The takeaway from this article is that hoarding cash is not a good store of wealth, and that the key to long-term wealth is to acquire net income generating assets. Great points for sure, but I strongly disagree with his assertions that saving up for retirement is ill-advised and that traditional investments (stocks, etc.) are too volatile and risky to be useful.
He never explicitly gives any advice for acquiring net income generating assets, but reading between the lines (and given the context) the advice is to pursue entrepreneurship. While I strongly encourage people to pursue entrepreneurship when it makes sense for them to do so, I don't think it's a substitute for proper retirement planning and long-term investment as this article seems to suggest. And it's certainly not good retirement planning advice for anyone who doesn't already understand the basic differences between money, wealth, and assets as this article seems to imply.
Given the failure rate of entrepreneurs and start-ups on average, it seems quite strange to dismiss traditional retirement planning and long-term savings as too risky while encouraging entrepreneurship as the solution in the same article. Traditional retirement investment vehicles (low-overhead diversified ETFs with a mix of bonds, ratio depending on years until retirement, combined with taking advantage of tax-advantaged accounts such as 401Ks, IRAs, etc) isn't anywhere near as risky, especially over the long term. Remember, a single stock market crash in your 20s or 30s is going to have virtually no impact on your retirement savings in your 50s and 60s. When saving for retirement, you have to consider the timeframe involved. By the same token, risky entrepreneurship isn't all that risky when you're young.
I'm glad to see someone advocating sensible retirement planning here. Though the post had a few good points about how to perceive wealth vs. money, I cringed at the notion that most stocks are "buy and pray" investments. Stocks have a better risk/return profile than just about any other asset class with a given 10+ year time window over the last century, assuming proper diversification. I should also point out that stocks, by definition, are ownership.
That being said, it is important to further diversify within a stock portfolio by having a good mix US, European, Emerging Market, small/mid/large cap, etc. As one nears retirement, risk can be reduced along with return by shifting into bonds. Again diversification is useful here. Have a good mix of both corporate and government, high quality, high yield, floating rate, inflation protected, etc.
Of course, developing a skill is a way to increase your wealth, as defined by the article, but diversified equity and fixed income holdings are a way to protect that wealth for a time when those skills are no longer relevant, whether it is by the slow erosion of time or a sudden unfortunate event.
I also found the article to be lacking. The overemphasis on "income-generating" assets does indeed reflect a misunderstanding of any sort of risk profile, as does the "buy and pray" moniker.
Income-generating assets do have a place in your portfolio, but certainly should not be the majority especially if you are so far away from retirement. As you mentioned, as one ages the allocation can be changed. Towards retirement and into it, income-generation should have a much bigger proportion as it better reflects one's needs.
> I strongly disagree with his assertions that saving up for retirement is ill-advised and that traditional investments (stocks, etc.) are too volatile and risky to be useful.
With my retirement age ~40 years away, it's not clear to me that locking my money into traditional investments is a good idea: existing historical records are not statistically convincing (to me) over such a term.
A single stock market crash or economic crisis may not matter over the long term, but I'm sure you're not suggesting there will be only one such occasion: it seems more likely that there will be several, which may or may not be timed in my favour.
When I come to unlock a pension, there's no way to know what the state of the economy will be and where the legislation will have gone. However, if I am dependent on that pension, it puts me in a very vulnerable position where I am likely to be taken advantage of - perhaps by the state or by an uncompetitive financial market.
You talk about tax-advantage, but I would have to retain this over several successive governments. I personally don't believe that it's in the interests of society for significantly wealthy people to retain additional tax advantages. I suppose it's in my personal interest for now to take those advantages, but I don't feel like they can be relied upon, and seem likely be changed over this time period - perhaps even retrospectively.
Anyway, if I am not completely dependent on my retirement savings, but have a means of generating wealth in my retirement, then I am in a much better position.
This is why I find entrepreneurship a good investment: it gives me valued skills that I will most likely retain into older age (even if I fail at first). Whereas, people who remain in traditional jobs have some danger of being obsoleted, or competed out of their jobs in older age.
> A single stock market crash or economic crisis may not matter over the long term, but I'm sure you're not suggesting there will be only one such occasion: it seems more likely that there will be several, which may or may not be timed in my favour.
Certainly, there should be several cycles expected in the economy and stock market every decade, but this is not entirely negative.
1) You are not investing all at once. Instead, you are dollar cost averaging - each paycheck, some of you money goes into the market, at either a high, or a low.
2) You are not divesting all at once. While taxable accounts have minimum distributions, no tax accountant is going to suggest that you take out all of your money at once. If you have 'enough' 1-3 years of divesting in a down market will leave you with a principle that will restore in a 1-3 year up market.
===== Other Note ======
> Whereas, people who remain in traditional jobs have some danger of being obsoleted
You are going to be in much more risk of obsolescence if you don't improve your skills as an entrepreneur than if you don't at a traditional job.
The stock market has historically never dropped in value over a 15 year period. If you continually invest through a crash, you will make insane amounts of money.
Lets say you started investing in 2006 (before the crash), specifically in SPY. Lets say you put $10,000 / year into SPY.
You'd have spent $80,000 over those years, and today, your SPY holdings would be worth $118,176.92. You'd make a 47% profit because you invested through a crash.
Crashes are the most amazing thing for your investment portfolio. Investing THROUGH a market crash makes insane amounts of money.
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The risk however, is the day you retire. If you retire during a market crash, you will lose a lot of money. But a crash during your 40 year investment period? That's the best possible scenario. Every crash will lead to insane gains in your portfolio. As others have noted, you can mitigate this risk by simply moving your money away from stocks as you near retirement age.
Bonds don't make as much money, but they're a lot more reliable.
> The stock market has historically never dropped in value over a 15 year period.
Feel free to clarify this, because I don't agree.
The records of the FT30 index only go back to 1935[0] - which is not nearly long enough to make reliable predictions about the next 40 years - but still, it dropped in value in the following 15-year periods (before taking into account time value of money):
> it seems more likely that there will be several, which may or may not be timed in my favour.
This is why people are advised to move into bonds as they get closer to retirement age. Easier said than done though, if you just saw the stock part of your savings get cut in half. Very tempting to stay in stocks until it comes back.
+1 entrepreneurship is risky and not for everyone.
I have generated wealth by working for other people, diversifying, having low living costs, and getting most happiness out of life from being with friends and family.
In other words, a mixed strategy of setting goals for lots of free time and consuming less than I produce.
Agreed that he misses the point with retirement. "Saving up" for retirement doesnt mean $1M in cash, it usually means $1M in income producing assets pieces of profitable businesses and future promises of more (bonds).
I like how you defined heath, education, and intelligence as the raw materials, but they don't directly give you the return that will make you wealthy. You need to apply those skills in some way to make income generating assets, and that is the tricky part.
For most people, including Robert Kiyosaki, income producing assets basically means buying and renting out property. I disagree with doing that on so many levels and also think it's a terrible investment in todays over inflated market.
Another option is to save and make investments, but interest rates are currently so low that it's almost impossible to get escape velocity through low risk investments.
That leaves us with entrepreneurship. That is why we are here and it is probably our best chance, but is never risk free and not a path that the average person will use to build wealth.
This said, building wealth rather than accumulating savings is hard even if you are lucky enough to have all of the necessary ingredients and the right mindset.
Your pillars of health, education and intelligence are important. I'm glad that I have them because whilst I do, I hopefully won't go hungry. They are a safety net. However, I don't think that those alone are a path to building wealth.
You are right; I've worked out the "accumulating savings" part reasonably well, but the "building wealth" is still eluding me.
Stock market index funds seemed to be a good answer in the past. By owning them, you share in the economic growth and income of your country (or another country or set of countries) as a whole. Although, the spectre of Japanese-style stagflation for most of the West makes this less appealing at the moment (although even with the flat growth of the past 13 years, there are still dividend returns.)
Property is popular because everyone has to live somewhere, the old "buy land, they don't make it any more" proverb, and the funemplyoment nature of buying, improving, renting, and selling property.
I think a lot of people misunderstand what a pain in the ass buying and renting property can be. Unless one is wealthy enough to own multiple properties and have a full-time management company doing all of his work for him, he's going to be taking a fairly hands-on role. Most tennants are flaky. Our perceptions of such might be colored by the fact that -- I assume -- a lot of us here are white-collar professionals making respectable incomes, or who could quickly arrange a steady enough job if needed. Most people aren't like that. Those people are your likely tennants, again, unless you're wealthy enough to afford higher-end rental property.
Then there's the legal minefield. Being a developer or landlord makes one person very rich very quickly, and that person is your lawyer. Especially in the Bay Area. People here pretty much threaten lawsuits if they made eye contact with a teenager on the sidewalk, or if their cat's not eating its food, or if they don't care for the weather on any given day.
Source: I own a small apartment building in LA and sit on my HOA board in SF. I am the definition of a small-time real estate owner in the uncanny valley: not poor enough to not give a shit, but not nearly rich enough to do so, either.
I'm not a full-time landlord; it's more of a nights-and-weekends thing. But it sucks up a not-very-fun proportion of my nights and weekends, and every now and then, it eats into my workday as well. I would recommend landlording to people born into significant wealth, who can buy multiple properties and let a management company deal with the headaches. I would not recommend it as an upward path for those who aren't prepared to make real estate a full-time job, and who can't afford to jump a few rungs up the ladder at the outset.
have you checked out BiggerPockets [1]? I'm just getting started in some small-time REI/landlording and that site's been a great inspiration. One great resource is podcast #37 [2] where they interview a guy who does real estate over there in CA pretty successfully. He talks a lot about wholesaling (which I don't care about) but he also explains how he built an automated system around his rentals; he doesn't use an external property manager, but he also almost never directly interacts with his tenants.
