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Frank A. Weil

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Can You Have Your Cake and Eat It Too?

Posted: 08/20/2013 4:06 pm

Mistakes occasionally turn out to be colossally successful. Can you organize your life to make that possible?

A number of years ago, there was a very well known and respected business man/ lawyer in Washington, D.C. who made hundreds of millions of dollars, primarily held in shares of the company he helped to found and lead. While the company prospered, and he served on its board, he set out to become a significant art collector. Over a number of years, he spent as much as fifty million dollars and established himself as an important collector with a great eye, as well as a major supporter of worthy causes that were very dependent on his help. His tax advisors told him to borrow the money for the collection, which he was well able to do.

(The reason for that was simply that by not selling shares and paying a capital gains tax and waiting for his ultimate death, when all the art and shares would get a new cost basis for estate tax purposes, he would be able to skip all the gains taxes. Smart advice! But...)

The BUT was the big mistake.

Suddenly and unexpectedly the company under his leadership hit upon hard times; its shares fell about 90 percent. He quickly found a new leader, the company soon began to recover, and in due course recovered all its lost value and a lot, lot more.

Meanwhile, the banks that had lent him the fifty million dollars grew worried, as the loans exceeded the value of the shares that had been pledged as collateral. So the banks did the typical friendly banker thing: they called the loans but gave him a bit of time to pay them off.

He then for the first time thought about selling art instead of buying it. He quickly discovered that his collection had become worth more than three times what he had paid. He selectively began to part with, at first, the paintings he least liked and was able to pay the bank well over two-thirds of what he owed within a month or so. By the end of six months he had repaid the loans completely and still had about three-fourths of his fabulous collection.

He had no doubt lost a lot of sleep and some face over the collapse of his baby. But, he never lost faith and never sold of a share of his company's stock. His community support wavered only briefly. And, in due course over many years the company prospered beyond anyone's imagination.

After his death, his home, the one that held the collection, became a marvelous pocket museum which has enriched countless visitors and all of Washington.

While this is a very grand example, there is wisdom and advice for everyone.

If a person spends their fun money in consuming expensive food and wine or boats, for example, when bad times come, as they do always predictably, there is less to placate demanding creditors. Diversification and spending primarily on things that can appreciate, AND that provide pleasure at the same time, is usually the safest way to use discretionary money that may be available.

The lesson in all this is that, after all, one can, if one is a bit lucky and shrewd, 'Have the cake and eat it too' if you follow the rules.

The person who inspired this story and will live on forever with greatest respect, particularly among people who live in Washington D.C., was David Kreeger, and his company is GEICO, now owned by Warren Buffett.

 
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