An Investment Manager's View on the Top 1%

http://www2.ucsc.edu/whorulesamerica/power/investment_manager.html

by niels_olson • 15 years ago

198 64 15 years ago

www2.ucsc.edu

ryanmarsh• 15 years ago

I'm still not discouraged... keep trying.

ShabbyDoo• 15 years ago

In summary: Those in the 99th to 99.9th percentile of wealth may be richer than those in the 98th percentile, but they don't enjoy most advantages implicitly granted to the top 0.1% of Americans.

gburt3• 15 years ago

I think this is a very important point. The 1% is not the enemy except for in symbolic terms.

The enemy is a much smaller group of individuals/corporations than that, and perhaps even, the enemy is more of a "process" than it is any group. I doubt Wal*Mart executives sit up at the top of their tower and plan about how they can tear apart society for their own self interest, but rather, there is a whole process and system built up that is doing exactly that.

cynicalkane3• 15 years ago

I was ready to agree until you said Wal*Mart, in particular in the context of 'tearing apart society'.

Economists--including progressives, such as Matt Yglesais--often comment on the bipartisan fetishization of small businesses and liberal demonization of large ones. This attitude often seems motivated by isolated incidents--the tendency of any deep pocketed company to attract bad press and lawsuits--not the general effect of large business on people as accounted for by sound economic data. In general, large businesses tend to offer better jobs and more advanced economies tend to have more, larger businesses. Nor should Wal-Mart be constructed as harming the lower class, as their very low prices are especially important for the lower class which they achieve by real efficiencies of scale for which mom-and-pop stores are generally incapable. I don't have time to find citations everything, but for the last claim you can check out http://www.slate.com/articles/news_and_politics/dialogues/fe...

sliverstorm• 15 years ago

Yes, it is unfortunate. 1% was a convenient number when the movement was formed. It does not seem to be factually accurate.

ebaysucks• 15 years ago

The top 1% is only 1.2 million USD net worth, top 0.5% is 1.8 million USD.

So basically for a team of 2-3 tech founders raising a series A round is the entry ticket to becoming part of the 1% (on paper at least).

randomdata2• 15 years ago

You don't even need a fancy startup. Interest rates are quite low right now, which makes saving more difficult. But if we assume an average 5%, saving just $6,000 per year once you reach normal working age doing a regular old job will find you with well over $1.2M by the time you retire.

$6,000 is a lot of money, but it's not that much money. An iPhone, for example, costs approximately $2000-3000 by the time it is all said and done and I see a lot of them out on the street in the hands of normal Americans.

With enough time, $1.2M can be made with a regular job. Nobody said you had to be in the 1% of net worth holders by the time you turn 25, or it doesn't count.

sbov• 15 years ago

The top 1% won't be $1.2M by the time I retire. For your comparison to be valid go ask someone who was born in the 40's how easy it would have been for them to save $6,000/year.

Klinky• 15 years ago

The article suggests $300K - $400K income and $1.2M in wealth. As far as being in the 1% when you retire, $1.2M now is not the same as $1.2M in 40 years. I doubt $1.2M will put you in the 1% 40 years from now given inflation & cost of living changes.

gburt3• 15 years ago

Two mistakes.

1. Time value of money. $1.2 million in 40 years will be about $2.65 million then, assuming 2% inflation.

2. 5% average savings. As far as I can tell, interest rates are no longer exceeding inflation, and haven't been for quite a long time in market-time. I would count on your interest to barely have you breaking even, all in, unless you're taking risks with the money.

seigenblues• 15 years ago

Yep, sounds about right. At the risk of pointing out the obvious, 1% of the US is still ~3,000,000 people!

anamax• 15 years ago

What kind of "net worth" do you need to throw off $50k/year?

I ask because a $50k/year pension is not unknown.

ccollins• 15 years ago

Given a lump sum of cash and annual withdrawal of a certain percentage of that cash (3% per year is safe, 4% is pushing it, 5% is a sure way to lose your money), you would need the following amounts of money to pay yourself $50,000 per year:

$1.67 Million @ 3% (1 / .03 * 50,000)

$1.25 Million @ 4% (1 / .04 * 50,000)

$1.00 Million @ 5% (1 / .05 * 50,000)

Put another way, if you have X Million, how much could you safely withdraw each year at 3% per year?