I imagine any of us here, being techie entrepreneurial-minded people, could build a system like that pretty easily. Create a website to market your rentals/show vacancies, post them to craigslist when necessary, find a general contractor to fill work orders and hire a V.A. to take calls and submit those work orders. I'm probably missing some things, but that's the basic framework for my plans.
Based on your post it appears you're not profiting at all from your assets - presumably then you're currently selling up?
Is this more "first world problems" and in fact you're making a reasonable return given your investment of time and money?
I've several friends who're small time landlords - ie own a second residence they let out - they all make a tidy profit and none of them appear to have been exposed any more than a regular home-buyer to fluctuations in the housing market. It all comes across a bit like complaining that your Cristal is warm and your maid keeps coming in late.
"Based on your post it appears you're not profiting at all from your assets"
Not true. I'm making decent cash flow and a net profit.
"Is this more "first world problems" and in fact you're making a reasonable return given your investment of time and money?"
Of course it's a "first-world problem." I think you're misinterpreting me as somehow complaining about how bad I have it. That's not the case. I'm in a very fortunate position that I can even be doing this.
The point of my post was specifically to respond to the previous poster's comment about how investing in real estate seems like "funemployment." It's not fun, and it's hard work. It can be lucrative, but it's not a set-it-and-forget-it type of job. And it's not easily scalable unless one is prepared to do it full time (in which case, if they're good at it, it can be quite lucrative).
How did your friends get the second residence? Do they have a mortgage on the rental property? That makes things much harder to break even.
For a lot of people, the only rental property they can afford is in lower income neighborhoods, and the return on investment is often much better there too. But the headaches are also much greater.
> Do they have a mortgage on the rental property? That makes things much harder to break even.
You have it backwards. Borrowing money at 4.5% is way cheaper than using your own money. There is opportunity cost to tying up your own money in the real estate. Real estate loans allow you to leverage your 15-20% down. It was really bad when they let you leverage using 3.5% down.
OTOH, those 4.5% mortgage rates are for property you live in, not for rental properties. You can play games by moving around constantly, but that starts to not be just a passive investment.
Also, I wasn't really thinking that people used their cash to buy a second property. (Unless you are buying very low cost houses in low-income areas.) More like an inherited house or such.
You might be right as I have an owner-occupied 2-Family house, but i was told that i was only dinged 0.5% on the rate for the rental unit.
> Also, I wasn't really thinking that people used their cash to buy a second property...More like an inherited house or such.
But in that case you have to think of your return as based on the opportunity cost of not selling the house and investing the cash in something else. If you aren't making money beyond what a loan would be, then it probably isn't a worthwhile investment to hold onto. (I'm over simplifying because there are tax benefits and you might gamble on appreciation).
Man I'm in the same boat, I'm renting a house and it can be such a pain in the ass sometimes. It's a good anxiety enhancer for me ;-)
Loads of work to make the property a good rental and then it's also loads of work to get the good tenants (especally in the beginning).
Now that they are settled I have more leeway but I know that more work is coming next.
As you said I would also recommend rentals to people that can either dedicate big chunks of time to it or to get it managed by someone else (by the risk of losing quite a big deal).
I don't know if I would do this again, sometimes I think I should have put the money in stocks and be done with it.
I think health is a wealth asset of it's own, because if you lack it you'll trade your wealth to get it back if possible. It also gives you the ability to turn your education and intelligence into more tangible wealth, which I will grant you isn't straightforward. But that doesn't mean they aren't assets.
A house is like education in a way - it seems to have intrinsic value, you know what YOU paid for it, but the outcomes that can come from trying to sell it vary DRAMATICALLY depending on the how good you are at selling it (and the current market conditions). So it is with my bachelor's from UVa - there have been times where it has gotten me basically minimum wage work and times where it's gotten me $1000/hr jobs, all based on how clever I was about it.
>but interest rates are currently so low that it's almost impossible to get escape velocity through low risk investments.
This period is not unique in this regard. Interest rate is always risk-related. There may been times of higher absolute rates on things like savings accounts, but the real returns and opportunity costs were similar.
What I'm saying is, there are plenty of investment opportunities; the stock market just rose almost 30% in 2013.
What do you suggest is better than rental real-estate as a income-producing asset to invest in? Entrepreneurship is great and all but the risk is frighteningly high
The risk is only not-high for people who have a decent safety net to fall back on (spouse, parents, or savings) and/or low obligations (i.e. your children won't go hungry if your startup busts)
That's not to disagree with your overall point--yes, you won't LITERALLY DIE--but relatively few people have the luxury to keep swinging and missing in the hopes of getting a hit.
dividend stocks seem great if you use dollar-cost averaging, DRIP investing, and you do the research necessary; they also seem like they take a very long time to build up a sizeable portfolio.
I really like Rob Walling's description of what he does with software businesses [1] though, and my plan is to do something like that.
I had a sneaking suspicion about the source of the thoughts behind the article as soon as I read the phrase "net income generating assets"—then saw the culprit in "Rich Dad, Poor Dad".
If you're going to read Kiyosaki's books, then you need to also do yourself a favor and read the criticisms thereof. Kiyosaki borders on a fraud, and many of the rich-dad'isms are flat out illegal. Indeed, as far as anyone is able to ascertain, most of Kiyosaki's traceable money comes not from real estate as he claims, but from selling his books and seminars.
Even if it's true, property millionaires are outliers who simply used lots of leverage to accumulate property during a massive credit fueled orgy of speculation.
They got lucky. Those conditions are not likely to return and the path is likely to be much more difficult for anyone trying to do the same today.
I don't admire property speculators such as Kiyosaki. Recklessness rather than brains led many people down this path, and then they were subsequently bailed out with taxpayers money and ZIRP when it all went wrong.
In addition, hoarding property is actually a massive net negative to society.
(I am talking about our breed of buy to let investors here in the UK. I'm not sure if you have the same characters stateside.)
I couldn't agree more. It's because of buy-to-let `investors' that rents on one-bedroom flats start at about £550 per month in the city in which I live and only go up from there. That's up by about £250 in the ten years I've lived here, and has continued to climb even during the Recession. Prices to buy have more than tripled during the same period. The net effect of that is that some people got very, very wealthy, others got a little bit wealthier, and the majority got much poorer funding the wealth of the other two groups.
> In addition, hoarding property is actually a massive net negative to society.
I think that progressive task on real estate could help with that. If you own one, two or even three houses, no tax, but if more, tax should grow very fast. Fast enough that it's more economical to sell property than keep it.
It's some fishy stuff. But reading that book was also the first time that I realized I could have income besides a paycheck from a job; I remember the book fondly, even if its specific advice (if you can call it "specific") is questionable.
If that's the only take away you had from Kiyosaki then I would say you are ahead of the game. You've found the gem in his philosophy (probably the only gem.)
Yes, it bloody well matters. What's the point in getting some high-level concepts correct if all the nitty-gritty detail is wishful thinking and fantasy?
Instead, read Warren Buffett's letters to shareholders and take it from there.
As much as I have not been a fan of Buffett over the past dozen or so years, I can't vote this up enough. Even better, the shareholder letters are available for free on Berkshire's website (some pdf, some html.) A little searching and you can find his letters to his partners from his hedge fund days. Buffett & Munger are exceptionally good at what they do and they articulate their philosophy & the nuts and bolts of how they do it for free to anyone that is interested.
Agreed. I think that there was a lot of snobbery the way he says 'look at how I got rich, you're doing it wrong'. But some of his concepts are immensely valuable. I like how he pushes the idea of strong education in accounting, law, and other business essentials, as well as his use of networking and assessing of market conditions.
I read through this, but I'm a bit lost. You realize you can use money to purchase income generating assets? In fact you realize that most people accumulate money for the purpose of purchasing these income generating assets?
If I have a lot of money I can easily change it into a lot of wealth and a lot of wealth can be liquidated into a lot of money. And no, nobody who is actually rich cares about their education or intelligence because neither of these are able to generate anywhere near the kinds of returns from simply buying up large amounts of income generating assets.
It seems like the author discounts the value of any investments you can purchase, which leads him to the conclusion that entrepreneurship is the way to go. As others have commented, this isn't borne out by history.
No place for comments on the post, so I'll reply here.
I think the definition of wealth that is quoted at the top, and the one I normally use, is different from the one you are using (at least at some points).
As far as I understand the definition, (material) wealth refers to the physical things that you can own or enjoy that are good and useful. So that includes cars, houses, clothes etc. But not things are purely money generating things (like stocks and shares). A house is a good and useful thing in its own right because you can live in it. Stocks and shares, and money itself, are not (apart from the sheer pleasure of seeing a large number on your bank account).
You might also include 'things' that are not quite in the same category as physical possessions, but are things that can be enjoyed - like holidays and gym membership.
In that sense, money and wealth are almost opposites - you have to give up money to get wealth. At the extremes:
You can have millions in the bank and have no wealth - if you refuse to spend it, you'll die of starvation in cold, broken down house; and you can also have no money but plenty of wealth if, for example, you are the owner of a large, entirely self-sufficient farm, with servants etc. who are all paid via the produce of the land and live in buildings you own. Neither are very likely in our economy.
