October 15, 2021
A lot of you are asking about Fiduciaries. This arcane word has broken through to the public lexicon. The financial industry is using it in complex ways, and we couldn't find a simple explanation online, so Caroline, Jayne, and others here wrote one for you. I encourage you to click through and read it.
When stock markets go up people start talking about wealth. What they are probably talking about is money. Money is a method of exchanging wealth. Money is not wealth.
Out of college I found myself going to a lot of rich people's homes, trying to convince them to invest in my startup. I went to their offices too, explaining that the Internet was a big thing. Their secretary would print their email out for them to read and after getting over that shock I would say a lot of stuff that I thought was incredibly convincing and eventually they'd ask something like "isn't Microsoft going to crush all of these businesses" and I would say "no, no it's very different from PCs trust me" and they would say "I love what you are doing but I don't love it enough to write a check." (Well, eventually some did.)
It was odd to me that all these successful people couldn't see this, but then I found computer scientist Paul Graham, who was about to go bankrupt with his Viaweb startup near me, and he was definitely on it. He was also writing some essays and posting them online, and I have referenced them ever since.
One of those essays, in 2004, discusses wealth creation. Graham got better editors after 2004, and this essay wanders a bit, but he makes two great points:
1. Wealth is the products and services that people want, and businesses get money by creating, or reacting to, the desire for wealth. It's noteworthy that the most valuable forms of wealth (love, friendship, faith) do not have transmissibility to money.
2. Wealth is not a fixed pie. The analogy Graham uses is working on an old car in your backyard on the weekend. If you spend your summer weekends fixing the car, the total aggregate wealth in the world increases.
Key takeaway: when you think about the world this way, the equity market appears attractive, because more than other markets, it reflects wealth creation, and wealth is what humans want.
Since 2004, wealth disparity has increased, and most of the disparity has occurred in the very high end of the curve. Several things converged to make this happen, among them:
1. The disruptors were not about to get disrupted themselves. When I worked for IBM in college, Lou Gerstner had taken over running the firm, leaving Nabisco for the job. The engineers called him the "cookie monster." The entrepreneurs running big American tech today are not cookie monsters, and they are applying a ferocious cocktail of engineering talent and modern management to problems. They are, in effect, disrupting themselves.
2. The Internet created network effects that led to natural concentrations. Due to the Matthew effect in economics, networks favor the dominant player. For example, local newspapers in every town succumbed to mighty global ad engines that could now reach both Chester, Vermont and Maysville, Oklahoma at the same time, and do so at almost zero incremental cost. The Uber network works better at large scale, etc. In rural America, Revenge of the Nerds went from a funny 1980's movie to taking away your parent's job.
We'll have to discuss how to tax this stuff later. Stay tuned. Strap in.
1. Viaweb escaped bankruptcy and sold the firm for a lot. It became Yahoo Store. He then started Y Combinator, which invested in little things like AirBnb, Uber, and Reddit.
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