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The Money Game Part II: John Jacob Astor by Van K. Tharp, Ph.D.
Active Share — Panacea or Overrated? by D. R. Barton Jr.
Gold Analysis and Strategy by Florian Grummes
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The Money Game Part II:
John Jacob Astor (1773 - 1848)
I’ve chosen John Jacob Astor as the first person in my Money Game series because: 1) he was the first American millionaire, 2) he is considered to be the fifth richest American (based on wealth as a percentage of the GDP), 3) the 14th richest man of all time, and 4) he was good at playing the money game.
John Jacob Astor was born in Germany, the son of Maria Magdalena and Johann Jacob Aster. Although his father was a relatively poor butcher, John received a fairly good education. At an early age, he began working under his father as a dairy salesman.
Later, at the age of 16, John was able learn and become fluent in English when he immigrated to London and started working for his brother making musical instruments.
After the American Revolutionary War, and just a few months after his move to England, John moved to New York with his oldest brother, Henry Astor. With £5 in his pocket, John helped Henry establish a butcher shop. He became a peddler, hawking goods from his brother’s shop.
John got his financial start through marriage to Sara Todd, the daughter of the woman who ran the boarding house where Astor stayed. This marriage gave him two things: a dowry of $300, and a very smart woman who helped him considerably in his business dealings throughout his life. My guess is that women seldom get the credit they deserve for the financial success of the family.
The Fur Trade Begins
I haven’t been able to find out how he became interested in the fur trade but Astor was able to take advantage of the Jay Treaty between England and the United States in 1794. That treaty opened up the fur markets in Canada and the Great Lakes region of the U.S. While the British were given the rights to the Canadian Fur market, somehow Astor managed to plunge into the commerce in furs in that region on his own. Perhaps his advantage was that he simply engaged in fur trade there while other Americans thought it was only available to the British. Anyway, he started trading with the Mohawk and Seneca Indians, undertaking all aspects of the fur business — hauling, packing, and arranging shipment.
This sort of work was very labor intensive, but profits could be as much as 1,000% of the amount invested. So, if he invested his dowry in the fur trade, he could have made $3000 from his first venture; and in the late 1700s, that was a lot of money. As his wealth grew, Astor set up outposts so that the Indians would bring the furs to him; doing this, he was able to control the area as far west as Minnesota.
Finally, Astor got one of the more prominent fur traders in New York, William Blackhouse, to provide him with capital and act as his mentor. Astor would eventually name one of his sons William Blackhouse Astor after his mentor.
The Magnate of the Canadian Northwest Fur trade in London was the Northwest Company. Astor made contact with them and started importing furs for them from Montreal to New York. He then discovered that London was more lucrative than New York, so he started shipping his furs to London and then to all parts of Europe. By 1800, 11 years after moving to America, Astor had become one of the leading figures in the fur trade and had amassed about $250,000.
Furs and Shipping
Astor eventually acquired 12 ships for his trade. I’m not sure when he acquired them, but when you are a large scale exporter, it only makes sense to own the transportation as well. However, the British had been impressing American sailors for their own ships. To prevent such actions, President Jefferson signed the 1807 Embargo Act, which, of course, impacted Astor and his ships.
Astor was apparently friends with Jefferson. With a million dollars in hand, Astor got Jefferson to help him form a new company to trade with Russia and China. However, Astor’s real motive was to control the fur trade in the Pacific Northwest and along the Columbia River. Remember that Jefferson made the Louisiana Purchase in 1803 and Lewis and Clark had made their expedition to the Pacific Ocean. Astor wanted to be the first in business in the Pacific Northwest. He financed two prolonged explorations, one by land and one by sea. In 1811, his ship, the Tonquin, arrived at the mouth of the Columbia River after sailing around South America and the expedition formed Fort Astoria. Astor also financed overland explorations to the Northwest and his party helped discover the Northwest Passage and the Oregon Trail. Again, the big money game produced positive benefits for many.
John Jacob Astor and the War of 1812
Astor, of course, was opposed to the War of 1812 because he was afraid of what would happen to Fort Astoria. Indeed, the British captured it shortly after the war started. As a result, they held an area the size of the original 13 colonies for the next 33 years and took away Astor’s claim to the Pacific Northwest.
