Generational Wealth

I don't like the idea of hereditary privilege, and yet I believe in the power of compounding. This creates a conflict. Living hand to mouth - isn't very powerful. Someone building wealth with their great-grandchildren in mind - is incredibly powerful. Start with 100, and grow it at 1%. In year 1, that growth is 1. A generation (35 years) later, 1% growth is 1.4. Two generations later, it is 2. Three generations, 2.8. Ten generations later, it is 32. If opportunity is only created for the individual... 35 years of a 'working life' is incredibly short. Our labour is hand to mouth. Social Capital is where the magic happens. This is why I am passionate about the idea of Community Wealth Funds. The reality is, it is far easier to destroy than build. Building takes generations. Destruction takes momentary stupidity. We have the power to contribute over our lifetimes. If we think beyond our lifetimes.

Giving Cash

'Tacit Knowledge' is the stuff that we know that we don't know how to explain. Explaining is hard. Knowing how to do something can be learnt through trial and error. One day it is frustrating and hard, and the next day it is really easy. How? Don't know. Let me show you. I believe there are two types of poverty. One is hard to solve. Hard Poverty may involve broken family structures, mental health issues, and entrenched structural prejudice that is really challenging to solve. Easy Poverty is just a lack of cash. People come at 'solving poverty' with all sorts of clever (expensive) methods. I don't think you can understand the solutions to poverty if you aren't in poverty. As Rutger Bregman says, 'Poverty isn't a lack of character, it is a lack of cash'. Instead of solving poverty with the knowledge of the wealthy, cash releases the already existing tacit knowledge of those trapped outside the economy.

Multiplying Marshmallows

Would you wait for the Marshmallow? In the 1960s and 70s, psychologist Walter Mischel did a series of experiments studying delayed gratification. Children were offered one Marshmallow immediately or two Marshmallow's if they could wait 15 minutes.

Growing up, there were a couple of examples marshmallowy tests in my family. The first was when it came to Easter. My strategy with the chocolate hoard was to hold on to it as long as possible and only start any significant eating once my brothers were done with theirs. This cunning plan didn't lead me to more chocolate. There was a large and predictable risk of the big brother seigniorage, meaning I would likely get less chocolate rather than more as a reward. What it did mean though was that I wouldn't run the risk of running out.... while others still had chocolate. That was my biggest fear.

The second marshmallow test was that we had a deal with Mom and Dad. If we could set a goal and save half of the money required from our pocket money, they would chip in the balance. The second marshmallow. I became rather good at extracting these second marshmallows from my parents.

Bill Gates and Warren Buffett are two of the most generous philanthropists to have ever lived. They introduce an interesting question though. When should you eat your marshmallow if you are good at making more? If Bill Gates had focussed on direct philanthropy straight out of university, he wouldn't have had the firepower to do the work he is doing now. Warren Buffett believed that his core skill was making money. He is famously frugal. One of the reasons he gives for this is that he multiplies the prices he sees on things by several factors. If he spends $1, he will not have the opportunity to turn it into $10. Seeing your pile of marshmallows grow can be quite addictive. The irony is that many very wealthy people won't seem rich. Enjoying growing their marshmallow pile will mean they will live very simple lives because they are so conscious of the opportunity cost of putting the marshmallow in their mouths. It is the ones that indulge in conspicuous spending that really irritate people. While they may also be wealthy, big spenders are likely either rapidly eating through their wealth or living hand to mouth. Buffett has now committed the majority of his fortune to the Gates Foundation.

If you are able to earn 5% real return on your money and you invest half of what you earn for 15 years, you could stop working after 15 years and your money would carry on earning what you were spending in the beginning. Forever. 50% at 5% for 15 years = Freedom.

The Snowball

'The Snowball' by Alice Schroeder is the authorised biography of Warren Buffet. It is the warts and all story of what lead him to become the richest man in the world and then give it all away to charity.

I really like the metaphor of the snowball. Starting off slow and gathering momentum as it grows. To say he was obsessed with growing his snowball from an early age is like saying the ocean is damp. An insatiable curiosity and very little interest in money as something you spend, but rather as a scorecard lead him to a personal fortune of over $60 billion. An obscene amount of money by any measure.

Another book I have on my shelf but haven't got to yet is 'philanthrocapitalism' which I am looking forward to reading. What I find most interesting about Buffet's decision to give his wealth to the Bill and Melinda Gates Foundation is just how much it flies in the face of the image of what we have grown up to think of the uber wealthy. He loved the act of creating wealth, the recognition it gave and feedback of the scorecard that was his growing snowball. But he recognised that a large part of his wealth came from the fact that he was born into a society that recognised and rewarded his passion in this very tangible way. He won the 'ovarian lottery' by being born when and where he was. Then he worked bloody hard to get where he did. He feels he owes something to society for that.

What I also like about his decision is that he gives the money to someone who knows how to spend it in the best possible way. Gates takes a business like approach to solving specific problems in the world. Buffet knew how to make money, but recognised that spending it was outside his 'circle of competence'.

Playing to his strengths.

The Age of Communication

On the same day that he did the presentation, Bill Gates' TED presentation was up. A man not known for his public speaking ability, or rather, known for his poor presentation skills, was very very impressive. Talking about something he really cared about. Gates is what I call a 'Philanthrocapitalist'. Someone who has made vast sums of money through capitalism and now is ploughing that money back into the community creatively. He is applying his business knowledge and financial power to solving some of the worlds biggest problems. In his first 10 minutes, he talks about getting rid of Malaria, and in the 2nd 10 minutes he talks about trying to improve the quality of education.

