Chapter Thirty-Four Johnny Appleseed
The Latin phrase Quis custodies custodies warns that it's pretty hard to find hired agents you can completely trust. Investing for your retirement, you must be careful to avoid excessive transaction fees to pay your agents and minimize taxes to pay your government to watch your agents, who in turn watch the companies they invest in. Those companies are managed by hired experts, who are selected and overseen by a board of directors. The agents hired by the investors are charged with overseeing this process.
Gradually, the world is coming to accept John Bogle's idea of a market index fund as the best most people can do. Index funds don't even try to tell a good one from a bad one; they just buy them all in proportion to their size (successful companies grow, unsuccessful companies shrivel). Investing in the whole market,an index fund doesn't do much trading, seldom buying or selling. Therefore, it has minimum costs, minimum taxes. As a by-product, it has maximum diversification, hence maximum safety. Low costs and high safety don't automatically give the best performance, except that somehow they do. The Index Fund idea just relentlessly outperforms the vast majority of investment advisers, in both up-markets and down-markets. Investment advisers just hate index funds, bad-mouthing them constantly. But if you buy anything else, you had better have a very good reason to do so. The performance of an index is called beta; outperforming the index is called alpha. The sad truth is that most experts have a negativee alpha.
Well, it's just possible that a second Philadelphia-born idea can do the seemingly impossible task of showing a small but consistently positive alpha. The Pitcairn Foundation was created for his family by John Pitcairn, one of the world's all-time champion investors. About fifteen years ago, the Johnny Appleseed spirit caused the Foundation to open up its investment approach to non-family members; they created a public mutual fund company based on the collective ideas and experiences of the Foundation. John Pitcairn bought the Pittsburgh Plate Glass Company, nurtured it to success as PPG Industries, and then eventually sold it, based on the observation that almost no firms, family owned or otherwise, survive more than seventy-five years. Companies should be bought with the intention to sell them, even though they are managed expertly throughout their existence.
The Pitcairn Foundation observed that continuing dominance by a founding family almost always proved beneficial for the running of the company by hired expert managers. Notice that, while nepotism was often a bad thing in the managers, it could be a useful thing in governance. If you go too far with this idea, of course, you may get into the stifling arrogance of family control in European and Oriental firms. Founding family control keeps the managers from over-paying themselves or worse still, under-working themselves. But outside investors better watch these founding families; if you allow the inevitable minority of worthless family members to pilfer the company, you get the same thing at a different level of control, where it is even harder to fire them. There's a good idea here, but it needs a little extra.
|Pittsburgh Plate Glass Company|
After a great deal of intense scholarly work, it was observed that there are about six hundred major American corporations available for public participation where the founding family maintains control. Even this select group comes in two types. About a quarter of them have no "outside" directors other than the family, and the performance of these companies is about 15% worse than the index, suggesting the dominance of playboy directors. In the remaining group, family members only constituted about half of the outside directors. Now, that group of companies regularly perform 15% better than the index. Guess which type you ought to buy as an investor.
So, now we have the Constellation Pitcairn Family Heritage Fund, open to the public as a no-load mutual fund. Its portfolio consists of fifty-five of those six hundred families dominated companies (with a market capitalization of at least $200 million each), selected by the Pitcairn Financial company, entirely owned by the Pitcairn family. As long as it continues to outperform the index by 150 basis points, you can be fairly confident that the principle of family domination will endure, up and down the line. But not exclusively; somewhere it must be mixed with professional management. The family owns the fund manager, which is run by professionals, who watch the governance of the portfolio components, which are run by professional managers, overseen by founding family members on the corporate board -- themselves overseen by an equal number of non-family independent board members. It's like a Calder mobile, which by the way, is still another Philadelphia idea.
If you are looking to get rich fast, this isn't much of an idea. But since the Family Heritage Fund has consistently outperformed the index by 1.5%, it looks as though the advantage of selecting better corporate governance in the portfolio distinctly outweighs the disadvantage of reduced diversification. Maybe that's all it proves, but most of us poor saps don't even know that much.
