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Hetty Green: The Witch of Wall Street

Larissa Fernand  |  25 Sep 2017Text size  Decrease  Increase  |  
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Morningstar believes there are important lessons to be learned from the world's greatest investors. We will therefore be publishing weekly articles on the investment philosophies and strategies of history's most successful investors.

If you are interested in the subject of today's article, please attend the Morningstar Individual Investor Conference on 6 October 2017. Our vice president of research, John Rekenthaler, will be traveling from the US to speak on the subject of Hetty Green. To attend, please register here.

 

On a November evening in 1907, an emergency meeting of New York city's most prominent bankers convened. The aim of the all-night conference was to arrive at a solution to stave off a run on the banks.

Referred to as The Panic of 1907, there were runs on banks in New York City in October and early November that year. It was triggered by a failed speculation that caused the bankruptcy of two brokerage firms.

President Roosevelt looked to JP Morgan to engineer a solution, who in turn invited others to brainstorm and strategise. In the midst of this high-powered meeting of suits in JP Morgan's private library, sat a veiled woman in a worn-out black gown.

Though despised by some, she was feared by many. In an age where women were not allowed to vote, she was a formidable character in high stakes finance who built a reputation as a ruthless loan shark.

That was Hetty Green, nicknamed the "Witch of Wall Street".

Green was born into wealth, inheriting a few million (varying accounts put it at $5 million to $7 million) in her early thirties. Being a brilliant strategist and shrewd investor, she converted that to $100 million over a span of 50 years.

The Telegraph gives a better perspective: When she died in 1916 at 81, she had an estimated $100 million in cash and owned more than 6,000 assets (railways, hotels, office buildings, theatres, churches, cemeteries). She was worth almost $200 million, which would have the purchasing power of about $4.5 billion today (this was written in June 2016).

By comparison, the estate of JP Morgan, one of America's most prominent bankers when he died three years prior to Hetty, was worth $80 million.

That probably made her one of the richest women in the world during her day and definitely the richest one in America.

Unfortunately, her personal quirks and eccentricities were more newsworthy than her financial exploits. Her disregard for fashion, and obsession with money and frugality, were ample fuel for gossip. While she had the skill and laser-sharp focus when it came to making money, she detested spending it.

She refused to turn on the heat, even in cold weather. Using hot water was too expensive. There was no need to eat lavishly--crackers, oatmeal, ham sandwiches and pies that cost 15 cents were just fine.

She bought broken cookies for her children because they were cheaper and returned the berry boxes for a 5-cent refund. She haggled with local merchants over every penny.

Why spend money on a decent wardrobe when her worn-out black shabby gown would serve the purpose? As a teenager, her father gifted her $1,200 to shop for clothes. She spent $200 and saved the rest.

She instructed the laundress to wash only the hem of her dresses to save money on soap. It was her black attire (gown, hat, veil, and cape--all in black) that earned her the sobriquet "Witch of Wall Street".

She refused to pay for decent medical care for herself or her children. Renting and constantly shifting home was a smart move since having a permanent residence would attract property tax (property tax collectors first had to establish proof of residency to collect personal property tax).

Once on her mantle she displayed a bouquet of "roses" made from dyed chicken feathers because it was cheaper and lasted longer than a bouquet of real ones.

Her penchant for thrift was as disgusting as it was bizarre. It even turned out to be historical (she entered the Guinness Book of World Records as the "World's Greatest Miser").

Known as the "Queen of Wall Street," the "Witch of Wall Street," "Hetty the Hoarder," "America's first female tycoon," and "Wall Street's first female financier," the life of this idiosyncratic lady has a storytelling charm to it that instructs as it amuses.

So how did Hetty Green make money?

Hetty learned the rudiments of finance at a tender age. As a child, she was required to read reports on the stock market and on various business transactions to her father who would carefully explain to her things she did not comprehend.

She was also expected to keep a strict account of personal and household expenses. By the age of 8, she opened her first bank account.

