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How To Become Super Wealthy,A Letter To Dad

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Offline Heroslodge

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How To Become Super Wealthy,A Letter To Dad
« on: June 09, 2014, 09:32:50 PM »

Staunton, Your mother and I are so
proud that in less than a week
you'll be graduating college,
and from my alma mater, no
less! So this seems an
opportune moment to share some thoughts about what
you might look for in a
career. And as luck would
have it, I've just finished a
new book, "Capital in the 21st
Century," which has helped crystallize in my mind some
things you ought to consider. The book has caused a
predictable stir among the
pro-equality set because the
author, Tom Piketty, is a
French economist with the
gall to propose a global tax on wealth. But putting aside this
na´ve, socialist claptrap, the
book is a veritable treasure
trove of advice on getting
into (or staying in) the top 1%
. The book confirms what you
already know firsthand: The
rich are getting richer; the
really rich are getting really
richer; capital is hot; labor is
not. The obvious implication is that
you must find a job where
the distinction between
capital and labor is blurry. A
job where you can take a slice
off the top by getting paid as if you owned a piece of action
even though you don't.
Because without some capital
working on your behalf, no
amount of even the hardest
and most skillful labor will get you anywhere near the
top. (How many doctors or
engineers join the country
club these days? Virtually
none.) The great news is that there is
a record amount of capital out
there to work on your behalf.
Piketty estimates that total
capital is up almost threefold
since I graduated from college 30 years ago. And these days,
the real owners of capital
don't seem to notice if people
take a little off the top or are
largely powerless stop it
when they do. This was not always the case.
Indeed, Adam Smith -- the
first economist -- felt that
even a "principal clerk" (his
word for CEO) would always
be paid based on his "labour and skill" and never in
"proportion to the capital of
which he oversees the
management." Fortunately, times have
changed in part because
economists -- Smith's
intellectual heirs -- invented
myriad ways like the
"principal agent problem," or the "marginal product of
labor" to justify otherwise
outrageous levels of
compensation, provided there
is enough capital in the
picture. Smith must be turning in his grave! Now you may be wondering:
"How much capital will I need
working on my behalf?" It's a
tricky question, but Piketty
provides the answer. Let's assume that you won't
settle for mere membership in
the top 1.0% but have your
sights set on the top 0.1%
with a corresponding annual
income of roughly $4 million. Piketty's analysis of long-run
returns (4% to 5%) suggests
that this would require you
to have roughly $100 million
of capital working on your
behalf. Although this seems daunting -- it's what the
average American makes in
2,000 years -- fear not, for
there are a few places where
this type of money can be
found: Listed stocks: The average
Fortune 500 company has a
market value of $28 billion
(280 times more than you
need) and its real owners --
the shareholders -- are virtually powerless to stop
senior management from
taking 3.0% or more off the
top. So even if the company's
performance is lackluster, and
the pot is split between you and four or five other top
guys, there's plenty to go
around. So while the
corporate ladder can be long
and greasy, it's worth the
climb. I'd suggest you steer clear of smaller companies as
they're just as hard to run as
the bigger ones but don't hold
enough capital -- the average
Russell 3000 company has a
market value of only $1.4 billion -- to be worth your
while. Venture-capital-backed start-
ups are also a decent bet
provided you get in early and
abandon ship at the first sign
that the organization is not
steadily progressing toward an IPO, or a buyout from
Facebook, Google and the like.
You might try a few ventures
in your 20s and then go back
to business school if it hasn't
worked out. Private Equity and Hedge
Funds: This industry is a
dream come true. The
standard take is generous -- a
2.0% fee plus 20% profit share
-- which should net out to at least 3.0% assuming average
performance and even after
deducting the operating
expenses of the fund. At 3.0%
, you'll need $130 million
working for you, which is more than achievable when
private equity and hedge
fund assets are a record $4.5
trillion (35,000 times more
than you need) despite
lackluster aggregate performance. This mountain
of capital attracts a lot of
competition, so don't be
discouraged if you fail to
break into the industry the
first few times. Just keep at it, but please don't be
tempted to cheat, as the
government appears to be
getting tougher on the insider
stuff these days. Asset Management: This is a
decent fallback if the hedge
fund thing hasn't worked out
by age 35. The take is much
lower -- probably 0.6% after
costs -- so you may need $600 million or more working on
your behalf but don't be
daunted. Despite strong
evidence that the industry
destroys value compared
with lower-cost index funds, it still manages trillions. And
the lifestyle is decent as many
people secretly accept that
they can't beat the market so
they don't work that hard
trying. Personal Services: If you're
satisfied with being toward
the middle of the top 1% then
consider offering personal
services to those with capital
or access to it. They tend to be very brand/quality conscious
and willing to pay top dollar
for services, particularly
when spending the real
owners' money. Most well-
paid service positions are in investment banking, law, and
management consulting
though the occasional doctor,
psychotherapist, real estate
agent, or art adviser can make
the cut. It goes without saying that
you must steer clear of
government and the
nonprofit sector at all costs.
Although the Citizens United
decision suggests that the Supreme Court may one day
allow it, explicit profit sharing
by government officials
remains strictly illegal at the
moment. As a result, you
should only consider public service as second career after
you've made the money you
need. The nonprofit sector is
even worse because it holds
little capital, has no profits,
and generates nothing but a "social" return that would
hardly pay the bills even if
you got to keep it all. Finally, never fear that
mooching off someone else's
capital is somehow second-
rate compared with earning
income from your own. I've
never felt that way, and nothing could be further from
the truth. You'll seldom be
exposed to meaningful losses
(even the London Whale gave
back only two years of
compensation), and your slice is often in addition to, not in
lieu of, a decent salary. Furthermore, if you mooch
long enough, you can build
your own capital provided
you avoid profligate
spending, multiple divorces
and the like. I'm not denying that there is a certain nostalgic
appeal to building your own
capital the old-fashioned way
by starting a business, or by
saving gradually over a
lifetime of work. But these are risky and time-consuming
strategies in the low-growth,
high-capital environment
you'll likely be living in. Son, the time for internships is
over, and now your real
quest begins. In the 21st
century, a man without
capital runs a grave risk of
finding himself squeezed towards the bottom of the
top 10% and possibly even
lower. This is not a place you
want to be. Somewhere out
there is a $100 million slice of
capital with your name on it just waiting to be found.
Your mother and I have given
you everything money can
buy, and your children
deserve no less. I know that
you won't disappoint us. Dad


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