It seems you are mixing into that definition of wealth the ability to get money/wealth. I'd agree that is a form of wealth (in that you would say that person is in an enviable position), but, like money, it is more "potential material wealth" and not really physical/material wealth itself. And the ability to be happy with little material wealth is the best form of wealth, but, by definition, not a part of material wealth itself.
"Money is a medium of exchange for wealth, it is not a store of wealth."
Disagree. To be a medium of exchange, money must have "holding" value (because money does not circulate, but simply switches holders: http://blog.oleganza.com/post/43378777734/on-circulation-of-...). The liquidity of money is in how many people want to hold it in their cash balances. The more people want it - the bigger value of the total supply (regardless if it's slowly shrinking or growing). The more and longer people want to hold cash, the bigger liquidity - the more "wealth" you can reliably "move" from one person to another. E.g. Bitcoin valuation is pretty small right now, so people can't use Bitcoin (yet) to make multi-billion purchases. Because to make multi-billion purchase one of the parties must hold billions and another must be willing to hold billions (and then find others to who give them if they need in the future).
So the money to be a good liquid medium of exchange must be a good store of wealth. And the more wealth it is "storing", the better medium of exchange it is.
"Robert Kiyosaki, author of Rich Dad, Poor Dad (worth reading along with its sequels), proposes that rich people get rich by building their net income generating assets column (i.e. things that generate positive cash flow each month, not "buy and pray" investments like most stocks or houses)"
In short this is the equivalent of "find a good lawyer" type advice. Gee thanks for that tip. (As an aside I have those assets and I've done that type of thing with success).
The problem is finding those assets and not overpaying for them and making a good deal. Just like someone saying "you have to find a woman/man who is this not that!". Ok go find that person.
The other thing that I have observed over many many years (starting in college when I worked for a lawyer and dealt with some of the deals he was involved in) is that many people who have those assets got them by being turned on to them by people that they know (their attorney, a friend, a business associate) so they are out there circulating in the world and get presented (similar in a much smaller way to what Warren Buffet does) with opportunities. Could be a fraternity brother they keep in touch with etc.
That said you still (and this is important) have to know enough to take advantage of the opportunities (so it's not just luck obviously) and of course be the type of person who even is associated with others who have identified opportunities. See [1].
As far as investing in your house well I could spin that the other way. A nice house gives you the opportunity to entertain and meet people. People always like a good party. And if you have a vacation home people will always want to come to your vacation home and stay over. [1] In short, if you have nice things people want to be around you. You meet people. Those people are contacts that can help you with opportunities.
[1] I had a vacation home (actually still do) and had a boat. It is a great way to socialize and entertain. Regardless of whether those people are the type that are truly friends or not there is a business value to making contact with people like that in certain situations.
I disagree with the blog post (although I agree with one of the points, that money are not a wealth storage mechanism).
There are valid reasons to make savings - accumulate money (or any other liquid asset with high exchange value, not necessarily use value - like gold). According to many economists, this is not true; rationally, one should only invest (exchange money for something producing more money later) or consume (make yourself feel better).
The reason to make savings is to postpone the decision to invest or consume (which is irreversible, due to physical nature of the world), and by doing that, you may gain an edge over other people who are forced to make that decision earlier. In other words, you gain power over other people by saving money (which is kind of what Marx what saying about the goals of capitalist - to make more money, ultimately).
Let me give a couple of examples: A rich capitalist (having a lot of money on hand) can survive a strike of his employees forcing them to reduce their demands; temporarily outlive better competition; react to new challenges by investing into technology already proven elsewhere; temporarily reduce prices to drive competition out of the market, and so on. Although in these examples I talk about capitalists, this is true for anybody, but the effect is not so apparent.
Of course, the extent how much one can do that or how much it will help depends on the money distribution in society. You cannot save all the time, and not everybody can save at the same time - otherwise you get a deflation. Thus it's not a sure-fire way to gain power, because nothing is. The blog post calls it "personal freedom", but it's not just that; that's very individualistic view of what's going on.
And since there are valid reasons to accumulate money, they are not just a medium of exchange. Whether or not the result (power over other people) is "wealth" depends on personal taste, I guess.
"In practice, it seems people who know how to maintain wealth would never keep a large sum in cash around, but quickly turn it into net income generating assets"
Warren Buffet famously holds large sums of cash or cash equivalents from time to time. Dumping your cash into overpriced assets just to keep your cash balance low is no smarter than hording cash.
The article is flawed. It distinguishes between having money and making money - this is very questionable.
From a scientific view wealth == money. Wealth is measured in money, something is worth x dollar. How this money is stored is another question, it can be stock, gold or whatever.
From a philosophical point of view wealth can be whatever you want it to be. I think the view of the author is quite sane and i agree with him on that; but please don't tell me , this is the right definition of wealth.
BTW I am reading Hackers & Painters right now and pg has a similar concept of wealth.
What's lacking is is a call for diversification. Along with that pile of cash you should also have money making enterprises. If you have one without the other, the risks are higher for a complete loss. Money can rot like potatoes but if you keep the farm running you could also end up with a failed farm when you're too old to fix it and no saved potatoes in your basement to sustain you.
For the gamers in the house, this sounds quite similar to StarCraft and Magic: The Gathering.
In both games, unspent minerals/gas/mana is seen as a bad thing. Either you have your sights set on something specific a little expensive (battlecruiser/expansion), you are building an army for an upcoming attack, or you are reinvesting it back into your economy.
In none of those cases are you letting your money sitting around without purpose. An army of 500 mineral marines is definitely going to beat a player with no army and 500 minerals.
Disclaimer - I've never played Starcraft or Magic: The Gathering.
But I expect that in both of them, just like in real life, there is some value to having unspent liquid assets, in that they give you optionality. Unspent liquid assets can be converted at a later time into marines/computing hardware/other 'real' assets, depending on what is most needed at the time. If you turn all of your liquid assets into illiquid assets as soon as you get them, you lose that optionality.
You know, I hear what you're saying, but I don't think I've ever heard that.
Usually better players will give newer players a simple heuristic like "don't let your mineral count go over 1000", which seems generous even. Something more hard core would be like 800.
The point is, there aren't many scenarios where "saving" your money would be a good thing. Except for "expensive" purchases, which usually hover around 400 and no higher.
Units and buildings (things you spend money on) in StarCraft also cost time. So if you wait until the actual time you need things to request their construction, it's already too late. So there's some forecasting going on so that you can soak up the construction time.
Also, your economy is a forever investment. If you aren't attacking, you're building/expanding. So there's essentially never an ideal moment, there's always a fall through case. You're always spending your money on something.
The one possible exception to this would be the Zerg, who play in a more reactive style. Which means that their per unit construction time is on average less than the other races (as I'm saying this, I'm actually just guessing that, watch me be wrong). The point is, the Zerg are more reactive than they are forecasting, so maybe in this scenario, some amount of saving would be apropos. But still, you are spending on your economy until the last possible moment and then transitioning into an army. Zerg happen to specialize in "on the field" adaptation and parallel construction, making their throughput higher for shorter amounts of time.
But it could be argued that none of that money was "optional" or idle. I knew that I was saving for an army and as I was scouting I knew I was saving for a specific kind of army. Maybe burn 2/3 on unit construction and save that last 1/3 to use their on the field adapt ability (like baneling morph).
The problem is that Starcraft is a bad model, because in Starcraft, all the options are known in advance. In the real world, not so. Someone can invent something new tomorrow and all of sudden you may find those cash handy.
Also, 2-player Starcraft is an antagonistic game. In the real world, there are coalitions, and the game is more complicated. Having cash on hand can give you an edge when the coalitions change.
I feel like real time strategy games makes me think a lot about investment and a sort of compounding interest (making workers, expanding), investing resources in tech vs. army vs. making all armies better in the long haul (upgrading army), attacking early and have a worse late-game v.s. playing defensively ...
Some RTS are, to a surprising degree, a lot about economy and balancing the short term v.s. the long term when it comes to your own resources.
This makes sense but then what are some useful ways to use cash to build wealth if not buying stocks and other investments? I'm a young guy with plenty of money in the bank (in the tens of thousands; obviously not enough to retire but I could quit my job and do nothing for a while) and basically no debt. I find and I'm sure I'm not alone here with this feeling that, while I could spend a lot more money, I'm perfectly happy spending significantly less than I make. Right now, it's mostly in a bank, waiting for me to spend it on god knows what. Any advice on how to use it to build wealth?
Until you've figured out what to do with it, just buy shares VTI. Vanguard Total Stock Market. Or get the admiral version if you're in the US. Essentially it's a tiny fraction of ownership of all publicly traded companies. As long as the economy doesn't go completely down the drain it's a very good place for your money. It's not the optimal place for your money, of course, but compared to sticking your money in a checking or savings account it's a no-brainer.
Figuring out what to do with your money isn't easy. So until you've got a good plan, go with a sensible default. That's VTI. Every day you procrastinate on this you're simply burning money.
Really, there's no such thing as "optimal" because no one has a crystal ball. A portfolio of 100% VTI is indeed diverse, tax-efficient, and has low expenses. Personally, I'd add some amount of VXUS (international stocks) for further diversification and MUB (tax-free municipal bonds) for safety. You could do very well with just these three ETFs, often known as a "lazy" portfolio:
Keep in mind, though, that there are no guarantees. Stocks will have bad years, and you should expect that some years they will lose 50% of their value. The key is to choose an allocation that you can live with so you don't panic and sell when things get bad. Keep contributing and rebalance regularly (once or twice a year is usually enough). Tune out all the noise and stick to your plan. Even with these dips, most people expect stocks to perform better than any other asset class in the long term (20+ years).
