7 ms·

How the rich get richer (2020)

50 points by sigma5 3y ago

matt-attack 3y ago
Isn't the theory of compound interest sufficient to explain why the rich get richer faster than that poor get richer?
- eru 3y ago
  No, why? There's no single 'theory of compound interest'. First, the rich don't reliably get richer faster than the poor get richer. (Despite what the linked article or other texts might claim.) Second, interest rates are mostly an abstraction. Yes, if two people are both putting money in a bank account in the same currency, the one with the higher interest rate will get richer faster. In the real world, many investments yield a variable nominal rate of return (eg real estate, stocks, art, etc). And you also have to worry about factors like inflation or counter party risk.
  - VirusNewbie 3y ago
    >First, the rich don't reliably get richer faster than the poor get richer. yes they do, as money printing benefits those who are leveraged into assets more than other types of debt holders. The rich (by proxy, through investing in the stock market) actually hold more debt in aggregate. And per capita, they hold WAY more debt, hence benefit from money printing even more. Money printing is indirect wealth transfer from everyone else to the rich.
    - eru 3y ago
      You seem to assume that creditors are a bunch of morons? Any inflation that's anticipated at the time a debt contract is made will be priced in to the debt contract. That's (part of) why high inflation economies have high interest rates. You can load up with debt as well: it's fairly easy to open up a margin account at eg Interactive Brokers, or (almost equivalently) to trade in options (which have margin financing sort-of built-in).
      - VirusNewbie 3y ago
        This is the most arbitraged thing in the world, as inflations are lagging indicators. Chart M2 growth to CPI and you can clearly see what I mean.
        eru 3y ago
        > This is the most arbitraged thing in the world, [...] So we agree and you say that this thing is already priced in? Good. Yes, market participants anticipate many things, and make their contracts based on what they expect. Not on any mechanical considerations of what happened before.
      - pixl97 3y ago
        >You seem to assume that creditors are a bunch of morons? After 2008 and 'too big to fail', you don't?
        eru 3y ago
        'Too big too fail' is mostly about taking advantage of (implicit or explicit) government guarantees. Ie making the taxpayer bail you out. That's very different from normal creditors being morons. (And yes, the people with resources often, but not always, have an easier time getting the government to give them even more resources.)
  - robotresearcher 3y ago
    > the rich don't reliably get richer faster than the poor get richer. Given same rate of return, the one who puts in the most money gets richer faster, in absolute dollars. The article says that on top of this, those with more capital get better relative returns too. You don't refute this by just saying it's not so. The increasing wealth disparity we observe would seem to support this idea.
    - eru 3y ago
      Global inequality has declined in recent decades. (Mostly thanks to India and even more so China going from dirt poor to poor or middle income. But many other countries like South Korea or Singapore and previously Japan have also caught up. Poland and many, but not all, former Eastern block states have also done quite well.)
  - HumblyTossed 3y ago
    > the rich don't reliably get richer faster than the poor get richer. Doubling 100M in 10 years to 200M is, IMO, getting richer faster than double 25K to 50K in 10 years.
    - steveBK123 3y ago
      Also the poor generally don't have wealth to speak of, definitionally. Having $25k or 50k in savings is quite far from being poor.
- marcosdumay 3y ago
  If any constant factor were sufficient, there would be no time period when the reverse happened, the modern economies would be in an impossible state.
- schemescape 3y ago
  I don’t see the logic there. If they both got the same interest rate, then their wealth would grow at the same rate. Add in progressive taxation and the gap might narrow. If they’re getting different rates and taxation is regressive, then those seem like better explanations. Edit: also spending patterns. Edit again: note that this wasn’t meant to be a complete explanation. I just wanted to point out a few reasons why compound interest is not sufficient to explain a widening wealth gap (the claim in the comment I responded to).
  - foota 3y ago
    Well also, you can't benefit from interest if you don't have any money left over.
  - adastra22 3y ago
    Interest returns (including ROI on investments) only help you if you have money in the market. The poor don’t. The poor are also disproportionately affected by inflation, as that causes wage stagnation, whereas regular old inflation is less than interest rates so it is built in protection for capital holders.
    - schemescape 3y ago
      Yeah, more great examples of why compound interest is not the only explanation.
  - steveBK123 3y ago
    Low income spend a higher % of their income - therefore inflation is bad (rent/food/gas costs more). High income save & invest a higher % of their income - therefore inflation is good (their stocks go up). This isn't some sort of moral or judgmental statement. It's simple math. The more your income goes up over time, the less of a % is needed to cover the basics of food/shelter/energy.
    - jdhsvzhhgfr 3y ago
      Not quite. Inflation doesn’t make stocks go up Willy nilly, that’s outright silly.
- vondur 3y ago