$1M: $30k / year

$2M: $60k / year

$3M: $90k / year

$10M: $300k / year

Keep in mind you will pay tax on these figures (15% Long Term Capital Gains tax if you're lucky, or more if it's regular income). And this does not account for inflation, so assume the value of money gets cut in half every 25-30 years.

rayiner• 15 years ago

You don't even need to be an entrepreneur. A nurse/engineer couple could hit $200k in their 30's, and that income would allow a rate of saving that would lead to well over $1.2m in home equity and retirement accounts in their 50's or 60's.

theorique• 15 years ago

I'm not sure how you mean this. A Series A round doesn't confer any personal wealth - it's investment in the company in order to help it grow.

Do you mean the valuation of the private company that takes place as part of the Series A round typically gives the founders some level of paper wealth that puts them in the 1%? If so, this makes sense. (Of course, it generally takes a lot of work to convert that into something that can actually be realized in a liquidity sense.)

moocow014• 15 years ago

One thing I wonder is if the upper crust of the upper crust are actually losing their wealth in relative terms (globally) by damaging the country. In essence, if you extrapolate the trend big money and assets in a broken country are not as valuable as the same in a healthy country (whatever the definition of that is). Now I know they can move their money overseas but I would guess that much of the US's top .1%'s money making vehicles are tied to the US in one way or another.

michaelochurch4• 15 years ago

One thing that struck me was reading 1984. The inner-party elite of Oceania were barely middle-class by a material standard, and their society was falling further apart every year, but they held a lot of power. Materially, they weren't in an enviable position, any more than kings who died horribly of now-curable diseases are enviable, but the perverse and horrible (like O'Brien) could enjoy the shit out of their power and others' misery. The boot stomping on a face for a thousand years.

Most dictators enjoy their peoples' misery, and they get more out of the power than they would out of the 1-10x bump it would give their financial status (they have enough money, and unlimited means to get it) to be leading a healthy nation instead of a failing one. Kim Jong-il? While he was alive, I bet he was one of the happiest fuckers out there. And the U.S. corporatist-fascist oligarchy isn't morally superior in inclination; it's just that there are social structures (like laws and elections) in place retarding their progress.

Some people judge wealth and prosperity in absolute terms: what we can do, experiences we can have. That's how most of us on HN feel: it's a positive-sum, win-win mentality. But a lot of people see these things in purely relative terms: they like elitism and exclusion, and that others are suffering from bullshit they don't have to deal with. It makes sense when one considers that excessive financial ambitions are usually sexual in nature, and the sexual benefits derived from obscene wealth are based solely in relative social status (being "alpha").

The OP needs to be read by a lot of people (who probably won't read it): people who conflate $400k/year neurosurgeons who got "rich" and startup new-money by working their asses off (who are generally held to deserve their good fortune, and I agree) with an entrenched, culturally underaccomplished, fascistic, and depraved aristocracy of indolent, manipulative parasites that society should be getting rid of+ through whatever means necessary.

(+ To make it clear, I mean we need to get rid of the aristocracy as an institution, not "get rid of" the individual people. I'd find it quite morally acceptable to solve society's problems in a way that finds them bad, if they weren't willing to decline peacefully and gracefully, but I also think revenge is an utterly stupid impulse and find it most useful to not care either way what happens to them, as long as they're removed from power.)

moocow014• 15 years ago

Wow great post. You already touched on this but to reiterate after achieving a certain amount of wealth, freedom and comfort in life, I wonder whats the point of exclusively striving for more. I can understand wanting to not be a slave to your mortgage, employer, etc etc (in fact it is something Im actively trying to do right now to dedicate myself to my own work) and generally wanting to better your life but after a certain point the marginal difference in lifestyle achieved by more wealth becomes negligible and possibly negative.