I'd also recommend The Little Book of Common Sense Investing:
It's written by John Bogle, who founded Vanguard to bring diversified, low-cost investing to the masses. Vanguard is different from other companies in that it's client-owned. The Bogleheads forum is pretty good for this kind of investment advice:
You might also check out Wealthfront and Betterment. They are software-based financial advisors that use Modern Portfolio Theory and the Black-Litterman model to allocate your money optimally given their assumptions about expected returns and correlations between asset classes:
One reason is that you get greater returns by diversifying. Unfortunately, diversifying correctly is hard. A second reason is that younger people typically can afford to invest more aggressively and older people should typically invest more conservatively. So an investment strategy depends on your personal goals and attitude towards risk. Finally, it doesn't take personal aptitude into account. By investing in an index fund you can inexpensively get average performance, but you can get greater gains by investing your money in a way where you can do better than average. Start a company, real estate, art, etc.
Ideal situation for growing your money, imho: using your expertise, try and figure out some kind of investment that looks very risky to people who don't have your expertise, but isn't risky to you because you know the market better than most people. Invest in that, managing the risk sensibly, and you should be able to grow your money.
If you don't have any such areas of expertise, then the best thing you can do with your money is use it to learn - gain one or more or many of these areas of expertise.
> what are some useful ways to use cash to build wealth if not buying stocks and other investments?
This article lacks the humility to recognize that a large collection of publicly traded companies are going to have much more time, experience, and resources (wealth and leverage of it) to properly manage a company toward profitability.
This really depends on your specific goals, your time frame and other aspects of your financial situation. Personal financial planning doesn't have to be complicated, but you need to be aware of your investment options and which are suitable for a given goal and/or time frame.
When will you need the money? In one year, or not until retirement? What are you planning on doing with the money? (If you don't have any plans, at least have an idea of when you might need to withdraw it)
Probably the biggest factor going to be your time frame. If you are going to need the money in 1-5 years (say for a house down payment), I would stay away from equity/stocks; in general, the proportion going towards equity should decrease as the time available decreases, because the volatility can result in negative returns. If you're going to need it in less than a year, just dump it in a savings account or similar where principal is guaranteed.
At the polar opposite is if you're just concerned about long-term growth. Then, I would in invest in a broad-market ETF like some of the Vanguard ones. Come up with an asset-allocation plan that ensures an acceptable level of risk.
Personally, I'm not a huge fan of directly investing real estate for the purposes of producing rental income. I just don't have any concern for property management, maintenance or dealing with tenants.
If you do go down this route, be sure to do the analysis and compare the expected income and risk with the alternatives (i.e. stocks/bonds, etc.)
This is one area the author of the article falls short in. There's lots of mention of "income generating assets" (with somewhat of preference to real assets) but not really any thought given to the different risks associated with each.
There seems to be an oversimplification that the only way to increase your wealth is to own assets that produce a cash flow (i.e. stocks that pay dividends, properties that generate rental income) with no focus given to capital gains. Capital gains have traditionally been a huge part of wealth gains and furthermore, may be more tax-efficient. None of this is mentioned, instead anything that doesn't produce a cash flow is hand-wavingly dismissed as "buy and pray".
There are also intangible assets. e.g. Some people give to charity to get into the right networks.
Being able to afford time off work to build an open-source project, having the money to pay people to do some of the work (graphic design, documentation): you can build a high-value consultancy this way.
Two ideas:
Buy bitcoin mining equipment.
Have a kid and use money to spend maximum time with him/her doing cool stuff so he/she grows to be awesome and thankful to you.
This is also why wealth redistribution works far less well than people who imagine it as money redistribution think it will. Part of the wealth is tied up in the owner, and that can't be redistributed without loss, sometimes great loss.
Let's take a concrete example. Suppose that class warfare rhetoric utterly wins, and as its first scalp The People decide that the filthy rich Bill Gates needs to have 100% of his wealth confiscated for the good of The People. For simplicity, let's assume that 100% of his wealth is in Microsoft stock. So, The People United take all of his stuff. What do they get? Well, they don't several billion dollars. They get "several billion dollar's worth" of Microsoft stock. Well... that didn't accomplish much. We can't clothe or feed the people Microsoft stock. We need to liquidate it into money to get anywhere, and The People aren't too happy about the filthy capitalist stench of suddenly owning that much stock anyhow, so they immediately sell it all. Of course, dumping all that stock on the market at once immediately sends the price plunging; depending on how foolish The People in terms of wanting to be rid of it immediately it could well plunge to nearly zero. The People destroyed billions of dollars of wealth to obtain probably hundreds of millions of dollars, and quite possibly destroyed Microsoft in the process, hardly a net gain. The stock was as valuable as it was partially because it was in Bill Gates' hands.
In practice, you can't just "claw" wealth from the wealthy and hand it to "the poor" and have the effect you're expecting. You can certainly destroy large amounts of wealth, and yes, the poor will come away with something, but it's far less efficient than the "it's all just money" model leads you to believe. You aren't taking "$100 dollars" away from the wealthy and giving "$100 dollars" to the poor; at scale, you're moving a $100 asset out of the hands of "the wealthy" and into the hands of "the poor", and that's not going to produce the results you were looking for. And again, let me emphasize, it does work to an extent, it just doesn't work as well as you might naively think.
Politics being what they are, people are going to assume that I'm a fan of this truth because I'm saying it. I'm not. It would actually be really cool if redistribution worked as easily as people thought it does! I mean, seriously, awesome. How wonderful it would be if equality could be engineered so trivially! And let me be clear, no sarcasm there. However, it is still true, and it is something we ignore at our own peril. Also, does that mean all our social engineering schemes are hopeless? Well, no, again regardless of whether I'm a fan of them or not, but it does mean that, again, it's harder than we'd like to produce the results we're looking for, and it's a lot easier to overestimate the benefit to the poor and underestimate the damage to the wealthy and the general societal wealth (and even if you don't really care about the wealthy, you ought to care about the general societal wealth) that such schemes can have.
Liquidity is an irrelevant side issue. Gates would have exactly the same problem if he tried to sell all that microsoft stock to buy turnips; he could destroy billions of dollars of wealth just as easily as the people you so despise. (In fact, if you turn it around, Gates doesn't really have 100 billion dollars. He has something that looks like it's worth that much, but only for as long as he doesn't try and use it. If you destroyed 99% of his shares, you wouldn't be destroying any actual wealth - Gates' life wouldn't become any less comfortable, and microsoft would still exist and still be making the same products. So you're not damaging the societal wealth at all).
The interesting question is who will make better use of the dollars, or indeed microsoft shares. And the available evidence is that the poor make much more efficient use of their money than the rich (indeed on some level they have to, because someone 1000x as rich as me certainly isn't getting 1000x the value from their money). They spend money rather than hoarding it, improving the economy, and each marginal dollar improves their lives much more than it would for a rich person.
It seems noteworthy to point out in the GP in how he expresses class warfare. When this is invoked (here and elsewhere) it's always the poor who are committing "class warfare" against the rich. When in reality, with evidence abound throughout history it is the rich who actually commit class warfare on a continuous basis against everyone else. Even HN is not immune to this propaganda.
Historically this has been true, but nowadays it's not (at least in the US). To quote Paul Krugman on the topic, from way back when he still did economics:
"...growth in inequality is not a simple picture. Old-line leftists, if there are any left, would like to make it a single story--the rich becoming richer by exploiting the poor. But that's just not a reasonable picture of America in the 1980s. For one thing, most of our very poor don't work, which makes it hard to exploit them. For another, the poor had so little to start with that the dollar value of the gains of the rich dwarfs that of the losses of the poor. (In constant dollars, the increase in per family income among the top tenth of the population in the 1980s was about a dozen times as large as the decline among the bottom tenth.)"
None of the facts he stated have changed. The poor have not started working. And citing the growth in inequality since the 1990s only makes his point about dollar gains/losses more stark.
>citing the growth in inequality since the 1990s only makes [Krugman's (1990)] point about dollar gains/losses more stark.
Actually, nothing is different nowadays as from long ago in history: the class-warfare is still the rich (capital) waging class-warfare on the poor (labor). Krugman, whom you quote, realizes this as well and rescinded his comments from that time:
"I think our eyes have been averted from the capital/labor dimension of inequality, for several reasons. It didn’t seem crucial back in the 1990s, and not enough people (me included!) have looked up to notice that things have changed. It has echoes of old-fashioned Marxism — which shouldn’t be a reason to ignore facts, but too often is. And it has really uncomfortable implications. But I think we’d better start paying attention to those implications."[1]
"The pie isn’t growing the way it should — but capital is doing fine by grabbing an ever-larger slice, at labor’s expense."[2]
Neither of the posts you cite contradict Krugman's original argument. They merely argue that the rich have a new way of becoming richer without exploiting or the poor (namely robots).
The mood affiliation is different, certainly. But I'm citing arguments, not tone.
There’s an implicit notion here that we’re waiting for the poor to start working. Perhaps it's coincidental, but I’d like to call out a possible conflation, because it's something I've seen expressed from time to time on Hacker News, and I think it perpetuates erroneous beliefs about poverty.
Krugman here is talking about the very poor; this is a relative statement, and it is almost a tautology to say that most of them don't work. (Rather, one should be quite scandalized that anyone who works could still be very poor.) Whatever the merit or relevance of his point may be, he’s not trying to characterize the conditions of poverty. He's trying to express the scale of the wealth disparity between rich and poor, and point out that a simple model of rent-seeking cannot account for it.
