The Family Foresight Thought Experiment

Suppose you're a family patriarch who just sold the business you've founded and nurtured, leaving you with proceeds of $1 billion or so.  One night as you dream, you're visited by a sentinel from the future.  He informs you that one hundred years hence things are very bad: a dreaded virus threatens to kill a huge number of people.  Your granddaughter, as yet unborn, will be the only one who can develop the cure to save civilization.  She will be born with the brains, thanks to the genes you will pass down.  She will develop the sense of virtue and duty, thanks to the values you will pass down. 

The only thing she will lack is the money needed to manufacture and distribute the cure, which will cost in the neighborhood of $5 billion in today's dollars.

Your task is simply to invest your current $1 billion such that in one hundred years its real value grows five-fold, an annual real return of only 1.6%.  Suppose you are going to live another 50 years, during which you can actively oversee your portfolio, and then your handpicked successor will live another 50 years after he takes over. 

The idea is not to earn the highest return, but to more or less preserve the value of the portfolio against whatever comes: war, revolution, taxes, inflation, etc.  You must think of every possible calamity and take steps to avoid it.  Like a modern Knight Templar guarding the Holy Grail, you must safeguard this vital pool capital through the years until it can save civilization.

Everything is on the table, including:

1)  What companies do you invest in?
2)  In which domicile do you hold your capital?  What is the world's safest country in which to hold capital?
3)  Who will be the custodian of your capital?  Is there such thing as the world's safest bank?
4)  In what form do you hold your capital?  Do you trust paper money?  Do you trust stock certificates?  Do you trust the electronic system that we all rely on to tell us what we own?  Or do you feel you have to invest in hard assets?

How hard is it to succeed at this task?  Consider that if you'd started this experiment in 1908, you would most likely have failed if:

a) You held your capital in Germany, then probably the most scientifically advanced nation in the world.
b) You had your capital in British pounds, then the strongest currency in the world.
c) You were a member of any of the most noble families of Europe.
d) You had the equivalent of $10 billion and lived in Russia or what was then the Austro-Hungarian empire.

Comments

[phdinsuntan...:]

certainly not in a large multi-strategy hedge fund
or in a alibaba style gold cave,
woop dont spit to the heavens please,
a farms portfolio may deliver,
certainly countries with democracies
or at least with some property rigth bias,
there is anyone? Good question Nadav,
but to be honest, granddaughter
will need a state loan the way we are going.

2008 Sep 23 10:30 AM

[kowalski:]

That's an easy one:

(1) you set up a legal structure (off-shore) that will allow you to cash in investment gains tax free;

(2) you invest the billion into a diversified multi-national (and multi-currencies) bond portfolio;

(3) you reinvest the yearly proceeds (about 30 - 60 mio) into international real estate and land!

That should do it!

2008 Sep 23 10:38 AM

[Roberm73:]

Good fun
If you held physical assest from 1908, Gold Coins, Silver Coins, Hell even paper assest (Dollars of the day) you would see almost a 3-4 times return. Key underlinded of long term weath preservation is not to trust any goverment (all can fail), Land can be seized (russia), but if you and your hiers, have large physical assest and have them stored in several highly safe counties, (Swiss, Sweden) or in several global places with little chance of reveoultion (Small islands and nations).

2008 Sep 23 10:47 AM

[glassbox:]

I like this little puzzle - its a good distraction...:)

I would ask the sentinel from the future to take my US$1BN to the future and leave it with a fund manager there that can give a return of at least 30% a year. I would assume she doesn't need to use her US$5BN immediately. Of course, if she thinks its not enough - then, too bad...she'll have to find the other US$4BN herself. But US$1BN should hopefully be a good start.

Better the US$1BN in cash in the future than the devil of a financial sector today. With the current understanding of how our Wall Street smarties and regulators have screwed up the whole financial system - the $1BN today may be worth nothing 500 years later if its locked up in a bank.

2008 Sep 23 11:03 AM

[glassbox:]

Hahaha... maybe you should spend the billion to send trees to the moon with enough to keep the trees alive for the next 500 years. And if we go by how we humans have the tendency to blow ourselves and environment up every now and then, perhaps some real trees from the moon may actually be worth US$5BN in 500 years time!!

2008 Sep 23 11:05 AM

[ts2:]

Buy real estate in the largest 1000 cities of the world.

