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Timeless Rules for Financial Success
03/24/2006 12:00 am EST
What could Ben Franklin's advice mean for today's investor? Mark Skousen, who took on the challenge of compiling The Compleated Autobiography looks at Franklin's investment advice, which remains as timely today as it was 300 years ago.
"What most people forget is that Franklin was also a successful investor after he retired from his printing business at the youthful age of 42. Over the years he built up a substantial fortune, and relied on his savings and investment income to pursue a gentleman’s career in science, politics, and community service. Franklin built his investment retirement portfolio by saving, avoiding debt, placing well collateralized loans (bonds), and investing in rental properties. How did he manage his money?
Rule #1: Be an Optimistic Investor
"First, Franklin ignored the doomsayers and profited from his prediction that America was destined to be a great prosperous nation. An incurable optimist, Franklin was always bullish on America, and life in general. He was critical of the doomsayers and complainers: ‘I saw in the public papers of different states frequent complaints of hard times, deadness of trade, scarcity of money, &c.,’ he wrote in 1785. ’It is always in the power of a small number to make a great glamour. But let us take a cool view of the general state of our affairs, and perhaps the prospect will appear less gloomy than has been imagined." "Know the signs of the times. Franklin recognized a great future for America, as he took advantage and invested in real estate, banking, and other investments. In order to make the right investment decisions, you need to have a sound view of the future. What is the future of America and global investing? Measure the pros and cons and make up your own mind. There is always some investment area worth pursuing, whether it’s US stocks, foreign investing, precious metals, or real estate. There’s always a bull market somewhere.
Rule #2: Beware of ‘sure deals’ and limit your speculative opportunities, so as not to jeopardize your entire portfolio.
"You are bound to be misled and overly optimistic about some speculations. In 1769, Franklin joined with some partners and friends to seek a land grant in the Ohio territory of 20 million acres from the British Crown. He was told by his friends that the land grant was almost guaranteed. But five years later, nothing came of it. Ultimately, Franklin’s investment went up in smoke. Fortunately, Franklin’s loss was small. He made the mistake of mixing money and friendship, but avoided the temptation to put too much money into a 'sure deal'."Franklin’s land grant investment is not unlike speculations some of you may be tempted to take in penny stocks and ‘private placements’ with supposedly great prospects. Although there are some thrilling exceptions, most never fulfill their grand promises. My advice is to diversify and minimize your exposure to these speculations. Franklin said, ‘Experience keeps a dear school, but fools will learn in no other.’
Rule #3: Be Prepared for financial setbacks and diversify your holdings and limit your risks.
"Franklin made it a point of having a wide variety of income sources, so that a loss in one would not destroy his entire portfolio. In addition to earning income from his role as minister and postmaster, he maintained seven or eight rental properties; earned interest-bearing bank accounts in Philadelphia, New York, London, and Paris; invested in common stocks such as the Bank of North America, which paid a sizable dividend; and occasionally loaned funds at interest to individuals and institutions.
"His substantial interest and rental income from bank accounts and real estate saved him from several severe financial setbacks during his years abroad. He recognized the cycle of boom and bust in life, and prepared himself during the good times to survive the inevitable and unpredictable declines. In 1772, there was a banking crisis in England, but Franklin survived unscathed. ‘Being out of debt myself, my credit could not be shaken by any run upon me.’"Franklin warned, ‘Revenue without economy is never enough." All of us are hit with financial setbacks from time to time. That’s part of the business cycle. By always living within our means, even when those means occasionally shrink, we can always survive and prosper. Despite a ten-year war and numerous financial setbacks, Franklin died a very rich man, and has recently been ranked as one of the Wealthy 100, a ranking of the 100 wealthiest Americans of all time."
Editor's Note:The Compleated Autobiography, by Benjamin Franklin, compiled and edited by Mark Skousen, covers the final 33 years of his Franklin's career—as a revolutionary, diplomat, and financier—written in Franklin’s own words. It’s available at Barnes & Noble, Borders, and Amazon.com.
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