Hetty made her fortune during the Gilded Age. In case you are wondering, Mark Twain called the late 19th century the "Gilded Age." By this, he meant that the period was glittering on the surface but concealing decadence below--corruption, conspicuous consumption, and unfettered capitalism.

Upon her father's death in 1865, she invested her inheritance in government bonds, which were deeply discounted in the aftermath of the Civil War. The public were wary of the country's post-war prospects. Her faith in the government's ability to pay its debts rewarded her handsomely. She later claimed to have made $1.25 million from them in a year.

But it was stock market panics that really proved her mettle. When there was blood in the streets, metaphorically speaking, she kept her cool and benefitted from it.

The Panic of 1893 was a national economic crisis set off by the collapse of two of the country's largest employers, the Philadelphia and Reading Railroad, and the National Cordage Company.

When that happened, banks and other investment firms began calling in loans, since hundreds of businesses had overextended themselves by borrowing money to expand. This caused hundreds of bankruptcies, especially across banks, railroads, and steel mills. Over 15,000 businesses closed during the Panic of 1893.

During this time, Hetty loaned millions to individuals who put up their real estate as collateral. When they could not repay, she took the property. She also acquired property primarily through foreclosures from collateral underlying her bond investments. In this way, she acquired property scattered across states. It is said she received $40,000/month as rent only from her Chicago properties.

Her flint-eyed instinct to spot an opportunity was admirable. She saw the Panic of 1907 approach and began to maintain considerable liquidity for lending purposes. In the aftermath of the event, a number of major investors found themselves in her debt.

Upon her death, it was estimated that she owned 6,000 to 8,000 parcels of real estate across various states. Just the Chicago holdings were valued at $5 million to $6 million. Alongside hotels and office buildings she also owned cemeteries and mortgages to churches, estimated at around 28 when she died.

Though she never borrowed, she became the go-to person for loans--be it America's great cities like New York and Chicago, or a church. More than once she came to the rescue of New York City (loaned $1 million in 1898 at 2 per cent, $1.5 million in 1901).

In 1907, she gave $1.1 million in exchange for short-term revenue bonds at 5.5 per cent. In 1900, Tucson, Arizona, needed capital to finance the city's water and sewage system. She bought the entire bond issue.

As an investor, she was drawn to real estate, bonds, and railroad stocks, and confessed that she found them more attractive than mines, factories, or trade.

Hetty focused on buying low. She had the courage and nerve to buy when others were selling, and sell when everyone was buying. She never speculated or bought on margin. She had a preference for conservative and long-term investments, substantial cash reserves, and used a crisis to her benefit.

Though she never wrote a book or maintained a diary, she did share her thoughts on and off with reporters:

• Common sense and hard work are the recipes of success. Common sense is the most valuable possession any one can have.

• Before deciding on an investment, I seek out every kind of information about it.

• There is no great secret in fortune making. Buy cheap. Sell dear. Act with thrift and shrewdness and be persistent.

• Watch your pennies and the dollars will take care of themselves.

• When I see a good thing going cheap because nobody wants it, I buy a lot of it and tuck it away. Then, when the time comes, they have to hunt me up and pay me a good price for my holdings.

• Her advice to her son when he had to manage some mortgages she held that had fallen in value: Get the exact sum due on each mortgage, interest and principal, fixed in your mind ... If anyone is fool enough to offer you the full amount, take it. If you're offered less, tell the man you will give him the answer in the morning. Think the matter over carefully in the evening. If you decide it will be to our advantage to accept the offer, say so the next day. In business generally, don't close a bargain until you have reflected upon it overnight.

Her love for money might have been pathological and her obsession with frugality eccentric.

But going by her sheer business acumen, her single-minded intensity and sharp focus, at a time when women were shunned in matters of finance and not allowed to vote, the Witch of Wall Street could well have been called the Wizard of Wall Street.

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Larissa Fernand is the editor of the Morningstar India website, where this article initially appeared.

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