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Post No.: 0396risk

 

Furrywisepuppy says:

 

Every rich person tends to become a ‘businessperson’, no matter how they initially made or inherited their wealth – but that’s only because once someone has enough to live on and has a lot of money left over, they might as well invest that surplus somewhere. And it’s easier to take risks if you’ve got lots of money to play with because a risk to the money isn’t the same as the risk to one’s home, meals and security if you can afford to lose that money – it’s not risking your chance to have the heating turned on but your chance for a vacation property. If you do lose something essential like a meal, you’ll grow weaker when trying to ‘pick yourself back up to fight again’ too. There are risks to any investment but already-rich people can afford to take those risks without risking their own health (unless they stress over such losses for being greedy and lack perspective for forgetting how much they’ve still got). Woof.

 

If you’re not rich then the usual route to having a realistic chance of becoming a successful entrepreneur nowadays is, when you have a great idea, you’ll need investment. (Building personal savings up for this can be too slow.) And this investment typically comes from, yes, already-rich people/groups because they have the spare money – rich people/groups who’ll purchase a huge proportion of the shares of your company and therefore its projected value, while they demand that you spend 100% of your time on the business when they themselves won’t proportionally reciprocate according to the size of their share of the company, or they sometimes do nothing more at all. Indeed there are different types of investors who’ll contribute different levels of involvement (e.g. angels, venture capitalists), and there’s a risk these investments won’t bring them returns. But, again, the risk to life as opposed to merely the risk of money isn’t equal because if they lose their total investment then they should be fine unless they’ve foolishly gambled too much, but you might lose everything such as your own home. (A bank loan might be more appropriate instead, but banks are again wealthy organisations. Here, you don’t need to give away any equity but you’ll have to repay the debt with interest.)

 

So if you’re rich, you don’t need to work like other people per se – you invest in assets and/or ventures and let other entrepreneurs/employees work while you take a cut of their smart ideas and hard efforts. This also means that you can take a slice of the ideas and efforts of as many other people as you can afford, thus spreading your risk – money can literally buy percentages of other peoples’ working lives and efforts.

 

Therefore rich people can become even richer simply because they were rich in the first place and can afford to make risky investments (in terms of money) without risking their only home or even own efforts or time. They can profit from multiple sources for having multiple investments, which if optimised, can spread and therefore minimise their total risk too. The money they already have is essentially ‘doing the work’ for them. Equity crowdfunding exists nowadays to make it easier for more people to invest in start-ups, but the vast majority of private stockholdings are still held by already-rich individuals and organisations.

 

Wealthy people can therefore afford to take some of the higher risk investments too (high risks means high potential gains although also high potential losses in an efficient market) because they can afford to lose a lot without losing their basic livelihood. Our personal risk preferences/appetites aren’t only shaped by our personalities but by our circumstances.

 

Some investors view £50k as a mere ‘punt’! And ‘punt’ is correct because it’s not like they’re better predictors of successful ventures than chance it seems – for example, perhaps only ~10% of investments made by ‘dragon’ investors make a worthwhile return, and this is one reason why they demand more equity because one investment has to make up for many failures. (They’re more involved in helping and mentoring those they invest in compared to standard venture capitalists though.) ‘Throw enough mud at the wall and some of it will stick’ isn’t an indication of predictive skill. Even they’ll accept that luck plays a key role, and that means it helps if you’ve got a lot of mud to initially play with.

 

There have been many success stories for sure, but there are also many stories where investors have missed (and dissed) offers that turned out to be incredibly lucrative too. History is littered with big examples – well-known and underreported – in all industries, where corporations, investors or bosses have rejected ideas or people and got it wrong (e.g. Hewlett Packard rejected Steve Wozniak’s vision of a personal computer several times, Kodak declined to develop digital photography technology, Star Wars was rejected by the major studios of the time, and there are numerous examples in the music industry of artists who were initially snubbed by record labels before they became superstars). There are also many examples where they’ve wasted a lot of money on things too, such as backing the wrong technologies, projects or people.

 

If you’re on jobseeker’s benefits then you’ll likely be pushed to take any immediately-paying job you can get over being supported for any entrepreneurial ambitions you may have that might bring greater but deferred economic and/or social returns. You could have a great business idea that’ll boost the economy, create many jobs or otherwise be good for the country/world, but if you’re struggling with daily living costs while trying to build it then it’s less likely going to happen, which would be a loss for everyone.