Regardless, Astor formed alliances with the British and the Americans — both sides in the war. The US was in debt by $17 million from the War of 1812 and Astor advanced nearly $10 million to cover part of it. I doubt he was worth $10 million by this time, but he did what many wealthy people do during wars: he advanced money and then sold the bonds at a profit. Indeed, when those bond prices declined, Astor bought more and sold them in London at a profit. Notice that at this point, Astor has alliances with significant people in London and with the president of the United States. Astor was considered a super patriot for funding the war, even though he sold many of the bonds in London, to America’s enemies. In the end, Astor made a huge profit by financing the war.
So far, we see several examples of Astor’s game:
- He saw profit opportunities and took advantage of them first.
- He developed an extensive network of people to help him, both influential Americans and influential British.
- He financed a war, although probably not using much of his own money. This was also a favorite tactic of bankers such as the Rothschilds and J.P. Morgan.
In addition, because of the lost fur trade, Astor joined the opium smuggling trade. Notice that, at this point, he doesn’t need any more money; now it’s just a game to dominate.
Astor’s American Fur Company purchased ten tons of Turkish opium and then used its own ship to sell them in Canton, China. However, the opium trade didn’t last long, because now, Astor had discovered how much the North American Indians liked alcohol. So he started trading liquor for food, which was a very lucrative profit center for him because the Indians were addicted.
In 1817, the U.S. Congress passed a protectionist law (Astor’s influence?) that barred foreign traders from U.S. territories. The American Fur Company now dominated the area around the great Lakes.
In 1822, Astor established Astor House on Mackinac Island as the headquarters of his American Fur Company. Astor’s business interests grew to span the globe in time and his ships were sailing every one of the seas. In 1834, Astor sold his business, but the American Fur Company provided him with $500,000 in yearly income for a long time.
Astor hired the famous author, Washington Irving, to write some of his stories on the fur trade. Irving published Astoria in 1836 and it became an instant best seller.
Astor’s Real Coup: Owning New York City
While his primary occupation was furs and later financing the War of 1812, Astor had sort of a hobby. As he acquired money, Astor began to acquire land in Manhattan and the surrounding area which eventually became New York City.
- In 1799, a politician named James Roosevelt sold Astor land that was too poor to farm for $25,000. It was the equivalent of 120 city blocks today.
- In 1804, Aaron Burr sold him Kings Farm and Richmond Hill for $62,500. Most of King’s Hill Farm was under a 99 year lease from Trinity Church, so Astor just sub-leased it.
- Astor also purchased 70 acres in north New York City for $25,000. Sixty years later it was worth $70 million and is now Times Square.
- Astor leased the Richmond Hill Mansion to the then-Governor of New York, DeWitt Clinton. Clinton also needed money, so he sold much of what is now Greenwich Village to Astor for $75,000 in 1805.
- Acquired the Eden Farm (most of midtown Manhattan).
- Acquired the Philipse-Morris title to 51,000 acres in Putnam Country (with help of Aaron Burr).
- State of New York claims against Astor led to many years of litigation, but Astor prevailed and sold property to NY State for $525,000 plus annual payments of $25K for the rest of his life.
Later in his life, Astor sold his Fur Company to concentrate on developing Manhattan and effectively became the landlord of New York. He constructed a five-story, 300-room hotel in Manhattan, The Astor House, in 1834. In his will, he left $400,000 to build the Astor Library, which was later consolidated with other libraries to become the New York Public Library.
When Astor died in 1848, he was worth $20-25 million—America’s first millionaire. If calculated as a percentage of the US GDP, his estimated net worth would have been equivalent to $110.1 billion in 2006 U.S. dollars. This would make him the fifth richest person in American history—ahead of Bill Gates. Most of his money went to his second son (the eldest had a mental problem), William Blackhouse Astor, who doubled the fortune to $50 million before he died. Interestingly, the first U.S. Income tax occurred during the Civil War and it was William Blackhouse Astor who brought suit against the U.S. and was able to get it repealed.
Astor and the Money Game
So what were Astor’s rules for playing the money game?
- Find unique opportunities and take advantage of them.
- Fur trade in Canada when it really was in British hands
- Corner the market if possible.