  Not really. I was watching a video about how someone like Elon Musk won’t take a salary from their company. Instead they get paid in stock. Using the stock as collateral they take out loans at low interest rates based on how well the banks assume that the stock will perform. Then all of that money they have is non taxable. If the stock performance outpaces the interest rate, then even better.
  - eru 3y ago
    Details depend on jurisdiction, and exact legal structuring. (Eg where I live, there's no capital gains tax, so someone like Elon Musk could just sell their shares without any extra taxes, instead of having to borrow against them.)
    - mrguyorama 3y ago
      They would probably still do that scheme, because it has the benefit of you never see the downside risk of stock. If the stock goes up, you can pay off the loan and keep the difference. If the stock becomes worthless, you can default and let the bank be stuck with trying to claw back funds from a bankruptcy. Notably, the rich do not have problems with "credit score", which never seems to apply to them.
      - eru 3y ago
        It sounds like you assume banks are run by morons that like losing money? And it sounds like you have no idea how borrowing against stocks works? First, the banks charge you interest depending on amongst other things the risk incurred. More risk, more interest. (Look at eg junk bonds for an example.) Second, when you borrow against your stock, you typically only get, say, 50 dollars loaned for every 100 dollars of stock. (Details vary.) If the value of your stock drops anywhere close to eg 75 dollars, typically the bank has the right to sell some or all of your stock to pay off the loan. If your stock dropped so quickly that it's gone before the loan has been paid off, the bank might or might not come after your other assets. Whether they can do so, depends on the contract you have with them. Again, if it's a non-recourse loan, you are going to pay higher interest, and they'll demand more conservative loan to value ratios. > If the stock goes up, you can pay off the loan and keep the difference. Third, why would you pay off the loan, and with what money? The whole point of the scheme is to never sell stocks, so you never have to pay capital gains taxes. You just let your loan's balance accumulate over time with the compound interest. (One popular scheme is called 'buy-borrow-die': because of a quirk in the US tax system, you don't pay capital gains taxes when you die. So you acquire stock somehow, then borrow against it, and you pay off the loan only when you die: your estate or the bank sells enough stocks to cover the loan, and doesn't have to pay capital gains taxes.) The banks are happy to let you run up a balance, as long as your loan-to-value ratio stays low enough. Ie as long as your stocks grow sufficiently faster than your outstanding loans. > Notably, the rich do not have problems with "credit score", which never seems to apply to them. Credit scores are a standardised system to deal with average people. If you are rich enough, the bank can afford to have a real human look into your specific situation, instead of relying on a number. As as a slightly made up example: Elon Musk is known for getting into legal fights and being annoying to deal with, and trying to wiggle out of obligations. So creditors might charge him more interest purely for that risk. Whereas Michael Bloomberg always stick so this agreements, and a handshake from him is a firmer commitment than an thousand page contract with Elon Musk that covers all eventualities. Paradoxically, someone who is known to to be able to afford expensive and competent lawyers might have to pay higher interest rates than some middle class Joe Average. It's not that the bank thinks Elon Musk has a higher risk of running out of money than Joe Average; but it's that the bank fears that Elon Musk is harder to sue than Joe Average is to foreclose on.
- Xeoncross 3y ago
  Compound interest includes both value inflation from governments printing money and actual earnings/payments from assets. Owning something that earns while you sleep does tend to increase you ability to focus on what is important. Sadly, I'm not sure anyone who is wealthy has what I would call a focus on what is important. Terrible situations, failed marriages, relationships with kids, etc..
- mistrial9 3y ago
  in the first year of covid-19 in the USA, millions of small business people on Main Street had serious impacts or simply closed, worse for common employees. Yet in that same year, the net worth of the top 5 wealthiest individuals in the USA (carefully watched on Bloomberg terminal and elsewhere) increased a LOT. Famously Elon Musk in particular. How does "compound interest" explain that?
- pmorici 3y ago
  In the US, where the majority of wealth is self made and not inherited, I’d guess that it is a function of IQ. Smarter people just make better decisions with their money on average. Edit: for those that doubt [0] [0] https://www.sciencedirect.com/science/article/abs/pii/S0160289607000219 https://www.sciencedirect.com/science/article/abs/pii/S01602...
  - shmageggy 3y ago
    From the abstract of your link: > Regression results suggest no statistically distinguishable relationship between IQ scores and wealth Stop spreading dangerous myths.
    - pmorici 3y ago
      It says that earnings are correlated with iq.
  - deterministic 3y ago
    There is zero correlation between IQ and wealth.
- ppeetteerr 3y ago
  The argument being made is that compound interest is higher the wealthier you are.
LUmBULtERA 3y ago
