Invest like a genius: The investment secret of Benjamin Franklin, Albert Einstein and Warren Buffett

Invest like a genius: The investment secret of Benjamin Franklin, Albert Einstein and Warren Buffett

12 min read

‍Unlocking a concept that captivated three of the greatest minds in history

It’s no secret we all want to make smart investments. The hard part is figuring out what to do. No matter how much we read, how many professionals we listen to, it’s still difficult to know what to believe and who to rely on. Sometimes the more we listen, the more confusing it can get.

We live in an unpredictable world, as the events of 2020 have forcefully reminded us, with markets prone to volatility and cycles that can be challenging to time. So where to begin? What fundamental philosophies should we be relying upon for long-term investing success?

I’m going to share an investment idea as powerful as it is timeless. And I don’t want you to take my word for it. I’ll let three of the smartest people in history tell you the simple secret that each discovered. Then I’ll show you how to use it in a very powerful way.

Over the course of my career, spanning over $40 billion in investments, I’ve built large companies from the ground up in the real estate finance world, net lease world and sports world following the same guiding principle: discover new and better ways to think about old ideas. As Myron Scholes, the Nobel prize winner in economics, once said, “sometimes we need to break the tyranny of the status quo,” and that has proven true in the investment world again and again. Over the last several years, one new idea in particular has emerged that I believe has the potential to be very profitable, based primarily on a concept the three geniuses below discovered many, many years ago.

One was an inventor, experimenter and widely considered one of the wisest men in all of America during its formative years some two centuries ago. You may recognize him from the $100 bill: Benjamin Franklin.

One is synonymous with scientific genius, one of the greatest thinkers of the 20th century, who discovered the deepest truths about the universe: Albert Einstein.

And the last is known as a financial genius, and often called the greatest investor of the last five decades: Warren Buffett. 

What makes these men such outliers is their uncanny ability to take the complex world around us and boil it down to simple truths. Franklin took life’s complicated lessons and refined them into Poor Richard’s Almanack. Einstein took the incredibly difficult connection between the major physical forces in our world and created the simple equation, E = mc2. And Buffett takes all the lessons he has learned about investing and turns them into a simple letter he shares every year.

So it’s not surprising that, rather than some complicated investment theory about Fibonacci numbers, or triple witching option trades, the idea that struck the deepest chord with all three of them is a simple one. And this simple idea is probably one you have all heard about.

Compound interest.

I know what you’re thinking – that’s it? That’s the genius investing idea?

Well, yes. Sort of. Franklin, Einstein and Buffett shared the secret. They just didn’t tell us how best to use it.

Here are some clues about how influential they considered compound interest to be:

• Buffett called it one of the three things that made him rich when he said his “wealth has come from a combination of living in America, some lucky genes, and compound interest.”

• Einstein was rumored to have called it “the most powerful force in the universe.”

• Franklin was fascinated by it and built a legacy employing it in his Franklin Trusts for Boston and Philadelphia, turning $4,000 into $6.5 million.

Compounding is the simple idea that each of them recognized had incredible potential. But, of course, there’s a catch. While sometimes the most powerful investment idea is also the simplest – it’s also true that sometimes the simplest idea is the hardest to follow.

It turns out that figuring out how to harness the power of compounding as an investor—how to capture and take full advantage of it—is actually quite hard. Several years ago, my partners and I set out to solve this puzzle: creating a new way to use compounding to create wealth that would be simple to follow and deliver on the full promise of this time-tested investment idea.

Before I share what we discovered, let’s start by taking a closer look at compound interest and see if we can figure out why it’s so powerful.

Franklin described compound interest this way: “Money makes money. And the money that money makes, makes money.”

That’s the key. The money that money makes has to make more money. This is the concept that has created much of the wealth in our country and it is what creates something I like to call the “wealth curve.”

The curve you’re seeing is a pretty simple illustration of compound interest – investing in something that

grows at 5% and reinvesting all the returns at 5%. You can see the first part of the curve looks flat and then, all of a sudden, it starts to turn upward until the numbers start to get really exciting. That curve, that moment when compounding picks up steam, is the “wealth curve”. The earlier it starts, the faster your wealth grows.