‘Poverty’ itself is a somewhat relative term, but only somewhat. People recognize hardship when they experience it, and a plateau in the relation between happiness and wealth has been identified. At some point down the sloping portion of that relation, we have to recognize poverty.
I do not think that any scholar has disputed that there are a significant number of Americans who work as much as they can, willingly, and yet live in poverty. One can argue whether most of the impoverished have work, but one cannot dismiss those that do. It is inhumane and does not honour their effort.
Maybe they are stupid people, with bad lives, who make bad decisions. Let’s allow every secret prejudice we have, just so long as we do not ignore that they work and go wanting for things we regard as essential. It is not by choice nor lack of action that they experience hardship. There is no more justice to their income than there is justice in the grades of a bell curve. They cannot work any harder or smarter than they are working already.
I can't read your link. It's my impression that two-worker households are much more common now among the poor, in which case the poor are working more on the whole, and they're certainly being paid a smaller share of the value of their labour (see the worker productivity vs. income graph).
There is no relationship between "worker productivity" (real GDP/worker or real GDP/hour of labor) and the value of labor. When capital substitutes for labor, it reduces the denominator in the GDP/worker equation, thereby increasing productivity without increasing the value of labor.
Further, most graphs of the sort you mention compare mean productivity (you can't measure any other kind in aggregate) to median income, which is a statistical fallacy.
If you have data suggesting the poor work more than in the past, please present it.
"Class warfare" is waged through assets, not cash. See: expensive real estate, and other socially exclusionary asset allocation mechanisms, such as college educations.
This just seems like a complaint about illiquidity of certain assets, which is a legitimate concern, but also a pretty commonly addressed one, because it already arises semi-frequently. If you were one of Sam Walton's heirs, for example, you can't just dump all your Wal-Mart stock on day 1. But if you want to turn that in-practice-fairly-illiquid holding into more liquid and diversified holdings, you are not SOL. It might take a few years, but it's perfectly possible to liquidate most such positions without destroying them, and it's done routinely. There are even financial folks who specialize in exactly that, who you can hire if you'd like.
That's only the example, to make it easy to grasp. The same thing happens at scale in real life, too, it just isn't so obvious because it looks like merely the background state of the world, rather than something that is actively occurring.
Again, people are going to have a hard time reading this as a morally neutral statement, but the fact that taxes exist depress the value of assets on the market. It's already priced in to the value of the asset, so it doesn't look like something that is "occurring", but it's still there. This is a morally neutral statement, and yes, taxes can fund things of value that can bring wealth to the society at large, etc etc, but all of that adds to the truth, it does not somehow "undo" this fact.
> and yes, taxes can fund things of value that can bring wealth to the society at large, etc etc, but all of that adds to the truth, it does not somehow "undo" this fact.
Isn't the net effect what people are interested in? If you impose taxes and then do nothing useful with the money, sure, that's an easy negative. And if you tax only unproductive private-sector assets and use them for public goods, that's an easy positive. The real-world situation is that you typically tax assets or income that are at least partly productive, and use them to produce things that are at least partly valuable. You come out ahead if the things you do with the tax money are better than what would've happened absent taxation, for some value of better.
The contention of people who support high taxation (as most of us in Denmark do) is that the net value is positive, and we are therefore overall better off and more prosperous than we'd be if we did not have taxation, or had much lower taxation. Partly this is because of a view that certain systemic problems can be much more efficiently solved by the public sector: it's difficult to imagine the private sector producing Copenhagen's public transit system, or the Danish healthcare system, especially for the same money. And partly it's because the prosperity we enjoy seems to generally require a backdrop of "things working well" that the state partly provides: good transit, low crime, few homeless people, safe buildings, functioning court system, educated populace, etc.
Unfortunately, I think this concept is totally lost on inexperienced disciples of Rand. An understanding of the world and its historical development is a perfect cautionary tale as to why purely "meritocratic" systems will never produce anything of lasting value.
The industrial revolution was bankrolled by extreme government spending at draconian (compared to present) tax rates during the World Wars. Every technological and scientific breakthrough of the last hundred years was bankrolled by the state either directly or indirectly. This fact is lost on a generation that takes all of this for granted, because they naively believe that progress is the natural state of civilization.
Today, a president like Eisenhower would be called a hopeless bleeding heart liberal. Who cares that the USA became a dominant scientific, technological and economic powerhouse under administrations like his?
History is the best teacher. Personally, I will watch the disintegration of these naive "meritocratic" policies with great interest in the coming years. Who needs public investment in infrastructure, science or healthcare?
as a guy who's modeled and built economies for mmos, i can confidently say the more movement and activity in your economy, the healthier your economy is. consistent, steady growth and activity, rather than spikes (unbridled liquidity events) and valleys (accumulation stagnation), is the most desirable mode.
for a real world microcosm view, just look at the last six months of bitcoin activity. who on earth would consider that healthy?
> There seems to be no quick way to liquidate that much wealth without destroying some in the process.
That's not actually wealth that exists being destroyed, that's a poor measure of the wealth represented by a stockpile being revealed to be poor. The quoted market price of a unit (which is basically the marginal price of the last/next unit sold) times units held is not an accurate measure of the total value (wealth) represented by a stockpile of a marketable asset.
Strawman. Safety net programs aren't about "wealth redistribution", they're income redistribution. Further, there are social factors and goals beyond aggregate economic growth to consider.
It's called a strawman when you shoot down an idea that nobody else gives a shit about, however explicitly you do it and however many latin tags and semicolons you use.
Groups who capitalise phrases like The People traditionally want to redistribute control over the means of production, ie. they would have community ownership over microsoft itself. There aren't any socialist revolutionaries who want to break open the bank vaults and just start handing out cash, except in the popular imagination.
The other side of it, the one that's actually practiced in europe etc, is income redistribution, and that's different again.
Wrong; that's only part of it. Strawmanning is when you impute a weak argument to other-side proponents that isn't actually representative, so that you can knock it down, leaving the impression that there remains nothing against your side of the issue.
Following the logic of this post, you can't redistribute wealth, only money. ” The People” don't want to own companies, they want enough money to feed their families. The problem isn't that Bill Gates has a lot of money, it's that wealth is a system of exponential growth. It is somewhat unfair that his money allows him to make more money at such an outsized rate.
Taxes are a way to put wealth on an logarithmic scale instead of an exponential one. We don't want to forcibly take money from rich people, we want to make it harder for them to make more of it. The point of the post its that wealth is related to having something that can be traded for value. Higher taxes (potentially to support a Basic Income) would leave the rich with their ”wealth” while taking only money from them, hopefully leveling the playing field for everyone else.
I'm not sure I would say that "The People" don't want to own companies. This report from Give Directly suggests that giving money directly to the poor resulted in a "+116% percent increase in monthly household investment in land, farm inputs, livestock, housing and household durables..."
These purchases are money generating assets. I think you touch on an important point though. It's much easier for a random individual to turn money into a money generating asset than it is for them to take a random money generating asset (MSFT stock) and turn it into cash. Ownership of a money generating asset requires domain knowledge, whereas you can choose to spend money where you already have domain knowledge.
Both wealth and money (as defined in the article) can be distributed. What good is money if a person doesn't have a "wealth of knowledge" in order to make good choices with that money? Wealth === value, truly useful, Money === Exchangeable notes or coins or electronic funds which individuals may use to meet an agreed upon metric of value in a trade
Increased money available to the consumers who have non-zero demand for a set of goods can reasonably be expected, under most circumstances, to increase the market clearing unit price for the goods -- but with most reasonable sets of assumptions the relative increase in unit price will be less than the relative increase in available funds to consumers, and redistributing money from one group of people to another will increase the latter groups purchasing power, decrease the former groups purchasing power, and increase the number of units sold of goods and services which the latter group has a greater marginal propensity to purchase than the former.
It does when it's a nanny state telling people to spend.
First, taxation is not redistribution of wealth. In practice, it's always a lot heavier on the middle class than on the elite, the later have better means to avoid taxation. Second, this money is never just handed over to the poor. Here in Brazil, for instance, it's used to back credit programs by state-owned banks, and interest rates are high.
If you want to see the result of this politic in practice instead of theory, just fly down here. The poor are buying more and drowning more in debt because wages still don't follow prices, and still have poor access to education and health. Heavy taxation and 7% "official" anual inflation rate (the real one is double that) erodes away the middle-class purchasing power. All that while banks break anual profit records.
Then the president makes an announcement claiming there aren't poor people in Brazil anymore. Mission accomplished right? They successfully moved the population from unskilled poor people to unskilled indebted people. Screw that.
> It does when it's a nanny state telling people to spend.
This seems to be an article of faith (and one using buzzwords with no objective meaning) for which neither evidence nor argument is offered.
> Second, this money is never just handed over to the poor.
Concrete proposals to do just that (e.g., Unconditional Basic Income) have been made.
> Here in Brazil, for instance, it's used to back credit programs by state-owned banks.
And there might be all kinds of valid critiques of that specific use of tax funds, but it would be fallacious to conclude from the validity of those critiques of that specific use that using tax as part of a policy to redistribute economic returns from the wealthy to the poor is universally improper.
> This seems to be an article of faith (and one using buzzwords with no objective meaning) for which neither evidence nor argument is offered.
What do you mean? The argument is my entire comment explaining what's happening here.