>The data show that an individual in the 75th percentile of wealth distribution who invested $1 in 2004 would have yielded $1.50 by the end of 2015—a return of 50 percent. A person in the top 0.1 percent would have yielded $2.40 on the same invested dollar—a return of 140 percent. I may be mistaken but I think investing in VTI (total stock market index) and reinvesting dividends from 2004 to 2015 would yield you close to that 140 percent. Maybe 120 to 130? No need to be a top 0.1 percent to invest in that. The "rich are getting richer" is a natural consequence of compound interest (which works for those with assets, and against those with debts) and the stagnation of some wages.
- fnbr 3y ago
  Not sure about VTI, but if you invested in the S&P 500 and reinvested dividends, you would have got 130%: https://dqydj.com/sp-500-return-calculator/ https://dqydj.com/sp-500-return-calculator/
- Kirby64 3y ago
  Seems to me to be a simple consequence that rich people disproportionately have assets held in stocks or broad market funds. Only a small fraction is held in low earning products like savings, cash, or bonds. Conversely, poor people either don't have any assets at all, or keep the majority in low yielding accounts such as savings. Risk adversity is a big driver of that, since losing your emergency fund or savings is catastrophic for someone with no other assets, whereas losing some of your large stock portfolio is something rich folks shrug off.
  - LUmBULtERA 3y ago
    Agreed. Those properties, along with the impact of compound interest. However, another point I have is that similar yields are accessible by non-0.1 percenters by just buying a broad-market low-fee index fund like VTI/VTSAX.
  - ojbyrne 3y ago
    The article specifically calls that out as “conventional wisdom.” “Conventional wisdom suggests that richer individuals put more of their assets toward high risk investments, which can result in higher returns. But our research finds that wealthy people often earn a higher return even on more conservative investments.”
jokoon 3y ago
It's odd how the collapse of the soviet union turned the world into a dystopian capitalist nightmare, yet everytime somebody mentions the abuse of capitalism, immediately people starts to argue about the soviet union like a strawman. It's such a disgrace. I loathe the US for this. I dislike Putin and the chinese CCP too, but the war of economic ideology is such a blatant pain, it's really frustrating how people debate about those things. I'm dumbfounded everytime I read people trying to defend american capitalism. I quit that debate so many times, it's really bad for my mental health.
- LUmBULtERA 3y ago
  This article was about Norway.
Geisterde 3y ago
The rich get richer for 2 simple reasons. Half is because they are better with money management, they think about incentives and trends constantly and financially position themselves appropriately. The other half is that our money doesn't achieve its foremost goal of a store of value, leading to the monetization of assets like real estate and stocks; since rich people have a higher fraction of income/wealth towards investment, they capitalize on inflation that redistributes wealth towards assets; compared to lower income/wealth people who have a higher fraction towards consumer spending. The idea that the average income earner doesn't yeild the same as the rich is partly true, they have better access to advanced financial instruments, but its also that they are better at analyzing the incentives.
- HumblyTossed 3y ago
  > Half is because they are better with money management, Doubtful. More likely they can simply afford to have people who ARE better with money management manage their money. The poor, they don't have any money to manage. Stop assuming they're shit at it. If anything they have to be a damn sight more clever about it.
  - Geisterde 3y ago
    Only sith deal in absolutes. Objectively the poor have money to manage, there is not likely to be a single person in the US that doesn't have money of some kind. Start an llc to avoid taxes, take on long term low interest debt to build credit and acquire wealth, don't have a kid out of wedlock. There are a variety of tips and tricks that almost anyone can engage in. I know a lot of rich people, and I know a lot of poor people, its a product of marrying someone born to a different economic class; the rich are always talking about how they are rotating their investments and ways they are finding to save money, the poor have their second baby (dad in jail) wearing the newest jordans. There is no comparison.
- friend_and_foe 3y ago
  People don't like to talk a out that first point. Something like 70% of rich people in America weren't born rich. The fact that they're rich in the first place shows a filter they got through, they're good at getting rich which isn't easy. Of course saying "the rich get richer faster than the poor" after acknowledging this becomes nothing more than selection bias. That second point, the monetization of non money assets due to debasement of our currency and how that creates a pressure imbalance that moves real wealth from dollar holders to asset holders, I'd say most people discussing this topic don't get. I get it, but before reading this I wouldn't have been able to articulate it so clearly. The mental model you have to have about finance and economics in order to even formulate that understanding is almost too big for one person's head.
BeetleB 3y ago