Pretty powerful graph, isn’t it? We thought so too. We were fascinated by it and wanted to understand it better. So we started researching, taking a trip back in time to inform our future.

An investment 700 years in the making

The first written record of compound interest is from a 14th century ledger maintained by Francesco Balducci Pegolotti. A shipping merchant, Pegolotti came up with a table that showed merchants what they would owe in the future if they didn’t pay on time, adding any unpaid interest amounts to the principal and charging interest on those amounts as well as on the original principal. And thus, compound interest was born.

Mind you, interest of any kind was still an unusual thing. In fact, charging interest was illegal in England until 1545. But then, in 1613, Richard Witt wrote a paper, now housed in the British Museum, that applied the idea of compound interest to the worlds of real estate and investing. It is really the first time the full power of the idea was laid out in practical terms and the significant difference between simple interest and compound interest was made clear.  

Which brings us to back to Franklin, who understood the power of compounding and set up two trusts, for Boston and Philadelphia, that started with $4,000. He stipulated that nothing could be taken out of the trusts for 100 years. He wanted the money to make money, and the money that money makes to make more money. In fact, he went even further and said you can spend some after 100 years, but then I want it to grow and compound for another 100 years. The end result speaks volumes: the $4,000 grew to $6.5 million.

(I’m guessing not many of you want to wait 200 years to get wealthy. Fortunately, we’re pretty sure we’ve solved that problem.)

Next we come to Einstein, who was likely to have understood this concept not so much with regard to investing, but rather to nuclear fission. In a nuclear reaction, one neutron hitting one other atomic nucleus is uninteresting. Somewhat like simple interest, nothing big happens. But when the first neutron hits a second atom, and that atom creates neutrons that hit more atoms, all of a sudden, you have a nuclear reaction and something very big happens. This is why Einstein may have called compounding “the eighth wonder of the world.”

But Einstein was no investor. Someone who is and understood this idea is Buffett. When Buffett says compound interest is one of the three things responsible for his immense success, we should all take note.

Look at the shape of that graph. Remember the wealth curve? The early years don’t look like anything special, but something important is happening – something that only starts to show up after many years, something that is the key to creating wealth. What’s happening is, you guessed it, compounding. And that shape is the key to what we created to harness this profound investment concept.

From the ground up

We know that these wise men have told us compounding is a very powerful investment idea – maybe the most powerful of them all. But what’s the other half of the secret, the part that allows us to reap its full investment potential?

After all of our research, building upon all the lessons learned in our careers, we landed on an asset class that perfectly captures the power of compounding – one that has already created enormous riches for many of the world’s wealthiest families, churches and universities.

Unfortunately for investors of the past, the asset class that made those fortunes had never been brought into the modern investment era, had never been made widely available, and had never been transformed into an institutional asset class by a large public company.

The asset class? Ground leases.

For those unfamiliar with ground leases, every real estate property is comprised of a parcel of land and a building. In a ground lease, the owner of the land and the owner of the building are separate. The building owner leases the land for a long time, usually 99 years, pays rent to the land owner, manages and runs all parts of the building’s operations, pays all expenses and keeps all the profits from building operations. When the lease ends, the building becomes the property of the land owner.

When ground leases are properly structured, they are beneficial for both the land owner and the building owner. For building owners, they offer a value-enhancing combination of capital efficiency, cost efficiency and risk reduction. For land owners holding the ground lease, it’s an investment with three attractive characteristics: safety, growth, and upside.

One of the things that’s so appealing about ground leases is they’re one of the safest real estate investments you can make. They generate long-term, contractually increasing cash flows, and they offer future ownership in high-quality buildings when the lease expires. What particularly captured our interest was the shape of the rental payments.