“Buy land, they're not making it anymore” - Mark Twain

2008 Sep 23 12:08 PM

[Larry MacDo...:]

Great post.... Benjamin Franklin did something like this over a 2 century period. His estate set up two funds to lend money to help apprentices start their own businesses at 5% over 10 years. Costs kept low by having volunteer administrators. Worked out well -- is the lesson to skip indirect channels -- e.g. financial markets?
fintrend.com/ftf/Artic...

2008 Sep 23 12:10 PM

[glassbox:]

What held value in 1500?? We are talking about 500 years here. Real estate boomed only because of industralization and urbanization.

2008 Sep 23 12:13 PM

[Sophisse:]

A very good perspective to keep in mind, at a time when today's dramatic price fluctuations seem to be shortening our time horizons - well, mine anyway.

2008 Sep 23 12:25 PM

[RedOrtic:]

Buy art masterpiece because the time is working for you!

2008 Sep 23 12:41 PM

[dieuwer:]

Use up the money now and let humanity die. Who cares anyway for 500 years down the road...

2008 Sep 23 12:56 PM

[dieuwer:]

A comet may strike earth one day after the vaccine has developped...

2008 Sep 23 12:57 PM

[Owen:]

It's funny that you mention the Knights Templar. While they started off as a purely religious order, they quickly turned themselves into a successful corporation. For almost 200 years, the Knights Templar were the largest and most successful financial institution in the world, dealing with currency trading, savings, loans, and large real estate investments. Their downfall was due to poor long-term risk management--a lesson as valuable now as it was in 1307.

The key to having your investment survive 100 years is to keep moving it to where property rights are strictly observed. Most of the richest European, Russian and Chinese families ignored the first signs of revolution (French, Bolshevik, Communist--you name it), and had their riches confiscated "for the good of the people." Switzerland and The Vatican are the only two places in the world that can claim a stable multi-century adherence to property rights, although if you're an American Citizen, your money isn't safe in Switzerland either, as the IRS has recently proved.

Abandoning the gold standard (1971) or a ban on certain types of equity transactions and nationalization of the country's largest insurance company (2008) may seem innocuous enough, but encroachments into property rights usually start off in seemingly innocent ways.

2008 Sep 23 01:02 PM

[Russian Bull:]

Buy 10 castles, buy some mercenaries, buy some farmland, buy some wives, distribute funds equally, bury the rest under the castles. Roll the dice, have fun while you're alive.

(this is a nice distraction)

2008 Sep 23 02:24 PM

[X-Soldier:]

The family patriarch, leadership, and taking the long term view on history --I definitely like the topic. But there's far more this fictional patriarch should be worried about rather than just "where should I put my money?" This whole view about saving civilization with money remains part of humanity's stumbling block.

2008 Sep 23 03:27 PM

[NateCarrFan:]

Given how laughably unpredictable the the events of 100 years are in the Modern Era, it would seem that the best thing to do is diversify your portfolio as much as possible. Although as I write this, it occurs to me that we can expect a calamity or two to occur over the next hundred years - whether it's a pandemic, a nuclear war, runaway global warming, who knows for sure - and so there should be a special emphasis in the portfolio on industries such as weapons, medicine, etc. that could actually benefit from a global disaster.

2008 Sep 23 03:37 PM

[Greybeard:]

Simple! Buy politicians. But be sure to diversify. Buy them in the USA, developed markets, emerging markets and frontier markets. You'll achieve your $5B sooner than later.

Then, just to be prudent, hedge maybe 10% of your portfolio into:

(1) vice (gambling, alcohol, luxuries)
(2) entertainment (media, gaming)
(3) educaction (there's always a need to propagandize the next generation)
(4) advertising (a portfolio of services that crosses over to all industries, including Governments and NGOs)
(4) global warming offset brokerages (or inset other scams here)
(5) Bureaus of Engraving (there's always a bull market in printing fiat currency somewhere)

2008 Sep 23 09:53 PM

[silver:]

easy - buy and store silver -20 some years left in the ground, what happens then?

2008 Sep 24 01:00 PM

[muguwmper12:]

How about gold, iron, silver, nickle, copper, platinum, aluminum, diamonds, rubbies, baseball cards, spatulas, bricks, land anywhere in the in the industrialized world ... come on now.

It's easy to find examples of investments that would have failed...but the list that would have succeeded is basically endless.

2008 Sep 24 02:46 PM

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2008 Oct 13 01:07 AM