Mentioned in the article but it seems many commenters missed it: The rich get richer because they have access to more choices than the plebes do. There are lots of non-publicly traded investments out there. They have a minimum investment amount that many people cannot afford. A friend sets up and manages RE investment syndication deals - these are where a bunch of people pool their funds and buy RE properties (commercial offices, or large apartment complexes). He used to require $50K as a minimum investment. He now asks $75K. He is on the low end. I've encountered many that require $100K and require you to be an "accredited investor" - you need either $1M in assets (excluding your home) or earn over $300K if married to qualify. These investments are potentially higher risk (e.g. if they use your funds for 80% downpayment on a mortgage, and the value of the property drops 10%, you've lost half your investment). But their returns are quite high. For a deal that exits well, the investors typically get over 20% return (annualized). I used to be all about index funds, and then I saw these. You have to find an operator with a good track record, understand the factors at play well enough to evaluate their offering, and if you do your due diligence, then you pretty much always get at least 15% annualized. Most investors wouldn't even consider the investment if they felt it is less than that. But you need a lot of money to get in.
- thenerdhead 3y ago
  > You have to find an operator with a good track record Sounds like the bet Warren Buffett made and won. https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe... The trope of finding an operator with a good track record is regularly debunked by both the rich and poor.
  - BeetleB 3y ago
    This has no bearing to my comment. In fact, Warren Buffett, being a value investor, likely agrees with me. He would invest in companies where he had faith in their management (i.e. the operators I refer to). Your link is about comparing index funds with people who manage other funds. None of these people are involved in the business operations. So yes, they suck and index funds do better. The investments I am talking about are where you invest directly in a business. You are not buying stocks in the business, the value of which depends on a fickle market (hence why I explicitly said "non-publicly traded investments"). You are buying equity of the actual business, with a contracted amount of returns (i.e. preferred investor). The operators I spoke of are the people who are actually running the business. In the case of an apartment complex, they are involved in the operations of running the complex.[1] Don't think in terms of the stock market and index funds. Think in terms of "Hey, I'm starting a business and I'll give you 3% of equity if you give me $50K." The difference is that here they typically aren't starting a business, but buying an existing business (that already has clients, and a revenue history), so it's easy to analyze whether the business will be successful, and get a good forecast of revenue in the first 5 years. For the record, most of my investments are in index funds so I know where you're coming from. [1] OK, not really. Most will hand off to a property management company, but they've vetted the PMC before offering the investment to you.
ur-whale 3y ago
From the article's conclusion: > This suggests that while money is perfectly inheritable, exceptional talent is not. Unless I'm missing something, it also suggests that the rich get richer because they are more talented in the first place. Which kind of makes the point of the entire article rather moot.
- ppeetteerr 3y ago
  Or you can hire people who are talented. Another advantage of the extra-rich is that they don't rely on their skills alone. As the article says: "Specifically, for given portfolio allocation, individuals who are wealthier are more likely to get higher risk-adjusted returns, possibly because they have access to exclusive investment opportunities or better wealth managers"
etothepii 3y ago
Did I read this correctly? One's background rate of making it to the top 1% is 0.89%? That's amazing isn't it? It's effectively almost completely random. Not a massive surprise that someone who goes from 10% to 90% has something going for them that means they reach 99% more frequently than the base rate but that appears to then only by 2.1%, or twice what you would achieve by chance alone. I must be missing something. > Controlling for age, parental background and earnings, moving from the 10th percentile to 90th percentile of wealth distribution increases the probability of making it to the top 1 percent by 1.2 percentage points compared to an average probability of 0.89 percent.
ppeetteerr 3y ago
Wasn't this the entire thesis of Capital in the Twenty-First Century? https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Ce... A great read if you haven't already.
NotYourLawyer 3y ago
Poor people don’t have money to invest. At best, they squirrel a little bit away in a savings account and earn a low interest rate that maybe matches inflation if they’re lucky. Rich people invest in stocks. Richer people also invest in private equity etc. The results should surprise no one.
- steveBK123 3y ago
  This is it precisely. Poor people don't own assets. Rich people own assets. Inflation makes assets go up. Poor people experience the downsides of inflation (risings costs of everyday goods) without the upsides (assets they own also going up increasing their wealth). That is - if you are barely making ends meet and spend 80% of your income on housing/food/transport/energy, then 10% inflation is a huge problem for you. If you spend 20% on the same, and have 2x your income in the stock market, inflation might be awesome for you.
johnea 3y ago
> This suggests that while money is perfectly inheritable, exceptional talent is not. It's pretty funny that they assume these original generation returns being higher are due to "exceptional talent", no one even bothers to consider the possiblity that the original wealth accuulating generation were just more mercilessly exploitive assholes...
senectus1 3y ago
its simple, the rich have the spare money to invest. the poor do not. the poor must use that money to survive.