See the chart below showing the income stream of a ground lease – there’s that wealth curve again. No wonder ground leases have been a favorite investment of some of the wealthiest investors for centuries. But how do you get your hands on an institutional quality ground lease? You probably can’t. Most owners won’t sell them once they get a hold of one and they rarely come up for sale.

But what if we could solve that problem? What if we could make ground leases better for building owners and give investors a way to own a growing portfolio of institutional ground leases concentrated within the top cities in the U.S.?

So that’s what we did.  We created a company, Safehold, to break the tyranny of the status quo, and build a whole new industry.

Founded in 2017, Safehold is the first publicly-traded, nationally-scaled, institutional-quality company making ground leases an asset class available to all investors. The best part? Not only are we benefiting from the compounding nature of contractually obligated rental payments, we’ve also found a new way to create additional compounding benefits.

Actually, two new ways.

While one ground lease can offer up to 99 years of increasing and compounding cash flows, Safehold is building a portfolio of ground leases around the country underneath some of the highest quality office buildings, apartment buildings and hotels. This growing, diversified portfolio not only creates a unique, very safe, long-term, compounding cash flow stream, it also adds compounding portfolio growth to the value creating equation for shareholders. That’s our second compounding benefit.

And because the buildings on top of our land transfer to us at the end of the lease term, Safehold is also building a growing pool of future ownership interests in those buildings, effectively creating a trackable capital gains account that is also compounding. This is a third compounding benefit.

If you leave with only one takeaway after reading this, focus on the shape of the three curves we just looked at. All compounding curves, creating wealth in the way that has intrigued great minds, benefited great investors, and created great fortunes.  

So, here it is: our simple, three-part formula to help all of us start building wealth:

a) Geniuses have been telling us for centuries that compounding is the key to building wealth.

b) Ground leases are a powerful compounding investment, the most powerful we could find, and

c) Safehold is the first company to make available the benefits of modern ground leases to public company investors of all kinds, delivering three long-term compounding wealth curves simultaneously.

Our journey may have just begun, but we are excited to be following the path laid out for us by the formidable footsteps of our three geniuses.

Jay Sugarman is the Founder, Chairman & CEO of Safehold (NYSE: SAFE), iStar (NYSE: STAR) and the Philadelphia Union of Major League Soccer (MLS). He helped start Starwood Capital, now one of the largest real estate investment companies in the United States, and has managed private investment funds on behalf of the Burden family (a branch of the Vanderbilt family) and the Ziff family. Sugarman received his undergraduate degree summa cum laude from Princeton University, where he was nominated for valedictorian and received the Paul Volcker Award in Economics. He received his M.B.A. with high distinction from Harvard Business School, graduating as a Baker Scholar and recipient of the school’s academic prizes for both finance and marketing.

Unpredictable economic headwinds are creating challenging conditions for owners, lenders and buyers to have conviction in their valuations.

This is leading to a lack of liquidity in the capital markets, where owners are hesitant to sell at higher cap rates. Meanwhile, buyers and lenders are reluctant to execute transactions without a clearer sense of the cost of capital in the near term.

Consequently, the commercial real estate industry is at a crossroads, and building owners that have historically focused on traditional fee simple ownership are becoming increasingly open to more efficient capitalization strategies.

As a leader in the modern ground lease industry, Safehold helps asset owners maximize the efficiency of their capital stacks by providing low-cost capital — all while mitigating development and debt maturity risks and generating a strong return profile, said Tim Doherty, Safehold’s recently appointed Chief Investment Officer.

“Existing owners are facing refinancing at higher costs and potentially lower proceeds,” Doherty told Bisnow’s Studio B. “Developers are also seeing lower debt proceeds and higher pricing, and buyers are struggling to meet the bid-ask spread.”

Bisnow spoke with Doherty to learn more about what he is seeing in the market and the advantages of modern ground leases in all economic conditions.

Bisnow: How would you characterize the mindset of building owners and developers in this market?

Doherty: The volatile market has definitely made it difficult for owners, lenders and buyers to have confidence in their valuations, leading to a standstill in the capital markets. Owners don’t want to sell at higher cap rates, and buyers and lenders are not confident where the cost of capital will be in the near term to execute deals.