- Take advantage of new territories.
- Find an edge—trade furs for alcohol.
- Cover all aspects of your market (he did everything in the fur trade).
- When thwarted, do something else.
- Jefferson Embargo Act.
- Got Jefferson’s help in forming a new company to trade with China (but with ulterior motives).
- British take Ft. Astoria so
- Sell opium to the Chinese.
- Finance the War of 1812.
- Know key people and get them to help you. Those key people for Astor included:
- Aaron Burr,
- Gov. DeWitt,
- President Jefferson,
- And many influential people in London.
- Find a coach, mentor, financer (William Blackhouse).
- Sell everything and take advantage of other new opportunities as they arise.
- He bought and started to develop much of Manhattan.
There may be aspects to John Jacob Astor that I didn’t include, but to me, these cover his primary rules in the money game.
Next in the series, we’ll look at Commodore Vanderbilt, said to be the second-richest American and the 10th-richest person of all time.
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Skill and Luck in Trading Part 5:
Active Share — Panacea or Overrated?
It’s been a few weeks since we have dipped back into “the book that sat on Warren Buffet’s desk during an interview.” Let’s jump in for some stimulating, longer-term investing research.
In this series, we’ve been discussing concepts from an interesting new book, The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael J. Mauboussin. The author discusses the concept of “active share” that was coined by economists Cremers and Petajisto. Active share is defined as the percentage of a fund’s portfolio that differs from its benchmark. Let’s look at this concept and compare it to another concept that Mauboussin explores.
Morningstar, Active Share and Predictive Ability
Mauboussin takes a broad look at measures that provide persistence and predictability in sporting activities, business and investing. Spoiler alert: he discovers many predictive measures in baseball and none (of the ones he investigates) in business. Then, he turns his attention to investing.
In his quest for finding predictive ability in the investing world, Mauboussin first looks at the well-known Morningstar rating system. Morningstar assigns ratings to funds based on risk-adjusted performance. Our teachers in grade school called a similar practice “grading on a curve”. Morningstar gives each of the funds a 1 – 5 star rating based on a bell-curve or normal distribution. 35% of funds are put into the middling, 3-star rating, 10% into 5-star and 1-star ratings, and the balance is split evenly between 2 and 4-star ratings.
From a persistence perspective (how long does a fund out-perform or under-perform?), we find about what you’d expect – average performers tend to stay average, while extremely good and bad performers tend to revert toward the mean.
On the predictability side, Mauboussin finds that Morningstar’s rating system is not predictive. In fact, during his three year test period from 2008 – 2010, he found a slight negative correlation in the rating system.
Next, the author turned his attention to a study done by Cremers and Petajisto on active share. Their research shows a statistically significant correlation between active share and out-performance: the higher the level of active share, the higher the average performance of the fund. Put another way, active managers have outperformed the indexers.
I read a follow-up paper by Petajisto, published just two months ago, where he breaks down the different types of active share funds. His categories were Stock pickers (most active), Concentrated (combine active stock selection with exposure to systematic risk), Factor bets (less activity concentrated on seeking volatile influencing factors), Closet Indexers (very little active management) and Moderately Active (some active management but without a distinctive style). Interestingly, Petajisto found that those he deemed “stock pickers” accounted for most of the out-performance of the group, and that their out-performance was statistically significant across market cap styles as well as during the 2008-2009 financial crisis.
The latter two points seem to be made in an implicit response to a May 2012, non-peer reviewed, research piece done in-house by Vanguard. The piece attempted to refute Cremer and Petajisto’s earlier work.
The bottom line? Active share management has gained some traction in the investing world, so much so that the largest indexing funds are out trying to refute it. From a “luck vs. skill” perspective, active share’s statistically significant out-performance shows that skill does matter in investing. Due to the high level of the talent pool, this out-performance is moderate compared to other endeavors such as sports.
Next week, we’ll continue to dig more into dealing with the uncertainty inherent in trading and investing. Until then, I welcome your comments and feedback. Send them to drbarton “at” vantharp.com.
Gold Analysis and Strategy: March 10, 2013
by Florian Grummes
Florian has started writing his Midas Touch Gold Report in English again! From time to time we'll share his report with you. Click here to see the March report.
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