50 points by sigma5 3y ago

matt-attack 3y ago

Isn't the theory of compound interest sufficient to explain why the rich get richer faster than that poor get richer?

eru 3y ago
No, why? There's no single 'theory of compound interest'. First, the rich don't reliably get richer faster than the poor get richer. (Despite what the linked article or other texts might claim.) Second, interest rates are mostly an abstraction. Yes, if two people are both putting money in a bank account in the same currency, the one with the higher interest rate will get richer faster. In the real world, many investments yield a variable nominal rate of return (eg real estate, stocks, art, etc). And you also have to worry about factors like inflation or counter party risk.
- VirusNewbie 3y ago
  >First, the rich don't reliably get richer faster than the poor get richer. yes they do, as money printing benefits those who are leveraged into assets more than other types of debt holders. The rich (by proxy, through investing in the stock market) actually hold more debt in aggregate. And per capita, they hold WAY more debt, hence benefit from money printing even more. Money printing is indirect wealth transfer from everyone else to the rich.
  - eru 3y ago
    You seem to assume that creditors are a bunch of morons? Any inflation that's anticipated at the time a debt contract is made will be priced in to the debt contract. That's (part of) why high inflation economies have high interest rates. You can load up with debt as well: it's fairly easy to open up a margin account at eg Interactive Brokers, or (almost equivalently) to trade in options (which have margin financing sort-of built-in).
    - VirusNewbie 3y ago
      This is the most arbitraged thing in the world, as inflations are lagging indicators. Chart M2 growth to CPI and you can clearly see what I mean.
      - eru 3y ago
        > This is the most arbitraged thing in the world, [...] So we agree and you say that this thing is already priced in? Good. Yes, market participants anticipate many things, and make their contracts based on what they expect. Not on any mechanical considerations of what happened before.
    - pixl97 3y ago
      >You seem to assume that creditors are a bunch of morons? After 2008 and 'too big to fail', you don't?
      - eru 3y ago
        'Too big too fail' is mostly about taking advantage of (implicit or explicit) government guarantees. Ie making the taxpayer bail you out. That's very different from normal creditors being morons. (And yes, the people with resources often, but not always, have an easier time getting the government to give them even more resources.)
- robotresearcher 3y ago
  > the rich don't reliably get richer faster than the poor get richer. Given same rate of return, the one who puts in the most money gets richer faster, in absolute dollars. The article says that on top of this, those with more capital get better relative returns too. You don't refute this by just saying it's not so. The increasing wealth disparity we observe would seem to support this idea.
  - eru 3y ago
    Global inequality has declined in recent decades. (Mostly thanks to India and even more so China going from dirt poor to poor or middle income. But many other countries like South Korea or Singapore and previously Japan have also caught up. Poland and many, but not all, former Eastern block states have also done quite well.)
- HumblyTossed 3y ago
  > the rich don't reliably get richer faster than the poor get richer. Doubling 100M in 10 years to 200M is, IMO, getting richer faster than double 25K to 50K in 10 years.
  - steveBK123 3y ago
    Also the poor generally don't have wealth to speak of, definitionally. Having $25k or 50k in savings is quite far from being poor.
marcosdumay 3y ago
If any constant factor were sufficient, there would be no time period when the reverse happened, the modern economies would be in an impossible state.
schemescape 3y ago
I don’t see the logic there. If they both got the same interest rate, then their wealth would grow at the same rate. Add in progressive taxation and the gap might narrow. If they’re getting different rates and taxation is regressive, then those seem like better explanations. Edit: also spending patterns. Edit again: note that this wasn’t meant to be a complete explanation. I just wanted to point out a few reasons why compound interest is not sufficient to explain a widening wealth gap (the claim in the comment I responded to).
- foota 3y ago
  Well also, you can't benefit from interest if you don't have any money left over.
- adastra22 3y ago
  Interest returns (including ROI on investments) only help you if you have money in the market. The poor don’t. The poor are also disproportionately affected by inflation, as that causes wage stagnation, whereas regular old inflation is less than interest rates so it is built in protection for capital holders.
  - schemescape 3y ago
    Yeah, more great examples of why compound interest is not the only explanation.
- steveBK123 3y ago
  Low income spend a higher % of their income - therefore inflation is bad (rent/food/gas costs more). High income save & invest a higher % of their income - therefore inflation is good (their stocks go up). This isn't some sort of moral or judgmental statement. It's simple math. The more your income goes up over time, the less of a % is needed to cover the basics of food/shelter/energy.
  - jdhsvzhhgfr 3y ago
    Not quite. Inflation doesn’t make stocks go up Willy nilly, that’s outright silly.
vondur 3y ago