Brazil also has what would be equivalent to a basic income, it's called "Bolsa Família" and guarantees a certain income for families based on the number of members. In practice it has been used to manipulate votes, every election there are rumors the program could end so poor people keep electing the same (already proven corrupt) party that championed the program.
In theory those ideas are beautiful, but I'm not seeing it work in practice, and I'm cynical it can ever be.
> Brazil also has what would be equivalent to a basic income
No, it doesn't.
> it's called "Bolsa Família" and guarantees a certain income for families based on the number of members
Bolsa Família is a combination of a variety of traditional social welfare programs of the type that Basic Income is laid out as an alternative to, not an equivalent of Basic Income; it features a variety of means-tested and other qualification-based components. The part you seem to be referring to is a benefit with a fixed cash value per vaccinated child attending school to families whose total family income is below a certain threshold. It involves both means-testing (the family income threshold to qualify) and behavioral testing (based on vaccination status and school attendance) of exactly the type that Basic Income is laid out in opposition to.
>It does when it's a nanny state telling people to spend.
States are not magic. Economics does not suddenly turn into a zero-sum game just because consumers are spending food stamp money instead of "real money" from jobs.
In my experience, as part of my family is from ex communist societies, when you distribute money, there is concentration of power.
A government powerful enough to distribute all assets is super powerful, and those that control this government(the party) have all the power.
Having all the power, they have all the material resources for them, their families and friends, even when they don't have "money". They want a car, they ask for a car with any excuse and the day after they have the car, they want to travel and so on.
The rest of the society live in conditions of near slavery. They could ask for a car, as they are "equal", but it takes years to come, and when it comes, it is a horrible car you could not choose anything about.
Also corruption is levels of magnitude bigger than anything in something near capitalistic(even paying more than 40% to the state) societies. If your wife is beautiful and the people of the party wants to fuck with her, they will blackmail her with the working conditions of her family. The same party that controls the media and justice and the only company that hires people.
That was the reason my family emigrated, all at once.
>The rest of the society live in conditions of near slavery. They could ask for a car, as they are "equal", but it takes years to come, and when it comes, it is a horrible car you could not choose anything about.
Wait, you mean they have homes? As in, stable places to live that don't put them in debt peonage their whole lives?
Wow, that's a pretty big rise in their standard of living versus current-day neoliberal capitalism ;-).
For the love of God, pick a movie about eastern Europe 30 years ago and watch it. You don't know what you're saying.
The only way to arrive at an opinion like that is lack of perspective.
Some people say that living as humans in the wild is preferable to "debt slavery" or "peonage" or whatever the leftists-word-du-jour is. Would you agree with them ? Can you see that you may be suffering from a similar delusion ?
Bill Gates is a special case -- I would imagine the vast majority of stock (surely over 95%, maybe 99%) does not have value because of who owns it.
Also, if the rich are sitting on wealth which loses values as soon as it is spent, perhaps quite a lot of the "wealth" was never really there in the first place? (although there we are perhaps getting into philosophy)
If there is a revolution, then all financial assets are worthless overnight, stocks, bonds, whatever. Even physical assets lose a lot of their value - a factory that can't get raw materials and can't get their product to retailers is worth a great deal less than an identical factory with identical workers that is a going concern.
It's arbitrary who owns it, it just has to be owned. On a very superficial level, it's supply and demand. Increase supply without increasing demand causes price to fall.
It was really there because it generated a lot of wealth, eg: Windows 8 (if you think it has any value heheh). In the hands of the poor, the company got destroyed and it won't produce any more windows.
I have always found it odd people who are so against wealth (or income) redistribution always talk about the taking of money from the rich to the poor. Where have you been the last 30 years (in the US)? The only redistribution has been from the working poor and middle class to the rich.
Really against wealth redistribution? Talk about a bottom up approach to tweaking our economy instead of trickle down...
Actually... the redistribution is closer from "the old rich" to "the new rich".
50 years ago, when you said "the rich", it would mean descendants of Carnegie, Hersey, or other big name company builders who created monopolies in the late 1800s and early 1900s. The majority of "the rich" were lawyers and doctors with Ivy League degrees and long pedigrees.
Today's rich are Bill Gates, Mark Zuckerberg, Warren Buffet, Gabe Newell, Elon Musk. While you'd call them perhaps middle class, or upper middle class (Gates and Zuckerberg went to Harvard afterall), their empires are clearly self-built and self-sustained. These people did not inherit their riches like "the old rich" did.
The "new rich" suffer from boom and bust cycles. 20% of Americans will find themselves in the position of "New Rich" for at least a year, before their self-built empire falls back down to middle-class or lower status.
I admit... this is partly because college tuition rates were much much lower for Generation X / Baby Boomers than it is today. Government programs for education were never stronger than in those years. Today's young face rising tuition rates as education costs are cut... and for-profit schools have started up to more or less steal money from today's youth.
I don't understand the point of your comment? We should feel bad about people who were rich only for a "little" while? I feel bad about people who lose their jobs that were out sourced and then need to take a lower paying job to survive.
Sorry, still plenty of rich people who earn their money the old fashion way... They inherited it.
I wasn't even talking about individuals but a system that rewards people who already have wealth over the working poor and middle class. Worse, now with the "Citizens United" ruling we are creating a plutocracy that our Founding Fathers feared more then anything.
according to another article I read the new rich 10M+ wealth are mostly money mangers taking a cut of the money moving around. and collecitng it thtough capital gains.
As far as I know there are no proposals to redistribute wealth by seizing assets from wealthy people. They mostly revolve around increasing taxation.
Right now, when Bill Gates wants to use some of his wealth that is tied up in Microsoft stock, he has to sell it. When he sells it, he pays a capital gains tax of 15%. If we increase that tax, Bill gets less money and more of it goes to the government to be redistributed according to the wishes of the people (in theory!). There's no question of what the government is going to do with a bunch of stock.
The government ends up with cash, not a pile of Microsoft stock, which is the situation the OP was advocating against. The difference is the government doesn't have to sell off and devalue the stock to extract the value from it.
Yes, technically the government is inserting itself into the transaction and seizing some of the value. But that's what all taxes do.
The government is also the party that is responsible for enforcing the terms of the transaction (via the justice system) if one party where to try to defraud the other. In effect it's more like a transaction fee.
Eliminating the favorable taxation of capital income compared to labor (and most other) income is eliminating a feature of the status quo tax system, which amounts to major capitalists seizing wealth from everybody else.
^This. It's easy to see this when you look at the numbers that show productivity rising while lower income wages stagnate. Higher income earnings have gone up an extreme amount. We've built a society where gains in productivity are not shared and that's not an accident.
This is a really salient point. I would go a step further and ask whether or not that $100 is better in the hands of a wealthy person (in the context of this article - a person who would put that money to work in the local/national economy to make more of it), or in those of the poor person. Certainly the latter can put it to great use buying necessities of life, but in the hands of the former it might increase the latter's ability to find a productive job. I'm not really a fan of trickle-down economics, but I think it's more realistic than Robin Hood economics, for the reason you espouse.
I agree that in theory it would be awesome if wealth redistribution worked the way we think it might. I'd love to live in a Trekkie world where everybody seems to have all needs and wants met. In reality, redistribution is very much like throwing money away, considering the long-term impact of such. I think people are mostly either wealth generators or destroyers. Money in the hands of a benevolent generator has the possibility of benefiting many (even though in practice only a few wealth generators actually benefit the average person). In the hands of a destroyer it benefits only them, and only for a short time. Trickle down sucks, but it might be the most realistic option.
That said, while redistribution doesn't work, getting rid of tax shelters and deductions for the wealthy would.
> I would go a step further and ask whether or not that $100 is better in the hands of a wealthy person (in the context of this article - a person who would put that money to work in the local/national economy to make more of it), or in those of the poor person.
That's a testable hypothesis, and as it turns out it's already been refuted: research has shown that dollar-for-dollar, tax cuts are a net drag on the economy, and food stamps deliver the biggest bang for buck economic stimulus. Even investments in infrastructure don't deliver as much of a GDP boost as food stamps. Giving that $100 to a wealthy person is one of the least productive things you can do with it.
And I actually think that furthers the idea that "money == wealth" isn't a helpful way to look at the world. Why are food stamps so effective? Because when you're hungry, food stamps are astonishing wealth to the recipient, far more than the societal costs of providing it.
Unfortunately for people who read this as a strong endorsement for general redistribution, it is indeed the "biggest bang" and once you have filled someone's belly (and generally filled in the lower Maslow levels), you no longer have such simple options to take a bit of wealth from one and give a lot of wealth to another. At the margins that's not the choice we face; usually it looks more like my original post.
I am a libertarian, but I greatly value the social safety net. It is an incredible, incredible source of societal wealth. The problem is that there's no way to scale the safety net up beyond being a safety net, because again let me emphasize that would be awesome, but it just doesn't work.
Yes, wholeheartedly agree here. I was not thinking of having the basic Maslow levels met, as I think that kind of social net should be somewhat guaranteed, and the economic benefit is obvious. Once those needs are met, does a redistribution of $100 have a net positive or negative on the overall economy? Not sure, but gut tells me negative. The wealthy will invest, which has a tiny net positive on the economy that compounds over time. The non-wealthy will consume, which has a positive immediate benefit on the economy, but poor long-term benefit along with terrible environmental consequences. Really, we probably need both for any economy to survive, but consumption is what the middle class is for anyway.
Economy is driven by consumers so making sure consumers have more money is surefire way to improve economy. Giving the money to business owners (or not taking it away) doesn't improve anything beacuse their investments are not limited by money owned but by their customer base which does not change. At best they'll spend additional money on advertisment which will just steal some customers from their competition at almost no benefit to the economy apart from increased activity in advertisment agencies.