I know this is going to sound like rainbows and unicorns but its hard for me to understand why the mega rich aren't all motivated to diligently invest a significant portion of their money and efforts into humanistic efforts. It seems like they understand money and investment in monetary terms but they fail miserably at understanding the non-materialistic and 'big picture' returns.

yangez• 15 years ago

>entrenched, culturally underaccomplished, fascistic, and depraved aristocracy of indolent, manipulative parasites

The article specifically mentions the "financial services or banking industry" in this context so that's who I assume you're talking about. Now, this sounds great when you use a vague sound bite, but are you really prepared to say that society should strive to "get rid of" anyone who makes a lot of money in the financial sector?

prostoalex• 15 years ago

Why? Asia is better for manufacturing, Europe is better for banking.

US is the largest consumer market out there, but when the credit bubble bursts, Asia will provide a pretty good replacement with tons of disposable incomes concentrated there.

api4• 15 years ago

What parasitic elites do to their host civilizations is something a little bit like the tragedy of the commons, except that the latter usually refers to exploitation of inanimate resources.

api4• 15 years ago

... and the problem I have with Occupy's "tax the rich" and similar sloganeering is this:

Given the immense political connections of the financial class, it is a virtual certainty that any attempt to "level the playing field" would end up falling not on them but on the more productive rich and the upper middle class. In other words, the burden will fall on the people who actually earned it. If anything, the financial elites will find a way to benefit from it at the expense of the "lower rich."

It's not the haves vs. the have-nots. It's the connecteds vs. the connected-nots. The connected-nots with high net worth are just peasants in fancy suits.

Really... doctors, lawyers, engineers, business owners, and executives in productive industries ought to be marching in the streets too. This is not the 99% vs. the 1%. This is about a sophisticated, complex, deeply embedded system of financial con artistry vs. everyone else on the planet. What we have here is a worthless parasite class -- a decadent nobility -- that has buried itself into our civilization like a tick.

cynicalkane3• 15 years ago

[EDIT: I may have misinterpreted the parent post as criticizing finance. I'd delete my comment but I'm leaving part of it here because it has already been replied to.]

What we have here is a worthless parasite class -- a decadent nobility -- that has buried itself into our civilization like a tick

The fact of the matter is you will have a very hard time finding a financial person who defends the current state of things. I never have. Nobody considers bailouts or too-big-to-fail optimal, and nobody likes the regulatory mud the financial industry swims in. And the financial industry, and probably my paycheck, would be smaller if none of this stuff existed. And I wouldn't mind because it'd be made up for by living in a more productive nation.

Of course, you'll still see mega-rich financiers because the economies of scale are unbeatable in this industry. And calling the financial system "con artistry vs everyone else on the planet" is a worthless thing to say because trading, investing, credit, and risk management add value and to say otherwise puts you in a very flimsy position, a position by which you'd have to adopt a wildly heterodox economic view--such as classical Marxism--to reasonably defend yourself.

veyron• 15 years ago

I think you misinterpreted the original statement. Both the article and the parent post take a critical view on inherited wealth, which doesn't necessarily come from the financial industry per se.

_dps2• 15 years ago

I often play "defender" of the finance industry among my friends, but I think we should separate two claims:

  1) finance, as a whole, is "bad" for whatever reason
  2) separate from (1) the people and companies involved in finance are "bad"

These are two entirely different claims. It's totally possible to believe that the finance industry provides valuable capital allocation and risk management services, but to also believe that the companies running these services have become corrupt (and that said corruption happens at the expense of the "99%").

I don't think one can reasonably blame the population at large for suspecting something fishy. Between bailouts of "clearing house counterparties" like AIG/Fannie/Freddie, below-inflation Fed Funds rate to which finance elites have exclusive access, a revolving door of GS alumni at Treasury, etc., one could easily be forgiven for suspecting systematic corruption. The only way to overcome this predisposition is an open commitment to transparency and "taking your lumps when you deserve them", which, in my opinion, has not been demonstrated by the finance community vis-a-vis the taxpayer.

Retric3• 15 years ago

People make a lot of money on wall street from doing one of 2 things either playing the lotto, or taking a modest slice of vary big cash flows. I would argue that much of the current financial system is designed to extract money from people and institutions with capital though fees and Martingale style investments. Consider, few people would trade an extra 1% return for a 1% risk of complete loss of all equity unless they only share in the upside. Yet, plenty of institutions try and 'pickup penny's in-front of steamrollers' because the people making the decisions share the same risk profile as the company.

justincormack• 15 years ago

Very roughly the financial sector takes 1% per annum from financial assets, by various means (commissions, fees, spreads etc).

