This is financial advice . . .

. . . for Smaug

Smaug the Magnificent by Michael Hague

Smaug pursues a unique financial strategy.

Being the Middle Earth version of the Wolf of Wall Street, he emerges from the Grey Mountains and attacks the great Dwarven kingdom of Erebor, located beneath the Lonely Mountain, in 2770. He piles up all the treasure of the underground kingdom in a great hall and makes it his residence. Forbes estimates his net wealth at USD $62 billion.

From this time on, Smaug only emerges occasionally to steal and eat a maiden from neighbouring Lake Town. Good thing he didn’t live anywhere near my town or he’d have been a very hungry worm. Eventually Lake Town is abandoned and he disappears for a long time, presumably inactive and asleep like those snakes in zoos that do nothing and only need to eat once every two years or so.

Smaug chooses not to invest his wealth in stocks, bonds, real estate (aside from the mountain) or in money market accounts. He doesn’t even have a bank account. Instead, he keeps it all in its original treasure form, mostly physical gold but also priceless antiques such as mithril armour and the Arkenstone.

Finally Smaug is killed in 2941, ending his wicked reign of 171 years.

Here are some finance tips that might have helped Smaug.

The Good

1. Bookkeeping

Smaug doesn’t seem to write much down – hard with those claws, I imagine – but nevertheless has a perfect memory of his holdings, down to the small golden cup pinched by Bilbo which he misses immediately.

2. Debt

Smaug lives completely debt-free. He does not own a credit card, has no auto loan owing and is not burdened with any student debt. Having said that, debt for Smaug would not be so hazardous as it is for us because collection would be tricky.

Smaug also saves money on mortgage interest repayments by stealing his home outright rather than taking out a loan.

3. Budget

Smaug has no budget app, spreadsheet or envelope system but he doesn’t need them. Aside from any appreciation in assets, his total income and spending are both zero. A budget can’t get any more balanced than that.

Normally I say spend less than you earn but in Smaug’s case it doesn’t matter because he has sufficient wealth without needing to build his net worth any further.

4. Emergency fund

If Smaug loses his job (?), breaks a wing requiring expensive medical treatment or needs to do unexpected repairs to his lair, he has ample funds on hand to cover these costs.

The Bad

On the other hand, Smaug is also making some financial errors. Let’s look at what His Magnificence could be doing better:

1. Diversify

Gold and collectibles are fine but should only make up a small proportion of one’s overall portfolio.

Consider this graph:

Source

I couldn’t find stats from our world for 171 years, but over 126 years the S&P 500 and Dow Jones Index have blown away Gold and Silver. Even the red and blue lines are hardly visible here because they, in turn, are blown away by the Wiltshire Large Cap total return index, which includes dividends. See the source for more information and to play around with the graphs for yourself.

There are certainly short-term periods in which gold has outdone shares. However, the longer the time frame, the more likely that shares will outperform. Once you get up to nearly two centuries, the chances of gold outdoing shares are negligible.

Smaug would be better off putting a portion of his treasure into a broad, ME 500 index fund, which is comprised of the 500 largest companies in Middle Earth. It’s well diversified and includes household names such as Rohan Equine, Iron Hills Minerals and Shire Tobacco.

Smaug might also invest in real estate, perhaps by buying up abandoned Dale and Lake Town on the cheap and developing them as tourist accommodation.

Thinking more creatively, Smaug might use his wealth as seed money to start his own business. He’s already living in a mountain which once produced much of the treasure he’s laying on – couldn’t he start that up again? I suppose finding labour would be tricky given that he killed most of them.

Another option might be self-employment opportunities such as offering guided tours of Erobor or taking paying passengers on his back for joy rides. Not every business is suited to every personality type, however.

Smaug presumably has a strong knowledge of collectibles, given his encyclopedic knowledge of his collection, making it a good investment for him even though it isn’t for most people. He might as well keep this part of his investment as is.

2. Insurance/Security

As demonstrated by his eventual fate, Smaug puts too much faith in a single layer of defence (his diamond-covered torso). He should hire some security for his hoard, perhaps some orcs to guard the perimeter, plus take out home insurance that covers burglary.

It would be better to keep at least some of the treasure in bank vaults, just in case. Not a good idea to put all your eggs in one basket.

3. Financial Planning

Smaug’s main problem is his lack of a financial plan. He has $62 billion but no idea what to do with it.

Invested sensibly, at 4% that would provide an annual income of about $2.5 billion. That’s enough for Smaug to do a lot of things – take a holiday, start a family, hire a mercenary army to expand his holdings, etc.

Instead he literally sits on his gold and does nothing.

Smaug needs to figure out what his goals are and plan how to use his assets to get from here to there. Otherwise there’s no point. He might as well be sitting on a pile of rocks back in the Grey Mountains.

Having said that, much of his gold has been enchanted by Morgoth. The spell makes Middle Earth creatures value and covet the treasure far above its actual monetary value, especially the greediest races (dwarves and dragons). He probably can’t spend or invest the treasure even if he wants to.

Conclusion

Smaug’s problems are more relevant to us that you might think.

We don’t all have $62 billion in physical gold and other precious items but some of us definitely have enough wealth that we don’t really need to worry about it much anymore. I recently published amounts, by age, that ought to be enough for anyone.

Plenty of us are at or near these milestones but still fear penury and we panic about market downturns, inflation, tax and so on. Are we so different to Smaug?

Financial planning is as much about spending as it is about saving. It’s about time management – saving now to spend more later. The end goal is not to cop a black arrow through the heart and die with more money than anyone else.

Smaug’s obsession with his treasure reflects a human reality. Always remember that your money is just a pile of metal or numbers on a screen – meaningless until you use it for something. Number go up/number go down should mean nothing to you. Spending money on going out with your mates, visiting an amazing place, helping a good cause or getting your kids off to a good start is where the value resides.

And hate them as much as we do and should, banks are a safer place to put your money than under the mattress – especially if it’s well-known that you keep it there. Only store at home what you can afford to lose. Focus on your personal safety first, especially if you’ve wiped out several peoples and stolen their loot.