>I would go a step further and ask whether or not that $100 is better in the hands of a wealthy person or in those of the poor person. Certainly the latter can put it to great use buying necessities of life
There has been a lot of thought and data on this already. The answer is in - giving money to poor people is much "better" as the money travels much further. They buy the "necessities of life" quite quickly, and the money changes hands several times, benefiting other (mostly poor) people along the way. Wheras in the hands of a rich person the money is unlikely to do that. It mostly goes into an investment as there are no necessities of life urgently needed. (lower Marginal Propensity to Consume http://en.wikipedia.org/wiki/Marginal_propensity_to_consume#... )
I found these posts interesting, and I don't know what to think of them. In terms of large corporations, I do think it would be more beneficial to split the money more evenly amongst the people who helped create the wealth, and, with bill gates in particular, is having money in stock actually generating wealth? Sure, if he sold it all at once it would crash, but if he slowly started getting rid of it and turning it into cash, what would Microsoft actually be losing? Wealth, more evenly distributed, would give more people a greater chance at, in turn, creating more wealth. I think one of the things, or at least one of the things that perturbs me, is the huge difference in salary that key players are able to command, through connections or plainly through the non-unionable work that employees can offer, limiting, collectively, their negotiation power.
This was just a guttural post, I'll probably need to re collect my thoughts and edit this or post something again more in line with the op
I think I get what you're saying... mainly that when wealth is so centered in that 0.1% upper crust of power brokers, that it keeps potentially wealthy people off the boat. Combine that with the fact these people are well connected and intertwined, and it becomes
> Wealth, more evenly distributed, would give more people a greater chance at, in turn, creating more wealth.
Yes and no. Look at lottery winners (or other windfall recipients) as an example that the average person cannot create wealth. Some people are able to create wealth and most are not. Let's say Bill Gates does indeed give every person that shares his picture on Facebook $5000 dollars. Most people will waste it, some will use it to pay down debt, and a small percentage will create wealth from it. I think there are two groups that could potentially benefit the most from this. Upper lower class folks can easily put this money toward education and skills that would have a net positive. Upper middle class folks might potentially start new businesses and markets which have a definite impact.
If people have a problem with current wealth distribution, there is a very easy (not easy in the sense of doing it, rather in understanding it) way to reallocate it - get out of debt. Debt is one of the main ways rich people get richer, by reallocating money from the poor to the rich. Getting rid of their main source of income would force them to invest in real, tangible businesses that solve real problems (because presumably without debt, nobody is buying a new TV yearly anymore). I believe debt is the primary source of economic stratification right now, not income.
> In terms of large corporations, I do think it would be more beneficial to split the money more evenly amongst the people who helped create the wealth.
Amen to this. This culture where CEOs earn 20x the average employee salary is screwed up. Also, it would be beneficial if they didn't own every politician ever created, but that's another story.
The process you imagined will only produce the opposite outcome: when the price of MS stock plunges to zero, Gates himself will likely buy back all his (confiscated) stock and since MS the company operates independently from the stock market, the real value of the company is not destroyed, and will likely bounce back when Gates buys back all his stock. Soon he will regain all his lost wealth and be filthy rich again. This actually happened in 90s Russia: when the former Soviet Union was no more, then Russian government issued every citizen shares of the SU state owned entities - factories, OIL FIELDS, etc. As you rightly pointed out, ordinary Russian citizen didn't know what to do with these "shares", they dumped them cheap. Some enterprising individuals then acquired them cheap and that's how the Russian Oil Oligarchs got their wealth.
Wealth is also perception based and circumstances based. The value of a product or a stock can be increased with the help of smart marketing. Does it mean the wealth has increased? Many entertainment product would lose the value if suddenly, say a serious war is declared, or a better alternative product appears. Where the wealth disappeared?
A similar story was illustrated in Carl Barks' Scrooge McDuck story.
A tornado lead to Scrooge losing all his money to everyone. This lead to everyone leaving their job and going on vacation. Soon, goods became scarce, so they had to turn to Scrooge who were selling produce from his farm at inflation-level prices. Soon everything returned to its usual equilibrium.
(Scrooge owns a lot of businesses, anyway, so that would be another avenue for him to recoup his losses.)
I don't think that story means what you think it does. It's a tale of wealth and power. Money is just one part of the equation.
It also perpetuates the right-wing myth/prejudice that poor people are lazy and can't handle larger amounts of money than they "need", which has been proven wrong repeatedly.
> I don't think that story means what you think it does. It's a tale of wealth and power. Money is just one part of the equation.
You automatically take me for a fool when all I did was present the story, not my interpretation of it. Fiction can be interpreted in many different ways, independent of the author. I think the story is saying that there is more to wealth than just money; that you can't just throw money at things or people and magically get the equivalent amount of wealth.
How is it about power? Scrooge recouped his money by just working on a farm and selling the produce. If it was about power and/or assets, he would have recouped it through his businesses (of which he owns a considerable amount of), as I hinted at in my post.
> It also perpetuates the right-wing myth/prejudice that poor people are lazy and can't handle larger amounts of money than they "need", which has been proven wrong repeatedly.
Maybe it does. I think it has more to do with the fact that you can't just inject money (or redistribute it) into an economic system that is more-or-less closed (there is a more or less fixed amount of labour in the system and so on) and get the desired effect. Without some restructuring of the system, you're probably going to get a lot of undesirable effects like inflation, which might just return you to where you were (or leave you in a worse state). Scrooge had been hoarding all of that money for decades... to put it back into the system has the same effect as to print money.
If the story was motivated by some right-wing philosophies, I think it was more motivated by the simplistic model of human motivation for wealth and and incentives (everyone immediately goes on vacation when they have met a windfall). Scrooge is more motivated by money itself than wealth so he was able to buckle down and get his money back.
But I'm not an economist so my opinions might be wrong. Nonetheless I don't consider myself a "right-wing", which is a rather vague concept in this discussion since you're from Brazil and I'm from Norway.
I'm sorry, I got the impression you were corroborating the parent comment's idea that money is better kept within the rich.
The whole economy could go bust and society revert to bartering, yet Scrooge would still come out ahead because he owns the means of production (the farm/businesses) - assuming he has the power to uphold his ownership either by force or politics.
Re. motivation, I wasn't implying it's intentional, cultural/social context is carried into everything we do. An alternative ending would have people starting their own businesses, producing value and growing the economy as a whole. If written by a norwegian, maybe Scrooge would have found oil within the city borders and distributed the proceeds to all residents :)
He claims that wealth does not come from owning "buy and pray" assets like stocks and homes, yet most individual net worth gains in this country over the last 50 years have been as a result of owning exactly those two things.
I get his point, but by defining wealth as ownership of "net income generating assets" I think he is ignoring history.
Very good comments, though I disagree on just one point: Money is a medium of exchange for wealth, it is not a store of wealth.
It actually is a store of wealth. Money buys investments, which is where you store wealth. Money is easily transferable in and out of interest bearing accounts, which is a way to store wealth.
The fact that you can buy investments with money makes it a medium of exchange. Money is theoretically supposed to be a store of value as well, but it is not a good store of wealth, due to inflation. With current central bank policy (or at least Fed policy in the US), most interest bearing accounts are not currently a good way to store wealth, because after adjusting for inflation, their low interest rates mean that you are actually losing wealth over time.
> Money is theoretically supposed to be a store of value as well, but it is not a good store of wealth, due to inflation.
Medium of exchange and store of value are the two main functions that "money", as such, can have, but it is misleading to say that money is "theoretically supposed" to serve both purposes. Any particular money is adopted with very specific purposes, and modern fiat money by design has a very limited role as a store of value, being intended primarily as a medium of exchange that is useful as store of value only in the short term (and only secondarily so, as utility as a short-term store of value is essential to utility as a medium of exchange) specifically in order to encourage investment in productive non-money assets as a store of value.
If you put money in a bank, and get interest, it is a store of value just as much as a bond is. It's not a permanent store of value (inflation, etc) but nothing is. Houses can get taken away in floods, bonds can also get wiped out by inflation, and companies can go kaput.
I know there is a lot of truth in this article but I personally find it quite hard to decide what assets to invest the cash I own. I don't have enough to buy property but it is still too much to keep it in cash. As I know little about the stock market I see funds as a promising investment.
You get it, swombat (at least in my humble opinion). Thank you for posting that, I hope that it helps some people understand the distinction between currency and assets that produce returns.
edit: Just thinking further on it... I tend to approach things by thinking of pathological cases. In the case of a deflationary or flat currency, I think currency hoarding is a rational response economically even though it's unproductive and leads to high concentrations of wealth. On the other end, inflation that's too high will lead to an economy that is very illiquid and prone to solvency crises. There is a high incentive to minimize cash on hand and maximize debt. In my lifetime I've really come around on the value of a managed and low inflation to having a productive society.
I like the article and agree with the main points, but I don't really understand the fixation on terminology. Who really cares about what one person defines as wealth vs having money?
Isn't the real point here that people who are capable of making a living will always have means to live and those who don't may get by from time to time when they come into money but don't have a lasting ability to generate it for themselves?
On a larger scale, I think this same idea could be used to describe the success and failure of most companies. Companies that can create products or services that sell will succeed in the long run whereas those that have large cash reserves but no ability to produce products or services that sell will eventually run out of cash and fail.