Among the many churches centered in Philadelphia, the Swedenborgian is probably the least typical and most difficult to understand. The church does not actively seek out a new membership, but it welcomes everyone, in the spirit of Emanuel Swedenborg's observation that "All people who live good lives, no matter what their religion, have a place in Heaven." Without attempting to define the teachings of Swedenborg (1699-1772), who was quite able to speak for himself, it can be approximated that Heaven plays a central role in this belief system, and predestination does not. Although the ceremonial features of this religion are very similar to the Episcopal Church, its main emphasis is on good works as a way of attaining the reward of Heaven. In some ways, that is an unexpected position for a noted scientist like Swedenborg to take, since generally scientists lean toward Calvinism, with the mechanistic view that if God is all-powerful, then human free will must be impossible.
There are at least four divisions of the Swedenborgian religion, but the Bryn Athyn branch is most notable in the Philadelphia region. A very wealthy adherent of Swedenborg named John Pitcairn bought a large tract at Bryn Athyn and gathered the local church to live around a perfectly magnificent cathedral and church school. It is hard to think of any church in the Philadelphia region which approaches the magnificence of the Bryn Athyn cathedral. It has a special character that it was conceived and built during the crafts movement of the early twentieth century, with imported European workmen deliberately organized like medieval craft guilds. The central features of this workmanship reflect and then project the belief in personal individuality within the whole religion. No two windows, or doorknobs, or carvings are the same in the cathedral, reflecting the wish for each workman to devise his own unique creation and show the way of personal responsibility to the faithful. This cathedral is one of the things in the Philadelphia region most worth visiting, but to appreciate its quality you have to know what you are looking at.
Everybody in this church is unexpectedly hard to characterize. The Pitcairn Foundation was such a successful investor that it formed a mutual fund for others to share in its good fortune. Its central philosophy is to invest only in corporations which have been dominated by a single family, preferably the founding family, for at least fifteen years. There are about six hundred eligible corporations, and recent management scandals in the newspapers illustrate the Pitcairn's exactly knew the dangers of handing your assets over to a hired manager. This family-centered investing approach consistently yields better than the S & P 500, which in turn beats ninety percent of investment managers. You sort of get the idea you know where this family is coming from when you meet a courtly, meek, retiring but friendly person, who can say, "My mother is the only person I ever met who looked perfectly at home seated under a sixty-foot ceiling."
Two other famous Swedenborgians illustrate the unusual individualism of this religion. Helen Keller, the deaf-blind girl who overcame her handicap by going to Radcliffe and becoming a successful author and lecturer, for one. The other would be Johnny Appleseed (1774-1845), whose real name was John Chapman. Grammar school legends would have this bearded, barefoot vegetarian adopting a life of poverty like St. Francis, but in fact, he was an extremely shrewd businessman who died rich. He developed the business plan that American settlers would be going West into what was then the Northwest Territory, and having a tough time getting enough to eat the first year or two. So, he anticipated the paths of frontier settlement, and went ahead among the Indian tribes, planting apple trees. When the settlers arrived in the region, he sold them young apple trees and showed them what to do with them. Apples grown from seed are not the tasty morsels we know today but tend to be rather shriveled and bitter. So Johnny showed them how you make cider, and if you let it sit around a while, hard cider. The settlers would use the pulpy squeezing for compost, and he would be back to collect the seeds from them so he could continue his business plan in the next county. In short, he showed them how to drink the apples. He also let the Indians pick the apples, so they liked him and spared him the common troubles of the frontier.
If you are going to boil apples, you need a pot, and Johnny often carried his like a hat. He wasn't a nut, at all, he was a showman. In his backpack, he was also carrying a Bible. And in his head, he carried a motto, "All religion has to do with life, and the life of religion is to do good."
Who Watches the Watchmen?
The no-load, open-ended, mutual fund run by the Pitcairn Foundation has consistently outperformed the index by 1.5% as a result of concentrating on firms which continue to be overseen by their founding families.
The Swedenborgian Church
The Swedenborgians belong to the Church of the New Jerusalem, following the teachings of Emanuel Swedenborg, and strongly emphasizing personal responsibility, individuality, and good works. The Philadelphia branch is particularly strong, centered around a magnificent medieval cathedral in Bryn Athyn. Johnny Appleseed and Helen Keller were notable adherents, and a driving force has been the Pitcairn family of industrialists.