Not really. I was watching a video about how someone like Elon Musk won’t take a salary from their company. Instead they get paid in stock. Using the stock as collateral they take out loans at low interest rates based on how well the banks assume that the stock will perform. Then all of that money they have is non taxable. If the stock performance outpaces the interest rate, then even better.
- eru 3y ago
  Details depend on jurisdiction, and exact legal structuring. (Eg where I live, there's no capital gains tax, so someone like Elon Musk could just sell their shares without any extra taxes, instead of having to borrow against them.)
  - mrguyorama 3y ago
    They would probably still do that scheme, because it has the benefit of you never see the downside risk of stock. If the stock goes up, you can pay off the loan and keep the difference. If the stock becomes worthless, you can default and let the bank be stuck with trying to claw back funds from a bankruptcy. Notably, the rich do not have problems with "credit score", which never seems to apply to them.
    - eru 3y ago
      It sounds like you assume banks are run by morons that like losing money? And it sounds like you have no idea how borrowing against stocks works? First, the banks charge you interest depending on amongst other things the risk incurred. More risk, more interest. (Look at eg junk bonds for an example.) Second, when you borrow against your stock, you typically only get, say, 50 dollars loaned for every 100 dollars of stock. (Details vary.) If the value of your stock drops anywhere close to eg 75 dollars, typically the bank has the right to sell some or all of your stock to pay off the loan. If your stock dropped so quickly that it's gone before the loan has been paid off, the bank might or might not come after your other assets. Whether they can do so, depends on the contract you have with them. Again, if it's a non-recourse loan, you are going to pay higher interest, and they'll demand more conservative loan to value ratios. > If the stock goes up, you can pay off the loan and keep the difference. Third, why would you pay off the loan, and with what money? The whole point of the scheme is to never sell stocks, so you never have to pay capital gains taxes. You just let your loan's balance accumulate over time with the compound interest. (One popular scheme is called 'buy-borrow-die': because of a quirk in the US tax system, you don't pay capital gains taxes when you die. So you acquire stock somehow, then borrow against it, and you pay off the loan only when you die: your estate or the bank sells enough stocks to cover the loan, and doesn't have to pay capital gains taxes.) The banks are happy to let you run up a balance, as long as your loan-to-value ratio stays low enough. Ie as long as your stocks grow sufficiently faster than your outstanding loans. > Notably, the rich do not have problems with "credit score", which never seems to apply to them. Credit scores are a standardised system to deal with average people. If you are rich enough, the bank can afford to have a real human look into your specific situation, instead of relying on a number. As as a slightly made up example: Elon Musk is known for getting into legal fights and being annoying to deal with, and trying to wiggle out of obligations. So creditors might charge him more interest purely for that risk. Whereas Michael Bloomberg always stick so this agreements, and a handshake from him is a firmer commitment than an thousand page contract with Elon Musk that covers all eventualities. Paradoxically, someone who is known to to be able to afford expensive and competent lawyers might have to pay higher interest rates than some middle class Joe Average. It's not that the bank thinks Elon Musk has a higher risk of running out of money than Joe Average; but it's that the bank fears that Elon Musk is harder to sue than Joe Average is to foreclose on.
Xeoncross 3y ago
Compound interest includes both value inflation from governments printing money and actual earnings/payments from assets. Owning something that earns while you sleep does tend to increase you ability to focus on what is important. Sadly, I'm not sure anyone who is wealthy has what I would call a focus on what is important. Terrible situations, failed marriages, relationships with kids, etc..
mistrial9 3y ago
in the first year of covid-19 in the USA, millions of small business people on Main Street had serious impacts or simply closed, worse for common employees. Yet in that same year, the net worth of the top 5 wealthiest individuals in the USA (carefully watched on Bloomberg terminal and elsewhere) increased a LOT. Famously Elon Musk in particular. How does "compound interest" explain that?
pmorici 3y ago
In the US, where the majority of wealth is self made and not inherited, I’d guess that it is a function of IQ. Smarter people just make better decisions with their money on average. Edit: for those that doubt [0] [0] https://www.sciencedirect.com/science/article/abs/pii/S0160289607000219 https://www.sciencedirect.com/science/article/abs/pii/S01602...
- shmageggy 3y ago
  From the abstract of your link: > Regression results suggest no statistically distinguishable relationship between IQ scores and wealth Stop spreading dangerous myths.
  - pmorici 3y ago
    It says that earnings are correlated with iq.
- deterministic 3y ago
  There is zero correlation between IQ and wealth.
ppeetteerr 3y ago
The argument being made is that compound interest is higher the wealthier you are.