I think everyone should know some basic macroeconomics, which elaborates some of these points. I just finished [1] and it fundamentally changed how I think of wealth. I used to think only of current value, but the key insight is that assets derive value as claims on future output. Money is not only a medium of exchange, it's also a (temporary!) store of value, and a unit of account as well. It is a tool, but certainly not an end in itself.
One of those terrific articles that comes along, tells you something you already knew, but does it in a way that crystallizes it into an actionable direction. Bravo.
I've been struggling to figure out what to do with the money I've been accumulating in my Bay Area tech job. I thought to put it into a house, but after reading this article, I think I'd really like to give entrepreneurship a serious go (whereas in the past, I might've done it as a side gig). Few people can claim to have that level of influence from their writings.
It doesn't have much to do with getting wealthy, but it is a very elegant explanation of money as a technology to track members' contributions to society and their deserving of the fruits of society's labour.
Money can be modelled as a shared memory, track record, of contributions.
If it was evident to my grocer, that those abstract thoughts and lines of code I created had value, I could then have credit for adequate food; if the whole value chain was transparent and inherently obvious to everyone...
Can cryptocurrencies displace this (outdated, imperfect) technology?
This is very well said and relevant in the context of our fascination with the "Net Worth" of wealthy individuals who often happen to be in technology. Gates, Zuckerberg, Ellison etc. own property/assets that could potentially be sold for billions but are different from those actual amounts in cash.
What particularly comes to mind was when Kevin Rose was on the cover of [was it Newsweek? Time?] proclaiming that Digg was worth $60 million or something. He had to state at least once that he did not actually have $60 million in cash on hand.
> ... entire lives in a period of unprecedented monetary stability. Money is so stable nowadays that it sort of looks like a store of wealth
In which country? The USD has lost around 90% of its commodity purchasing power since 1971.
> a small, steady, controlled inflation is really the ideal situation
I would agree up to the rate of population growth (1-2% or so). But US M2 expanded 8.4% last year, which is clearly far beyond what's needed to prevent the atrocious horrors of deflation.
It's interesting that he defines the three most important pillars of wealth to be health, education, and intelligence -- with the exception of intelligence (which is effectively fixed), these are commonly provided as public services in most countries so that everyone has equal access to them. Taken through this lens, it's clear how social services lay the groundwork for the wealth of a nation.
This blog piece has a lot of rich learnings for financial well being. What I disagree with is the author's stance on savings. It is dangerous because the 'unwealthy' minds are going to read 'saving is not good' as 'go spend'
Hah. I forgot he wrote one (even though I've quoted him in some of my articles). It does make similar points in his "Money Is Not Wealth" section in there.
It's not very surprising that others have said this - it's a sensible idea that's fairly well understood by some... but thoroughly misunderstood by others (still, and probably forever).
You said twice that children with great education are one of the biggest wealth. I'd have loved if you had given an example of how exactly. I'm curious to listen
From a cold, dispassionate economic point of view, you "invest" 18-25 years worth of blood, sweat, love, and tears raising your children. In return, they will start supporting you once they're capable of generating more than enough income to sustain themselves, hopefully before your retirement years.
This guys only 33 and hes already talking like some grey-bearded arm chair philosopher. "Listen closely sonny, here's what you should do if you want to retire comfortably like me." Reading "Rich Dad / Poor Dad" does not make you an expert on personal finance. Being CEO of a startup make you an expert on being successful.
But, as a more generic category, the fundamental pillars of wealth seem to me to be health (including youth, energy, endurance), education (including work ethic, general knowledge, wisdom, self-knowledge) and intelligence.
Health is extremely valuable, but fickle. You can lose it for no good reason and through no fault of your own. One just has to do the best one can. As for education and intelligence, I'm not sure I agree. Those resources are the wealth of the world. It's intelligence and creativity and just raw fucking grit that keep the fucking place from imploding. But many intelligent people end up as excess capacity, unused and maltreated. You need connections and credibility to unlock them. Education used to deliver that, out of the box; that's no longer true.
Ultimately, the best security is to be able to reliably get paid, well, for doing something that doesn't harm you to do it. That shouldn't be hard for programmers to arrange, but the age discrimination in our industry is disgusting, so I wouldn't count on being able to get quality jobs at 70, even with full capability and intelligence intact. When you get to that point where you the narcissism of the career world and its perverse (chickenhawking, see here: http://michaelochurch.wordpress.com/2013/12/14/vc-istan-6-th...) age obssssions go against you, it helps to have a wad of cash.
[I]t seems to me that the idea that the best preparation for retirement is to save up a load of money is a horribly noxious lie that has likely led to the bitter disappointment of hundreds of millions if not billions of people.
Well, it shouldn't be "money". It should be a portfolio of bonds, stocks, and commodities. (Real estate shouldn't be trusted; there are too many ways for misbehaving neighbors or politicians to fuck it up.) However, the idea that one can keep living off one's talents at the age of 70 is a fantasy. I wish it were that way; ageism is fucked-up and if it affects me in 30 years I am taking a Second Amendment Solution type approach to finally drop a pipe on that shit. Many people have their talents and ability intact at and beyond that age, but I would not want to be applying for programming or business jobs at that age.
Cash is a hedge against deflation. Many vast fortunes have been made by people who held cash, rode deflation down, and then bought assets at the bottom. You want a substantial fraction of your portfolio as cash to hedge deflation, just as you want a fraction in hard assets to hedge stagflation. You of course want a fraction in income generating ventures and equities that do very well in an environment of growth, as advocated here, but failure to hedge the other two conditions has often proved ruinous.
We haven't had a serious bout with deflation in 80 years so people have grown overly biased against cash. We haven't had a serious bout with stagflation in 40 years. Historically, deflationary and stagflationary downturns have been common. All the points in the article are highly valid, but it seems to overlook these critical reasons to hold quite a bit of cash and hard assets.
> We haven't had a serious bout with deflation in 80 years so people have grown overly biased against cash.
Coincidentally we're not tying the money supply to stuff we dig out of the ground, growing the money supply is now only as difficult as turning on the printing press. Unless that changes, I don't see how deflation is a serious threat anymore.
Debt based currencies deflate when a lot of debts go bad. When somebody declares bankruptcy and debt goes bad, that's money going "poof" and disappearing from the banking system, with knock-on effects. That's what happened in the 30s and nearly happened in 08. Whether or not the gold convertibility window is open doesn't much figure into it. If the US government were to partially default on its debts, or a lot of banking sector debt were to go bad, the value of US dollar cash would sky rocket as people scrambled to deleverage. This happened in 08. This happened in Japan in the 90s.
If a private debtor defaults and declares bankruptcy, then the money supply contracts and you get deflationary pressure. I'm curious, though, why you believe the US would see deflation if it were to default?
The Eurozone countries tended to deflate, but there are plenty of examples of countries that went the other way -- Germany, Argentina, Mexico...
I don't think the US will default any time soon, but if we were to get near that point, we would inflate our way out.
I have to disagree with this part of the author's post...
"But surely, having a lot of money, say a billion dollars, is the same as being wealthy? In theory, perhaps. In practice, it seems people who know how to maintain wealth would never keep a large sum in cash around, but quickly turn it into net income generating assets, and those who do not (e.g. lottery winners) often quickly find that the seemingly infinite pile of cash has evaporated into nothing."
You are a regular working class dude and all the sudden come into 100 million? 350 million? 1 billion dollars? The LAST thing you really need to do is "invest" that money to generate income. That's how most lottery winners lose their money is by making bad "investments".
You already have more money then you would have earned in a lifetime 1000x or so over that you can't possibly spend so why would you "risk" any of it? You live off the bank interest and have a really nice "modest" existence. Oh and... Stay away from money grabbing relatives but you do, of course share some of your good fortune.
Where is the bank getting money to pay you interest? By making investments. The fact that you're one level removed from the decision-making doesn't make it less of an investment.
Ummmmm Really? The Bank is taking the risk not you. Never heard of insured accounts? Granted, there are no guarantees in life but money in the bank is pretty solid. You may stuff a couple mill under your mattress if it makes you feel better...
I know of no definitions under which investments must be risky. Investments are "a commitment (of time, money, etc) in order to earn a return" (not a direct quote, but a fusion of Merriam-Webster's definitions of invest and investment). Nowhere in there (or any of the other definitions of invest/investment) is risk mentioned.
All investments are guaranteed returns? News to me... All my money into Target stock! All investment implies risk and I wouldn't learn financials (or anything) merely from Merriam-Webster definitions.
He never explicitly gives any advice for acquiring net income generating assets, but reading between the lines (and given the context) the advice is to pursue entrepreneurship. While I strongly encourage people to pursue entrepreneurship when it makes sense for them to do so, I don't think it's a substitute for proper retirement planning and long-term investment as this article seems to suggest. And it's certainly not good retirement planning advice for anyone who doesn't already understand the basic differences between money, wealth, and assets as this article seems to imply.
Given the failure rate of entrepreneurs and start-ups on average, it seems quite strange to dismiss traditional retirement planning and long-term savings as too risky while encouraging entrepreneurship as the solution in the same article. Traditional retirement investment vehicles (low-overhead diversified ETFs with a mix of bonds, ratio depending on years until retirement, combined with taking advantage of tax-advantaged accounts such as 401Ks, IRAs, etc) isn't anywhere near as risky, especially over the long term. Remember, a single stock market crash in your 20s or 30s is going to have virtually no impact on your retirement savings in your 50s and 60s. When saving for retirement, you have to consider the timeframe involved. By the same token, risky entrepreneurship isn't all that risky when you're young.