The sector is so huge because financial assets, leverage and debt has grown so much.

Moving back to a non bubble economy, where banks and other financial institutions, the shadow banking sector (and government, and individuals) are not hugely leveraged will resolve the profitability and size of the financial sector naturally.

Currently banking regulation seems to be the most efefctive way of doing this; getting to a state where too big to fail does not exist would help. There is little political will and lots of lobbying though to not get to this point.

pg• 15 years ago

As many pointed out the last time this was on HN, it's pretty misleading to consider anyone who sells their company to have made their money via "direct or indirect participation in the financial and banking industries." Disqualifyingly misleading, frankly.

niels_olson• 15 years ago

OP here. I was actually surprised to see this accepted as a new post on HN. I thought news redirected reposts to the page of the original post. Google actually shows three links

http://news.ycombinator.com/item?id=2922500 (died quietly)

http://news.ycombinator.com/item?id=2786547 (died quietly)

http://news.ycombinator.com/item?id=2844059 (exploded)

ivankirigin• 15 years ago

If a post isn't in the cache it can get reposted. It's a technical flaw but enables a good UX where if enough time has passed, a repost works.

nezumi• 15 years ago

If the top 0.1% do indeed manage to destroy the US economy, and, say, China becomes the preeminent economic superpower, does anybody happen to know if China's financial system would be able to resist the same sort of abuse? (If, indeed, it's not already too late.)

taa• 15 years ago

A very interesting article indeed. Not much new, though. I am curious, though .. many co-founders with very successful exits make the top 0.05% or 0.01% in terms of networth, but they're new money. They're not part of the 0.01% closed circle. What happens to them, usually? Are they accepted into the 0.01% circle once they've made enough money to afford it, or are they treated like a wealthier bottom half of the top 1%?

And for the wealthy people who have pledged 50%+ of their wealth to charity - where do they fall in all this classification?

moocow014• 15 years ago

I don't have any statistics to back up my points but I would think the following would be the case...

With the exception of really tremendous exits, let say a pretty successful cofounder gets between .5 million and 5 million (I'm making these numbers up but Id assume these are pretty reasonable guesses for a majority of moderately successful exits). So if thats the case you have a nice chunk of net worth but after an exit you may not have much cash flow to keep up with the big hitters who have a tremendous stream of cash coming in consistently.

Im certainly not arguing that the co-founder with the successful exit is in a bad position - just that their cash flow may be comparatively low compared to someone else who has an ongoing "money printing machine" so to say.

kennethh• 15 years ago

If anyone is interested in topics like this I would recomend: http://globaleconomicanalysis.blogspot.com/

This is one of the top financial blogs currently.

Look at articles regarding fraction reserve lending like this one: http://globaleconomicanalysis.blogspot.com/2011/03/central-b...

simonh• 15 years ago

One thing I as a Brit find strange is how the US taxes it's citizens and companies on income from abroad. The UK certainly doesn't do this and I'm not aware of anywhere else that does it either. It seems to me that if you are doing business abroad, say in the UK, you are not benefiting from US physical or legal infrastructure while doing so any more than a brit working in britain, so why are you expected to fund it?

To put it another way I'm sure Apple's operations in the UK are self-funding by now, so if Apple earns money in the UK and moves it to the US it is taxed by the US, where if a UK company transfers money earned in the UK to the US it isn't taxed. What's the justification for that? It seems nuts.

SudarshanP• 15 years ago

When Google's employees started to become rich, they were taught the best investment was index funds; that investment firms like Goldman were just out to grab their fees and didn't perform any better over the long run.

http://www.tradersnarrative.com/the-best-investment-advice-y...

tryitnow• 15 years ago

There's some other fascinating articles on this guys site. I especially like his look into the local real estate industry.

I don't share all his leftist proclivities but his research has been very eye opening and informative (and paradoxically made me a bit more libertarian).

marchdown• 15 years ago

It just occurred to me that some might not see the parallel between the "nighty-niners" and the bolsheviks. Both words mean "members of the majority".

An Investment Manager's View on the Top 1%

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