The Wealth of Generations
“Ultimately, if we want to keep the world human, then we need to start thinking about what it means to be human. It’s not just about how we work. It’s not just about what we do to survive. It’s about what it means to be uniquely human. What makes humans uniquely human is that we’re not just automatons. We’re not just machines. We experience and show empathy. We have desires. We have desires to be heard. We have desires to have the freedom to make decisions.”
Do you want your children to be able to start on a path of independence, wealth, and security?
Our capitalistic system’s dirty little secret is that capital tends to grow much faster than salaries and wages. So, people working for money have been losing the race to building wealth against those who use financial capital to create wealth.
The gap between individuals leveraging financial capital and workers is growing bigger each year. Spurred by technological advances, this trend is now even accelerating, and the value of skilled labor is declining further each year.
Consequently, our precious democracy seems to turn into an oligarchy. Power would then rest with a small group of people distinguished by wealth, education, corporate, political, or military control. Our society would then be controlled by a few families who pass their influence from one generation to the next. Is this what we want?
Today, the fundamental principle of capitalism, the concept of skilled labor, is at stake. Is it possible that we can all pass wealth from one generation to another? Can we manage a paradigm shift from nation-centered capitalism to a shared economy based on the Wealth of Generations by enabling all workers to become capitalists—sophisticated investors? The answer is yes! This book casts a positive outlook into the future by suggesting using artificial intelligence and other technologies to make us all capitalists, reaping equitable returns.
I don’t want a nation of thinkers. I want a nation of workers."
—John D. Rockefeller, 1903
TODAY, We Need thinkers.
About a hundred years ago, our society became officially a nation of workers when the General Education Board, funded by John D. Rockefeller in 1902, announced its mission to support higher education in the United States with presumably good intentions to build a nation of workers. But today, stagnating income from labor is leaving an army of employees with little to no room to grow lasting wealth.
Key Concepts of the Book
Asset Grid
Imagine a grid with four quadrants. Everything we ever invest in will show up in one or more of these four quadrants. On the vertical axis is the asset value (or equity), and on the horizontal axis is the income (or cash flow) generated from an asset. Both can be either negative or positive. A negative income means we pay every month for the asset. A negative net asset value means we owe more on the asset than it is worth. There is no equity in that asset; the amount we owe to the bank or our internal funding partner is higher than what the asset will sell for. In that case, we cannot sell the asset without taking a loss.
Wealth is Leverage
In 2013, I asked an artist to illustrate the concept of morals, mind, and money in a picture. Under my instructions, he drew a typical image of a lever, which can be used to lift a rock from the ground. The longer the bar is, the easier it is to push the lever down to lift the stone. The saying “to move mountains” literally has to do with the principle of leverage.
Simply put, wealth is leverage. No, not leverage like in the world of physics as the exertion of force using a lever or an object applied in the manner of a lever. No, also not the ratio of loaned capital (debt) to the value of its equity.
Leverage in the sense of influence. We can have moral influence, knowledge-based influence, and influence through money. Leverage enables us to move things forward—for ourselves and others. When we have enough leverage, we are free to create our future. Financial wealth exists in many forms. The terms capital and assets are essential to this book. So, buckle up!
The Wheel of Wealth
The Wheel of Wealth™ for me is a compass that shows me the way to my integrity and ultimately to wealth. The wheel is based on our vices and virtues. Vices make us blind and virtues make us see, especially when it comes to money.
TheSe are the 5 Asset Classes
You might have learned about asset classes in the past, and you might own and manage assets already in different asset classes. There are only five major asset classes: securities, businesses, commodities, real estate, and the money market. So, if you like to diversify your portfolio, these are your choices.
The Laws of Sophisticated Investors
In 2013, Thomas Piketty published his best-selling book entitled Capital in the 21st Century, in which he introduces two laws. The first law defines α, the capital share of a nation’s income. Picketty has drawn worldwide attention with the statement that the disparity between wage earners and capital owners is increasing and that governments should intervene to bring this process to a halt.
So, how should the numbers look like for a financially successful family? Let us look at family B with the following financial data:
Capital C = $1,000,000 (net assets, incl. residence)
Income I = $50,000 (salary, wages, capital return)
r = 2% (capital return is 2% of $1,000,000=$20,000)
Then: α = r x β = 0.02 x (1,000,000$/50,000$) = 0.4 or 40%
This family with α of 40% has the same income of 50,000$ as family A and a slightly higher return on their capital. But due to their higher net worth, their α is considerably better than the one of the first family. Also, the return from their capital is 20,000$ (2% from 1,000,000$), a considerably higher amount than in the case of family A.
But a family does not need to own much capital to have a high α as demonstrated in example for family C:
Capital C = 100,000$ (net assets, incl. residence)
Income I = 50,000$ (salary, wages, capital return)
r = 20% (capital return is 20% of $100,000=$20,000)
Then: α = r x β = 0.20 x (100,000$/50,000$) = 0.4 or 40%
Family C has the same value for α since this family can receive 20,000$ (20% from 100,000$) return from its much lower capital base of just 100,000$. The family wealth manager(s) have done a much better job of investing the family capital than family B and A.
Which family do you believe has a higher chance of building wealth for generations? Family A, B, or C?
The Leverage Indicator
How can you quickly determine whether you should take out a loan to leverage your proposed investment or not?
Here is a general formula that I recommend using to answer that question. I call it the Leverage Indicator or L:
Leverage is equal to the return on equity (ROE) divided by the annual percentage rate (APR):
L = ROE / APR
Please note that the return on equity (ROE) is not the same as the return on investment (ROI). ROI is the money that you receive as income from the entire asset. ROE is the money that you earn as income from the share of the asset in which you have an ownership interest, which is directly related to the money that you have personally invested initially.