He brings up a good point though. The technology is now available to take the highest quality education to anyone who has a computer. With the ability to cheaply record lessons from the worlds best teachers, pod casts, web conferencing, the digitizing of all knowledge and a networked world... there is no reason whatsoever for people to have access to the wealth of the world's accumulated knowledge. We just need people who are good at communicating. We need teachers. We need people who are passionate about spreading ideas.

With social networking only just sort of figuring out what it is capable of, I can't help but feel the days of borders and prejudices are numbered. It is only 500 years or so since Gutenberg invented the press and the world slowly started ridding itself of superstition and illiteracy. Ignorance and Fear are stubborn and it will take time to get rid of them, but it feels like we really are on the verge of a whole new world.

It is hard not to be optimistic in the face of all the deep problems the world faces.

Exciting Times.

This and That

Take a look at the TED talk by Jeff Skoll, the first president of eBay and the founder of Participant, a social initiative film studio that produced `An Inconvenient Truth', `Good Night and Good Luck', `North Country', `Kite Runner' and others.

His goal while doing his engineering degree and then going to Stanford to do his business degree was to become financially independent so that he could do things to make a positive change in the world. To `invest in good people who do good things'.

I am fortunate to know quite a few of these people and I would love to one day have that same opportunity. From paediatricians, to child psychologists, to people studying how to give people the ability to walk again through stem cell research or finding the cure for Aids.

That is why I love seeing the work being done by the Gates Foundation with the profits of the two richest men in the world... Buffet and Gates; Richard Branson donating all the future profits of Virgin Atlantic to finding a renewable energy source; the work that Jeff Skoll is doing (though I know less about that)... and other philanthrocapitalists.

They don't have to do what they are doing. There is no rule to say they must do this with the extreme wealth they create. It is not right or wrong, moral or immoral... but the world will certainly be a better place if this is one of the norms of what to do with extreme wealth.

Buffet is not a fan of inheritance (which I see as one of the major inefficiencies of capitalism)... he says something along the lines of

I want to give my children enough that they can do anything, but not enough that they will do nothing.

Mena Trott's talk is less about being `good' but equally about changing the world... she talks about blogs, why people find them scary and what value they can offer.

I still think people don't exchange enough ideas. I know lots of fascinating people and I so seldom get to interact with them all... I wish everyone had a blog.

Flirting with Communism

In a thread that did a bit of wandering

Greg says:

Trevor, you appear to be flirting with communism, what with advocating state control of the economy, and questioning property rights.

Yup Greg, you are right. It took a long time to convince me of the value of capitalism. In Standard 6, I took a lot of abuse for claiming Jesus, my hero at the time, was a communist.

In first year varsity, I thought our `Thinking About Business' course should have been renamed `Free Market Indoctrination'. I considered wearing a red shirt with a hammer and sickle on it to classes along with friends Tapiwanofsky, Robanofsky and I was renamed Donkonofsky.

I have to plead a fair amount of ignorance. My studies have lead me to know quite a lot about Capitalism. I know very little about Communism, and have not read much Karl Marx or the alike.

A few points...

1) I object strongly to the fact that we are so dependant on who our parents are as a future determinant of our success. I think Dynastic Wealth is as problematic as Hereditary Political Power, since I think Economic Power is often more powerful than political power.

2) I am very uncomfortable about the fact that some people don't seem able to exercise their right to free choice in a way that would benefit them because of short-sightedness. Manual Labourers and Domestic Workers blowing their salaries at the casino and on alcohol while their families suffer, concerns me.

3) I am equally concerned by the idea of a `Big Brother' Government deciding for you what you should do.

4) I think Capitalism provides better incentives for those who have money, and no better incentive than Communism once wealth is inherited. If the marginal value of extra effort isn't rewarded adequately, the person won't put in the extra effort.

5) I am a fan of making resources go to where they will work best for the greatest total benefit to society. I believe there is more marginal benefit where there is no wealth. I am not sure what measure is available for the greatest total benefit.

6) I believe property rights are important, BUT I also believe that there should be limits.... long term leases may provide similar benefits in terms of improvement. In theory, one very efficient Capitalist can slowly buy all the land in the country, then in their will say... I wan't all the trees cut down, everything burnt and no one is allowed to live here ever again. That doesn't sit right. If everyone was born with the same rights to property, and they managed to stuff it up, fine, take responsibility. But that isn't the case. It is the start of property rights that concerns me, and their duration.

7) I think Communism is impractical and power corrupts people to the point that it is impossible. Similarly, I think we need to consider what a purely capitalist world would do taking human nature into consideration.

8) I believe Governments are inefficient and that good leaders are rare, BUT an excellent altruistic leader who managed to inspire people beyond themselves can lead to better results than the invisible hand. The concede the Invisible Hand may get there in the end, and is probably a more realistic (yet far slower) path.

9) I believe in Teamwork, Ubuntu and relationships and that we can achieve more working together with inspired leaders.

10) I see more benefit in
(a) everyone being better off, than
(b) a few people being rediculously better off and the others only being better off, but less so than in scenario a.

11) I struggle to figure out how much of my own wealth I am entitled to spend freely and extravagently, and how much I should be targeting to relieving the extreme poverty of others.

12) I think I have worked hard, and `delayed gratification' enough to deserve to live a better than average standard of life.

There are other things, but this post is too long.

Some thoughts hint at Communism, so yes, there is flirting. But I like to think of myself as a Philanthrocapitalist.