You probably know that Thomas Jefferson wrote the Declaration of Independence. You may remember that he negotiated the best real estate deal in the entire history of America when he purchased the Louisiana Territory from Napoleon for spare change.
Jefferson also deserves credit for a bunch of other clever stuff, too. (As well as some criticism, I’ll note in passing, but let’s remember this is a blog about small business entrepreneurship and personal finances—not about politics.)
Yet, there’s something you may not know about Jefferson—and that is this: He was in the end a total personal financial disaster. In fact, he was saved from bankruptcy only because he died (on July 4, 1826) a few months before creditors auctioned off all of his property.
I wish there was some set of clever financial planning or business management lessons to be gleaned from Jefferson’s life. But, I fear, we don’t really get lessons of that sort from the great man. Rather, we get lessons about what we should not do.
Here, then, are the pieces of that part of Mr. Jefferson’s life story that jump out to me…
Lesson #1: Smart People Don’t Always Make Smart Money Decisions
A first quick point: Jefferson was supposedly a 160 IQ genius. (I’m not going to point you to links that state this, but you can find them with a quick search. Note that IQ tests didn’t exist when Jefferson was alive and so the people supplying these values are either guessing or parroting the guesses of others.)
In any case, Jefferson, was obviously a terribly clever person, a brilliant politician and a powerful writer. Yet here’s the surprise of sorts: he just wasn’t self-aware enough to realize that spending more than he made would ultimately destroy his family’s finances.
Joseph Ellis, the history professor who wrote the bestselling book about Jefferson, American Sphinx, said in his book that on another subject (Slavery) Jefferson’s approach was to combine procrastination and denial as his principal problem solving techniques. But you see the same problem solving approach used with his finances.
Note: It’s striking if you compare Jefferson’s Monticello with George Washington’s Mount Vernon that the richer man, George Washington, apparently lived far more frugally.
I feel awkward saying this, but if a great man like Thomas Jefferson can totally bungle his personal finances, hey, we all need to be more careful. Maybe especially as we age.
Lesson #2: Leverage Amplifies Financial Risks
You know something else that Jefferson’s finances illustrate? Using lots of borrowed money to “run the show” is risky.
Yes, leverage amplifies your gains. If you borrow money at 4% and reinvest that money in something that earns 8%, you make out like a bandit.
But the amplification works both ways. If you borrow money at 4% and then lose at the rate of 8%, you quickly get killed. At least financially.
Joseph Ellis, whose book I just referenced, wonders aloud in his book whether Jefferson’s investments in land (which is where he was investing) allowed Jefferson to think his investments were far more solid that was in fact the case. Which is interesting to ponder.
People sort of did that with real estate during our recent financial crisis at least initially. If the building or house or land someone bought was high quality, people almost didn’t care about the debt they incurred.
They confused the quality of the underlying asset with the quality of the investment arrangement. (This can apply to entrepreneurs and investors in lots of circumstances, right? We see some highly attractive asset, but then acquire it in a manner that means the investment is unstable or financially-shaky from the start.)
Lesson #3: Financial Risk Blindsides Even the Super Wealthy
A final quick point is about whether the top 1% … or maybe more accurately the top 1% of the top 1% get special advantages in the capital markets and in their entrepreneurship.
You might assume they do, right? You might, for example, fairly assume that the super wealthy (as Jefferson was in his day at least early in his career) are somehow well-enough connected or so “in-the-know” that they can avoid economic disasters and in fact pick up special bargains when things get crazy.
But that’s not really true at least in Jefferson’s case. (Or in the case of Jefferson’s friend and another U.S. President James Madison.)
Though Jefferson was obviously top tier in terms of his business and political connections, and though he had access to the very best political and economic information available, he was just slammed by the economic storms triggered by the panic of 1819. (This subject I will provide a link to. Here’s the relevant, though brief, Wikipedia article: Panic of 1819. )
Gosh, I hate to speak in cliches, but we all need to be careful and cautious in our investing…
Final point: If you get a chance to visit Monticello, do it. It’s a great experience. And by the way, I’d recommend reading Ellis’ book before you visit.