I wonder if at a certain point, someone learns about compounding, and just sticks with it, building generational wealth. And poof, the wealth just keeps growing as long as the descendants don’t make errors.
We seem to love creating stories about why so-and-so is rich, but, I suspect the most common answer is “time, patience, and no major bad luck”.
You make it sound easy, but there are relatively few billionaires in the US descended from historically wealthy families [0]. First off, this kind of compounding has only really been possible since the industrial revolution (~200 years). Before that, wealth came primarily from land ownership, which was zero-sum. Second, "no major bad luck" has been pretty hard to come by in most of the world across multi-generational time-scales. The US has had a historically exceptional period for the last 80 years or so, but there is no reason that has to continue. Third, "as long as descendants don't make errors" can also be a significant hurdle. Many Asian countries have a saying: wealth does not last past three generations (not meant to be taken literally, but people say it for a reason).
Also, to start compounding, you have to have enough to compound. Most people instead start off significantly in debt (student debt, mortgage/rent, etc.). Then they try to save enough to be able to raise their children and retire before they become too infirm to work, at which point they start compounding in reverse. All the while, they are competing with everyone else trying to do the same thing for how much they are willing to pay for scarce resources and how little they are willing to receive for their employment. Having your compounding achieve escape velocity is the exception, not the rule, and it has to be that way.
I also suspect that’s the most common path to single-digit millionaire in the US. My parents were the first generation on either side to attend college and the steady economic progress across 5 generations is impossible to miss.
Teaching the next generation(s) about how to invest (in self and in markets), not spend time nor money to frivolous excess, and delaying gratification are other critical parts of sustainability of family wealth. I think those were as big a factor as any other in the 5 generations from my kids back to their great-great-grandparents.
I'm not sure if the next few generations will have the same opportunities as the last few that enjoyed America's dominate place in the world, who also took out incredible amounts of debt that the upcoming generations will have to pay back somehow.
The values you mention are timeless & should be taught to all.
Hopefully technology continues to be a thing that rises all boats & that more people can get said boat.
I fear the current tax laws, political contributions & financial regulations favor those with more wealth so much that when you factor in compounding, their wealth will continue to grow at extreme levels compared to those with less wealth. Retail needs to start pulling their money out of stocks until large companies reduce executive pay to reasonable levels. Otherwise we just blindly keep supporting this current chaos. I believe we also need to start taxing margin loans, instead of going down a wealth tax road.
> The values you mention are timeless & should be taught to all.
Agreed, with the related note that I think that facts/knowledge can be taught by strangers, but values must be taught by family or another tight community structure (church, respected elders, or similar). Schools can prattle on all they want about delayed gratification and it won’t move the needle in behavior.
There are schools that can serve in that manner, but it’s a tiny minority of them. No (or virtually no) public schools with 125+ students per grade will have that tight community structure.
A private school with 20 per class and 60 per grade has a fair shot at it. Maybe a small public district could as well, but I’ve never seen it happen there.
Sports teams with strong non-athletic aspects to their program are another possible source of values transmission.
I agree that it’s not the sign on the building that matters, but the content and consistency of what happens inside it.
It’s true in theory, but a couple of big things happen 1) for the vast majority outlays increase as fast if not faster than wealth, and 2) things like divorce/remarriage/second families happen creating massive dilution, 3) the experience of most HNW clients is more like 3-5% real after tax.
Yes I suspect the rich's strategy of owning nothing and controlling everything contributes as much to their wealth retention through the inevitable catastrophic events in life, as much as snowball interest accumulation does.
Middle class / poor people generally know how to build wealth through interest but make the fatal mistake of keeping their wealth largely tied up in on-paper assets in their name, this means they're ripe for the taking from every judge / wife / healthcare creditors / random guy with a lawsuit as soon as something in their life goes south. Of course once you get to a certain segment of underclass people who are basically unbanked you get back to horse-shoe theory and you'll never be getting their $50k gold chain they keep around their neck.
Even within compounding there's an interesting phenomenon.
Start with $100 and compound it at 10% per year for 30 years and you end up with about $1,700. Improve that return by just 1% to 11% and after the same 30 years you have about $2,300.
That small 1% edge produces roughly 35% more money in the end. Compounding is extremely powerful, and even marginally better money management leads to vastly better outcomes over time.
Over the last 100 years, the S&P 500 has grown with an average of 6% yearly adjusted for inflation (9.8% nominally).
That means an inflation adjusted doubling every 12 year.
It also means that if you manage to live on e.g 1% of the wealth annually, your wealth will double(inflation adjusted) every 15 year.
So yeah, as long as you don't get too many children (branching factor not more than 4) you 'just' need to get filthy rich, and none of your descendants ever need working.
The last 100 years has been the era of the American Empire, which is monetized through the network effects of the dollar and dollar-denominated-assets. We don't have ships full of Potosí silver, but we do have 10% yearly S&P returns in an economy growing 3%. Extrapolating another year of that is probably reasonable, extrapolating another 100 years of that is probably not.
Yeah, it's easier to analyse the past than predict the future. I agree that I made a statement about the luxury of wealth the last century.
I don't know if the S&P500 will grow at the same rate the next century, but I am willing to bet a beer that stocks in wide index founds will grow faster than both inflation and average salary for the next century.
I think the realistic number is is more like 2-4% if it’s not supplemented by working (and sometimes even working) I also think when you add in things like paying for private school/ college, divorces, taxes, carrying cost of real estate, etc. luxury travel/clothes/meals/vacations it’s a big number.
I’m not saying it’s not possible, but I suspect the vast majority of grandchildren of a wealthy couple have meaningfully less than the original couple did, as well as less than their parents did.
2-4% of the wealth you mean? That surely depends on the wealth... If you need 200k a year that's 2% of 10 million, but 1% of 20 million.
If you manage 1% then the real value doubles after 15 years. If you need 2% annually, the real value doubles after 18 years. The moral of the story is the same, with enough wealth you can live comfortably while your wealth grows.
The tough part is someone with 20 million "in the bank" will have a hard time constraining themselves to 200k/yr expenses. It seems like a lot but next to 20 million the temptation to spend a little, like 1m on a house, 100k on a car seems like nothing and a potentially reasonable purchase. But it drastically changes the trajectory of that balance.
And you wouldn't feel as good spending 1m on a house or 100k on a car with a 200k salary and zero in the bank.
and the further you get from the actual work that created the nest egg the greater the temptation - because no one treats found money like earned money.
We seem to love creating stories about why so-and-so is rich, but, I suspect the most common answer is “time, patience, and no major bad luck”.