 

There are schemes, charities, incubators and early investors could like your idea and invest in it but that would mean giving a lot of equity away at that early stage. This could eventually erode your motivation if too much is taken away from you after further rounds of investment, when you’re working so hard for the benefit of the already-rich; especially if they’re passive investors who’ll take a hefty cut of your efforts while they sit and wait there for the hopeful returns. Becoming an entrepreneur might still be the best thing to do though, entrepreneurship should in general be encouraged, they’d argue that you won’t/wouldn’t have make/made it without their investment, and a share of something is better than all of nothing, but again it’s harder for some than for others. If you’re poor then you’re vulnerable to exploitation by those with the wealth, power and means.

 

Large companies can also, and often do, buy out the competition – particularly relatively fledging companies – thus already-powerful companies can stifle overall competition in the marketplace. You don’t need to be as smart to innovate if you can just buy whatever you want or need. It can certainly work out as a win-win for both parties involved, but anti-trust laws exist to help optimise the markets for customers and other stakeholders by ensuring that (near) monopolies and cartels don’t create an anti-competitive environment.

 

Money can also bluntly open doors via ‘sweeteners’, kickbacks or bribes. Even in simple and lawful reciprocation – the more one can give, the more one can get from another party. You need to spend some money to make big money – money talks! In any context, conflict or competition, the sides with the most money usually have the greatest chances of winning (e.g. political campaigns, lobby campaigns, commercial campaigns, headhunting, legal cases, tendering, football tournaments (wage bills are, or were, apparently the single strongest correlate with finishing positions in the English Premier League), etc.). Regarding passing or blocking bills/laws, if there are rich corporations on one side and millions of regular citizens on the other – the rich corporations tend to win and get their way.

 

You could pay to make your business life easier (e.g. by hiring staff, using accounting software rather than manual methods) but that obviously costs money, which you mightn’t have if you have little in seed fund and are just starting out. You could borrow money or surrender equity to pay for it again, but that means paying interest over time or giving up some of your future dividends or profits. This might still be worth it but it’s a risk, and the point of the posts in this series (the last one was Post No.: 0364) is comparing those with a rich initial starting point and those with a poor one, and highlighting the big and small (but compounding) things that make work easier for the former than the latter.

 

Rich investors don’t have any special knowledge or insight into the long-term future – they’re just taking a guess like anyone else, except they have more money to do so and can absorb the losses if/when they happen. There is some skill involved but that’s mainly in portfolio optimisation and spreading out risk, but anyone can do that with the right data and tools. The rest is guessing – especially if the markets are efficient and market prices do truly reflect what is known about the market for the foreseeable future i.e. one shouldn’t really be able to beat the market price; which one should pay. Guessing isn’t the same thing as knowing. And when it comes to guessing, they won’t have a better chance than anyone else at picking the winners. Some losers should be pretty clear, yet chocolate teapots do actually sell(!)

 

The way they cannot, with a high accuracy, pick out future winners despite having maybe picked out winners in the past (which can include their own ideas), indicates that there’s more luck to it than just skill. (An example of a domain where skill is more relevant is penalty shots in basketball – one isn’t expected to sink every single shot but is expected to sink most of them if one is genuinely skilled at the game.) The outcome should be much better than what chance will predict.

 

We can sometimes make our initial wealth via extremely good luck (e.g. via a high-risk venture that paid off against the rational odds, being born at the right time and place for one’s own ideas to be possible yet not already done by someone else before, or being born into wealth), and then once we’re rich, it’ll become easier to get even richer. This is unless we get too greedy and continue to take overly risky gambles and/or live beyond even our ample means until we’ve lost what we had. This occasionally happens, but here in most of these cases it’s not down to bad luck but a lack of good judgement.

 

Luck, or the lack of it, isn’t something that anyone morally deserves because no one earns it or chooses it. And if luck plays a large role – or really any role – then the markets won’t be perfectly self-regulating according to who deserves what. There’s no law that proves that luck always evens out for everybody in their lives – evidently some get a lot and some get very little (albeit some will try to find comfort in this reality by believing in karma due to a past life or the next life). This means that it’s not necessarily the case that ‘the cream always rises to the top’ and the gunk sinks to the bottom, which is one of the prime assumptions of self-regulating free markets. The main philosophical debate is whether it’s therefore moral to socially do something about it to adjust/correct for this luck to make it more meritocratic? Well in a democracy, it’d arguably be rational for most people to vote for measures that do for their own interests because most people aren’t considered rich – especially since the wealthiest 1% currently own ~50% the world’s wealth, and rising

 

…which shouldn’t be surprising based on how it’s easier for the rich to get richer.

 

Woof!

 

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