LUmBULtERA 3y ago

>The data show that an individual in the 75th percentile of wealth distribution who invested $1 in 2004 would have yielded $1.50 by the end of 2015—a return of 50 percent. A person in the top 0.1 percent would have yielded $2.40 on the same invested dollar—a return of 140 percent. I may be mistaken but I think investing in VTI (total stock market index) and reinvesting dividends from 2004 to 2015 would yield you close to that 140 percent. Maybe 120 to 130? No need to be a top 0.1 percent to invest in that. The "rich are getting richer" is a natural consequence of compound interest (which works for those with assets, and against those with debts) and the stagnation of some wages.

fnbr 3y ago
Not sure about VTI, but if you invested in the S&P 500 and reinvested dividends, you would have got 130%: https://dqydj.com/sp-500-return-calculator/ https://dqydj.com/sp-500-return-calculator/
Kirby64 3y ago
Seems to me to be a simple consequence that rich people disproportionately have assets held in stocks or broad market funds. Only a small fraction is held in low earning products like savings, cash, or bonds. Conversely, poor people either don't have any assets at all, or keep the majority in low yielding accounts such as savings. Risk adversity is a big driver of that, since losing your emergency fund or savings is catastrophic for someone with no other assets, whereas losing some of your large stock portfolio is something rich folks shrug off.
- LUmBULtERA 3y ago
  Agreed. Those properties, along with the impact of compound interest. However, another point I have is that similar yields are accessible by non-0.1 percenters by just buying a broad-market low-fee index fund like VTI/VTSAX.
- ojbyrne 3y ago
  The article specifically calls that out as “conventional wisdom.” “Conventional wisdom suggests that richer individuals put more of their assets toward high risk investments, which can result in higher returns. But our research finds that wealthy people often earn a higher return even on more conservative investments.”

jokoon 3y ago

It's odd how the collapse of the soviet union turned the world into a dystopian capitalist nightmare, yet everytime somebody mentions the abuse of capitalism, immediately people starts to argue about the soviet union like a strawman. It's such a disgrace. I loathe the US for this. I dislike Putin and the chinese CCP too, but the war of economic ideology is such a blatant pain, it's really frustrating how people debate about those things. I'm dumbfounded everytime I read people trying to defend american capitalism. I quit that debate so many times, it's really bad for my mental health.

LUmBULtERA 3y ago
This article was about Norway.

Geisterde 3y ago

The rich get richer for 2 simple reasons. Half is because they are better with money management, they think about incentives and trends constantly and financially position themselves appropriately. The other half is that our money doesn't achieve its foremost goal of a store of value, leading to the monetization of assets like real estate and stocks; since rich people have a higher fraction of income/wealth towards investment, they capitalize on inflation that redistributes wealth towards assets; compared to lower income/wealth people who have a higher fraction towards consumer spending. The idea that the average income earner doesn't yeild the same as the rich is partly true, they have better access to advanced financial instruments, but its also that they are better at analyzing the incentives.

HumblyTossed 3y ago
> Half is because they are better with money management, Doubtful. More likely they can simply afford to have people who ARE better with money management manage their money. The poor, they don't have any money to manage. Stop assuming they're shit at it. If anything they have to be a damn sight more clever about it.
- Geisterde 3y ago
  Only sith deal in absolutes. Objectively the poor have money to manage, there is not likely to be a single person in the US that doesn't have money of some kind. Start an llc to avoid taxes, take on long term low interest debt to build credit and acquire wealth, don't have a kid out of wedlock. There are a variety of tips and tricks that almost anyone can engage in. I know a lot of rich people, and I know a lot of poor people, its a product of marrying someone born to a different economic class; the rich are always talking about how they are rotating their investments and ways they are finding to save money, the poor have their second baby (dad in jail) wearing the newest jordans. There is no comparison.
friend_and_foe 3y ago
People don't like to talk a out that first point. Something like 70% of rich people in America weren't born rich. The fact that they're rich in the first place shows a filter they got through, they're good at getting rich which isn't easy. Of course saying "the rich get richer faster than the poor" after acknowledging this becomes nothing more than selection bias. That second point, the monetization of non money assets due to debasement of our currency and how that creates a pressure imbalance that moves real wealth from dollar holders to asset holders, I'd say most people discussing this topic don't get. I get it, but before reading this I wouldn't have been able to articulate it so clearly. The mental model you have to have about finance and economics in order to even formulate that understanding is almost too big for one person's head.