But we are seeing market transaction volume increase. People are picking their spots and executing where there is liquidity. They’re going after markets where the valuations have changed, but the fundamentals haven’t. Multifamily and industrial are great examples of product types that continue to have strong fundamentals.

Bisnow: Safehold pioneered the modern ground lease. How has the perception of ground leases changed since then?

Doherty: Pretty dramatically. When we started, the market’s perception was very different from what it is today. Before we created the modern ground lease, they were inconsistent, poorly conceived and overly complicated. We provided consistency and simplicity, taking into account the interests of all participants, including lenders and owners.

We’ve now executed over $6B on more than 135 deals across numerous markets and asset classes for different types of capital needs. This includes development, acquisition and recapitalization. It’s one thing to see the hypothetical concept. It’s another to actually see it working in practice and generating higher returns for owners, operators and developers.

With over seven years of track record, we have seen several round trips and refinancings of leasehold positions, which have demonstrated the liquidity of the leasehold position as well as the increased returns for our clients.

Bisnow: What are the key structural advantages of a modern ground lease relative to traditional real estate capital?

Doherty: It goes back to the cost of capital. We’re a low-cost provider, and cheaper than all other CRE capital available. Simplicity, consistency and a low cost of capital allow us to provide our customers with accretive, passive capital to drive better returns.

Leasehold owners benefit from less equity required upfront, eliminating friction costs throughout the term and significantly reducing refinancing risk.

Bisnow: What is your investment team focused on in the near term?

Doherty: In a volatile market, you’re always looking for sectors and deals that are actionable. You’re going into areas that are impacted on the value side, but not the fundamental side. Office has been hit on both, so that’s a very difficult one for people to peg down. You don’t know what your revenues are or what the valuation method is yet.

Residential, including multifamily, student housing and build-to-rent, is the biggest sector we’re focusing on right now because the fundamentals have not changed, even if certain markets might be seeing near-term deliveries.

Existing owners are facing refinancing at potentially less proceeds than they currently have outstanding. This is creating a capital need that can come in the form of fresh equity, such as cash in from the existing owner or new, high-priced preferred equity.

Alternatively, Safehold’s low-cost, highly accretive capital enables owners to create a more efficient, conservatively priced capital stack that reduces and, in some cases, eliminates the need for additional equity required while driving better returns.

Bisnow: How do Safehold ground leases impact leasehold liquidity when building owners sell their assets?

Doherty: We’ve seen 42 sales and refinancings behind our ground leases, so the proof of concept is there. In these transactions, the cap rates have been very similar to fee simple comparable transactions, both on multifamily and office assets, with a range of no spread on cap rate to about 10 to 15 basis points.

Having a track record on third-party market transactions has been a powerful part of the liquidity story for Safehold’s modern ground lease assets.

Bisnow: How should owners evaluate the option of a modern ground lease structure for their needs?

Doherty: We’re always here to help new clients understand the benefits for their assets as well as the liquidity track record we have seen produced with our existing clients.

In today’s current environment, we are seeing a lot of demand across all property types. The most active market is currently multifamily — acquisitions, development and recapitalization. The ground lease creates a lower blended cost of capital than fee simple stacks for all scenarios.

The added benefit today in the higher-rate environment is in recapitalizations. If an asset was purchased three years ago with 65% leverage, a 100-to-125-basis-point move in cap rates would make the debt now 85%, requiring a cash-in refinance on a fee simple basis of approximately 10% to 25% of the debt balance.

Alternatively, if the same property was recapitalized with a Safehold ground lease and a bank or agency first mortgage, the equity could refinance 100% of the in-place debt and, in some cases, take cash out upon recapitalization.

Overall, we’re still in the early innings of this business with tremendous growth potential for Safehold and our customers.

Connect with Safehold

East Coast

Tim Doherty

Chief Investment Officer

West Coast

Steve Wylder


Ryan Howard

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