth and Family lessons from my lifes journey

Wealth and Family lessons from my life’s journey Howard Stevenson HBS Sarofim-Rock Professor Emeritus June 2016

Copyright 2016 Howard Stevenson 2

Our family Wealthy enough to face real choices Complex enough to experience most problems Lucky enough to have great hard working children Thinking about the issue for a long time Extensive Have early planning come to some definite conclusions 3 Copyright 2016 Howard Stevenson

Who are we? +1 who missed Thanksgiving dinner this year 4 Copyright 2016 Howard Stevenson

Six truths that guide me in investing and life You are accountable for your actions and your life The one sure thing is that things will change You can never know all you need to know Predictions are guesses about the future Every action is a bet with three parts: the upside, the downside, the probabilities of various outcomes The house sets the rules and you get to decide whether to play the game 5 Copyright 2016 Howard Stevenson

Wealth – What is it? Something that makes a person family or group better off An abundance of valuable material possessions or resources An accumulation of resources relative to others A storehouse of value for creating options, future or current 6 Copyright 2016 Howard Stevenson

The best things in life aren’t things! - Sign in café in Wilmington, North Carolina

A wealth spectrum li y m a F Copyright 2016 Howard Stevenson s s e p a H n i p 8

My mother’s definitions Being rich is spending less that you make Being poor is spending more than you make 9 Copyright 2016 Howard Stevenson

Wealth flows Wealth is like a flywheel Copyright 2016 Howard Stevenson Y d r a c e r o c s r u o s r e t at m 10

My observations about when you or your children have wealth One dollar rarely serves two purposes Education starts early Investment and consumption are often confused Focus Be on building assets wary of your debt structure 11 Copyright 2016 Howard Stevenson

Stevenson principles of investing 1. 2. 3. 4. Think through your investment goals. Be skeptical of investment “experts. ” Avoid the herd or get trampled. Don’t measure yourself on short-term, relative performance. 5. Make sure you have real diversification. 6. Develop a rich deal stream. 7. Invest bottom up but check top down. 8. Figure out the payoff matrix and probabilities. 9. Know the rules before you decide to play. 10. Understand the real constraints. 11. Don’t strive for perfect information. 12. Figure out what has to happen for you to win. 13. Understand the risks you are taking. 14. “Rightsize” your bets. 15. Pick an A person with a B idea over a B person with an A idea. 16. Run from any sign of dishonesty. 17. Remember that everyone wants something from a deal. 18. Weigh participant costs against potential benefits. 19. Ask your question even if you think it’s stupid. 20. Read the deal documents carefully. 21. Know what will signal an exit. 22. Don’t expect to maximize total returns. 23. Be disciplined about valuations. 24. Don’t cheat at solitaire. 12 Copyright 2016 Howard Stevenson

Philanthropic spending The four big questions for me in giving 1. Is the organization doing important work? 2. Is the organization well managed? 3. Will my gift make a difference? 4. Will the experience be satisfying to me? 13 Copyright 2016 Howard Stevenson

Managing Wealth - My philosophy Wealth Good is an instrument of choices require good goals Wealth Things is a responsibility will change Enough Failing is enough to plan is planning to fail 14 Copyright 2016 Howard Stevenson

Nice abstractions – but lots of tough decisions What choices do you make versus others What are my (our) goals What should my time horizon be For what and whom am I responsible 15 Copyright 2016 Howard Stevenson

Responsibility My family responsibility model S e l f S p o u s e Overlays C h i l d r e n G r a n d c h i • • l Com m d r e n interests distance personality longevity Futu unit re pr y ogen y Time ? 50% Copyright 2016 Howard Stevenson 25% 12. 5% 6. 25% Consanguinity 3. 12% 1. 56% . 78% . 39% Potential Influence 16

Family wealth models – three fallacies Multi-generational wealth Definition of family Top-down governance 17 Copyright 2016 Howard Stevenson

Multi-generational wealth Then 0, now 19 and holding Then 1, now 15 and counting Then 0, now 9 and counting Then 4, now 43 Then 8, now 68? Then 5, now 47? In 1964, at age 137, 483 direct descendants Now, 4000 -8000? Copyright 2016 Howard Stevenson 18

Why is this important? A reprise In 137 years - 483 descendants In 170 years – 4000 -8000 descendants Think of the income needs to support this “family” $100, 000 per year × 4, 000 = $400+ million annual distribution Of course there are marriage, divorce, deaths, bankruptcies and entrepreneurial successes 19 Copyright 2016 Howard Stevenson

Are equal and fair the same? Time 1/7 share 1/560 share 80 times How about time for compounding? Copyright 2016 Howard Stevenson 20

REAL Example: 50 Years in a Trust Formed 1962 Current Assets in 2012 Projected to Grandchildren Copyright 2016 Howard Stevenson 21

Definition of family Who is family Step children Adopted children Illegitimate children Hired CEO’s Which family will they align with Why am I special How many generations will be alive and 50+ years old at the same time What does that imply 22 Copyright 2016 Howard Stevenson

Defining family – wrong way Thinking it is about me and mine Me Child Grandchild Great Grandchild Great-Great Grandchild Child Grandchild Great-Great Grandchild Etc. Spouses (second spouses), in-laws, outlaws, others Copyright 2016 Howard Stevenson Grandchild Great Grandchild Etc. 23

The family tree Thinking the right way Me Father’s Paternal Grandfather Mother Father’s Paternal Grandmother Father’s Maternal Grandfather Father’s Maternal Grandmother Mother’s Father Mother’s Paternal Grandfather Mother’s Paternal Grandmother Mother’s Maternal Grandfather Mother’s Maternal Grandmother Family histories, family stories, values, experiences 24 Copyright 2016 Howard Stevenson

Top-down governance consultants’ dreams WHARTON Private Wealth Management Program Description (excerpt) The program allows participants to increase their depth of knowledge in key area of wealth management, while having the unusual opportunity to meet and work with others, like themselves, who are part of a family with substantial assets. 25 Copyright 2016 Howard Stevenson

Governance issues to consider Involvements In-laws Ages Generational priorities Who decides about Family leadership Choices Allocations Outside advisors Remember the responsibility slide 26 Copyright 2016 Howard Stevenson

My philosophy of family We are stronger together Family leaders are servant leaders Tree branches must – and will - thin Future generations will make their own choices – even if we were alive and would disagree 27 Copyright 2016 Howard Stevenson

A general theory of everything When it’s about power, it’s all over for families, companies and countries High Low Copyright 2016 Howard Stevenson 28

Raising wealthy kids – Challenges Developing high self-esteem Promoting healthy attitudes about wealth Building a strong work ethic Providing financial education Passing wealth successfully Being a positive role model 29 Copyright 2016 Howard Stevenson

Some advice for wealthy parents Give everyone a place in the sun Emphasize the need to accomplish something Trust their judgment enough to allow moderate failures – choices must start early Give information early Fair, equal, need, contribution are discussable but the end result will never be “equal” You will not be the only role model – no child is a “mini me” Unsolicited advice is rarely appreciated but be prepared to ask and answer questions 30 Copyright 2016 Howard Stevenson

Live and learn 31 Copyright 2016 Howard Stevenson

The ultimate failing view If you can’t take it with you, then I am not going! Jack Benny 32 Copyright 2016 Howard Stevenson

More information at www. wealthandfamilies. com Books available at Amazon. com Copyright 2016 Howard Stevenson 33