BeetleB 3y ago

Mentioned in the article but it seems many commenters missed it: The rich get richer because they have access to more choices than the plebes do. There are lots of non-publicly traded investments out there. They have a minimum investment amount that many people cannot afford. A friend sets up and manages RE investment syndication deals - these are where a bunch of people pool their funds and buy RE properties (commercial offices, or large apartment complexes). He used to require $50K as a minimum investment. He now asks $75K. He is on the low end. I've encountered many that require $100K and require you to be an "accredited investor" - you need either $1M in assets (excluding your home) or earn over $300K if married to qualify. These investments are potentially higher risk (e.g. if they use your funds for 80% downpayment on a mortgage, and the value of the property drops 10%, you've lost half your investment). But their returns are quite high. For a deal that exits well, the investors typically get over 20% return (annualized). I used to be all about index funds, and then I saw these. You have to find an operator with a good track record, understand the factors at play well enough to evaluate their offering, and if you do your due diligence, then you pretty much always get at least 15% annualized. Most investors wouldn't even consider the investment if they felt it is less than that. But you need a lot of money to get in.

thenerdhead 3y ago
> You have to find an operator with a good track record Sounds like the bet Warren Buffett made and won. https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe... The trope of finding an operator with a good track record is regularly debunked by both the rich and poor.
- BeetleB 3y ago
  This has no bearing to my comment. In fact, Warren Buffett, being a value investor, likely agrees with me. He would invest in companies where he had faith in their management (i.e. the operators I refer to). Your link is about comparing index funds with people who manage other funds. None of these people are involved in the business operations. So yes, they suck and index funds do better. The investments I am talking about are where you invest directly in a business. You are not buying stocks in the business, the value of which depends on a fickle market (hence why I explicitly said "non-publicly traded investments"). You are buying equity of the actual business, with a contracted amount of returns (i.e. preferred investor). The operators I spoke of are the people who are actually running the business. In the case of an apartment complex, they are involved in the operations of running the complex.[1] Don't think in terms of the stock market and index funds. Think in terms of "Hey, I'm starting a business and I'll give you 3% of equity if you give me $50K." The difference is that here they typically aren't starting a business, but buying an existing business (that already has clients, and a revenue history), so it's easy to analyze whether the business will be successful, and get a good forecast of revenue in the first 5 years. For the record, most of my investments are in index funds so I know where you're coming from. [1] OK, not really. Most will hand off to a property management company, but they've vetted the PMC before offering the investment to you.

ur-whale 3y ago

From the article's conclusion: > This suggests that while money is perfectly inheritable, exceptional talent is not. Unless I'm missing something, it also suggests that the rich get richer because they are more talented in the first place. Which kind of makes the point of the entire article rather moot.

ppeetteerr 3y ago
Or you can hire people who are talented. Another advantage of the extra-rich is that they don't rely on their skills alone. As the article says: "Specifically, for given portfolio allocation, individuals who are wealthier are more likely to get higher risk-adjusted returns, possibly because they have access to exclusive investment opportunities or better wealth managers"

etothepii 3y ago

Did I read this correctly? One's background rate of making it to the top 1% is 0.89%? That's amazing isn't it? It's effectively almost completely random. Not a massive surprise that someone who goes from 10% to 90% has something going for them that means they reach 99% more frequently than the base rate but that appears to then only by 2.1%, or twice what you would achieve by chance alone. I must be missing something. > Controlling for age, parental background and earnings, moving from the 10th percentile to 90th percentile of wealth distribution increases the probability of making it to the top 1 percent by 1.2 percentage points compared to an average probability of 0.89 percent.

ppeetteerr 3y ago

Wasn't this the entire thesis of Capital in the Twenty-First Century? https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Ce... A great read if you haven't already.

NotYourLawyer 3y ago

Poor people don’t have money to invest. At best, they squirrel a little bit away in a savings account and earn a low interest rate that maybe matches inflation if they’re lucky. Rich people invest in stocks. Richer people also invest in private equity etc. The results should surprise no one.

steveBK123 3y ago
This is it precisely. Poor people don't own assets. Rich people own assets. Inflation makes assets go up. Poor people experience the downsides of inflation (risings costs of everyday goods) without the upsides (assets they own also going up increasing their wealth). That is - if you are barely making ends meet and spend 80% of your income on housing/food/transport/energy, then 10% inflation is a huge problem for you. If you spend 20% on the same, and have 2x your income in the stock market, inflation might be awesome for you.

johnea 3y ago

> This suggests that while money is perfectly inheritable, exceptional talent is not. It's pretty funny that they assume these original generation returns being higher are due to "exceptional talent", no one even bothers to consider the possiblity that the original wealth accuulating generation were just more mercilessly exploitive assholes...

senectus1 3y ago

its simple, the rich have the spare money to invest. the poor do not. the poor must use that money to survive.