The Way to Wealth

The Way to Wealth: Three Rules That Made Ben Franklin One Of the Top 100 Richest Americans

by Mark Skousen, Chairman, Investment U
Thursday, January 12, 2006: Issue #502

Nothing but money is sweeter than honey. - Ben Franklin

Ben Franklin is famous for giving advice to aspiring entrepreneurs on ways to create and maintain a profitable business.

The Way to Wealth (published originally as part of his Poor Richard’s Almanac in 1758) is an inspiring “how-to” pamphlet filled with Franklin’s maxims and proverbs on how to build a successful money-making enterprise.

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. Despite war and numerous financial setbacks, he died a very wealthy man, and today is listed in the Wealthy 100: The 100 Wealthiest Americans in History.

Having just completed the final 33 years of his famous Autobiography (more on this later), I can tell you how he did it. It’s an amazing story…

Ben Franklin’s Sound Investment Philosophy

In 1743, at the age of 42, Ben Franklin turned over his printing business to his partner David Hall, receiving an annual income for over 20 years afterwards. He never completely retired, however. He worked for the government as a postmaster, colonial agent in London and minister to France. Nevertheless, 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’s way to wealth included building his investment retirement portfolio through saving, avoiding debt, placing well-collateralized loans (bonds) and investing in rental properties.

So how did Franklin manage his money?

The Way to Wealth Rule #1: Be an Optimistic Investor

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 clamor. 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.”

At the end of the War for Independence, he predicted, “America will, with God’s blessing, become a great and happy country.” The United States, he said, is “an immense territory, favored by nature with all advantages of climate, soil, great navigable rivers and lakes. [and] destined to become a great country, populous and mighty.”

In his Autobiography, he told the story of an elderly man who repeatedly predicted economic depression and a real estate collapse in Philadelphia, and warned Franklin to sell his printing house and his real estate investment holdings. Franklin ignored his advice and prospered. Eventually, he said, “I had the pleasure of seeing him give five times as much for one [piece of land].”

Chairman’s Note: Know the signs of the times. Franklin recognized a great future for America, for he took advantage and invested in real estate, banking and other investments, even during a time of war. 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. Personally, I’ve found there is usually some investment area worth pursuing, whether it be U.S. stocks, foreign investing, precious metals or real estate. There’s always a bull market somewhere.

The Way to Wealth Rule #2: Beware of “Sure Deals”

Limit your speculative opportunities, so as not to jeopardize your entire portfolio with speculations that promise “guaranteed” profits. You are bound to be misled and overly optimistic about the risk involved.

In 1769, Franklin joined with some partners/friends to seek a land grant of 20 million acres in the Ohio territory from the British Crown. His friends told him that the land grant was almost guaranteed. “We were daily amused with expectations that it would be completed at this or other time, but I saw no process made in it,” he wrote a friend. His British agents frequently promised that the deal would take place “any day now,” but five years later, nothing came of it. Ultimately, the partnership was never granted the land, and 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.”

Chairman’s Note: Franklin’s land grant investment is not unlike speculations some of you may be tempted to take in penny stocks and “private placement” with supposedly great prospects. Most never fulfill their grand promises. My advice is to diversify and minimize your exposure to these speculations. “Experience keeps a dear school, but fools will learn in no other.”

The Way to Wealth Rule #3: How to Handle Financial Setbacks

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 sizeable dividend; and occasionally loaned funds at interest to individuals and institutions.

His sizeable interest and rental income from bank accounts and real estate saved him from several severe financial setbacks during his years abroad.

In 1767, while colonial agent to England, his long partnership in the printing business ended. “A great source of my income was cut off,” Franklin wrote, forcing him and his wife to become more frugal in their spending habits. He limited himself to a “single dish” when dining at home.
In 1772, there was a banking crisis in England, but Franklin survived unscathed. “I only hazard a little using my credit with the bank Being out of debt myself, my credit could not be shaken by any run upon me.”
In 1774, Franklin suffered the most serious blow to his finances. As a result of the Hutchinson Letters scandal (where he sent confidential letters among British officials to America, where they were published), Franklin was vilified in England and fired from his job as postmaster and colonial agent, which amounted to a loss of £1,800 a year in income! Frugal living and their sizeable savings and income properties saved them from certain disaster. Late that year, his devoted wife Deborah died, and he was forced to return home.

Chairman’s Note: Franklin warned, “Revenue without economy is never enough.” All of us are hit with financial setbacks from time to time. By always living within our means, even when those means occasionally shrink, we can always survive and prosper.

Despite a 10-year war and numerous financial setbacks, Franklin died a very rich man. At the end of his life, he said he wanted to be known as “a man who lived usefully,” rather than “a man who died rich.” It turns out that he became known for both!

Franklin’s life is worth studying as a resource for building your own wealth. This year, we celebrate Franklin’s 300th birthday, and of all the Founding Fathers, Ben Franklin can probably teach us the most in terms of practical advice in business and investing. I urge you to pick up a copy of The Compleated Autobiography, by Benjamin Franklin, which I compiled and edited. This new memoir, covering the final 33 years of his illustrious career - as a revolutionary, diplomat and financial guru - is all in his own words.

Good trading, AEIOU,

Mark