Investing in Land
“Gerson Bleichroder was a nineteen-century German Jew who had a life filled with immense financial triumph, persecution, and personal sadness. Otto Von Bismarck represented the Old Prussia – aristocratic, agrarian, hierarchic – and it was his ambition and vision that welded the First Reich into an empire. In 1859, when he was 37, Bleichroder became the banker and investment adviser for the rising Junker diplomat, and for 30 years the two leveraged their insights and power to achieve great wealth and prominence. In nineteenth century Germany, it was the custom of the Prussian aristocracy to employ a Jew as “a more or less occult instrument,” as Bismarck so exquisitely put it. Incidentally, that’s the ultimate compliment for an investment adviser.
[edited...not particularly relevant for the issue at hand...]
“Bismarck, the Prince, worked hard at projecting a magnificent exterior and omnipotence….His primary obsession, other than ruling Germany, was with making money in the stock market so he could buy more and more timberland. He treated everyone around him abominably.
“However, both men must have had that mystical “seeing eye,” which enabled them to perceive the future chain of events that would be triggered by an action in the present. This is what successful investing still is all about. While suspended in the midst of times that were full of mystery, uncertainty, and doubts, they had the capacity to maintain their pose and world view and never to impatiently or irritably reach for a fact or conclusion.
“Bleichroder exploited the insights that Bismarck provided to make both his patron and himself very rich. But he also had what Bismarck once referred to as “a certain timidity in investing.” He told his clients he would attempt to get them over the long run a real return (after inflation) of 4% per annum, which would mean that the purchasing power of their wealth would double every 17 or 18 years. His timidity kept him from becoming engulfed in the new-issues market of the 1870s or in the mania for colonial investing that later wiped out so many men and German banking houses. In other words, he became very rich because he endured. I calculate that Bismarck’s account with him compounded at about 10% per annum over 25 years and that inflation averaged less than one percent. Bismarck was perfectly satisfied with this return, but always withdrew his profits and invested them in land and trees.
“Bismarck’s appetite for timberland was insatiable. His theory was that the price of land would gradually appreciate in line with population growth, or about two percentage points annually. His studies had convinced him that German forests would grow 2.75% a year, so that his real return for timberland would be around 4.75% per annum, because inflation at the time was virtually zero. If there was inflation, he was sure timberland and log prices would appreciate in line with the inflation. He thought that with very little risk, this was a spectacular compounding of wealth. As it turned out, Bismarck was absolutely right.
[*EMPHASIS ADDED*] “Over the next half century in Germany of war, inflation, surrender, and depression, timberland held value far better than anything else.”
-Barton Biggs (Hedgehogging)
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