One Reason Why It’s Harder to Build Wealth

It’s Labor Day and it’s a traditional union holiday.  Personally, I don’t care for unions.  I especially don’t care for the public labor unions.  To see the kind of damage they can create, come to Illinois where we have a billions upon billions in pension debt.  Property taxes are going up $500 million next year, and it doesn’t even put a finger in the dike.

At least unions have done alright by the capitalism that they detest.  The money they did invest in the stock market over the years since 1900 has done pretty well.

It’s a lot harder to build wealth today than it was in generations past.  There are a few reasons, but one I can readily point to and solve is the limitation on people’s freedom to invest.  The way to build wealth is to assume a little risk.  Government regulations are stopping most of America from assuming risk.

Right now, technology is changing every single aspect of our lives.  The innovation that is taking place is just as large as the switch from the agrarian age to the industrial age.  It will have just as big an impact on our lives, and money will be made from investing in it.

The cool thing is with the internet, it’s much easier to learn about it and get access to it.  Except there is a velvet rope that stops most people and that’s the IRS.  You have to be an accredited investor to invest in early stage companies.  It’s a benefit to the 1%.

If you are a factory worker, you are prohibited from making a decision for yourself, and risking some money to make some money.    I looked back and when Oracle IPO’ed, it sold 2.1 million shares at a price of $15.

ORCL data by YCharts

Microsoft IPO’ed the next day. Bill Gates made $1.6 million for himself that day, but owned another $350 million in stock.  Microsoft’s valuation was $617 million. Today, the inflation adjusted price would be $1.3B.  If that factory guy would have bought stock in $MFST, spent just $2500 bucks for 100 shares.  After splits and dividends that $2500 would have turned into $1.4M.  That’s a nice chunk of change.

Obviously, Microsoft is an extreme example.  But, no one today has the same opportunity.  Andy Kessler left a Wall Street job and moved to Silicon Valley in the early 1990’s.  He did a lot of research, and found a company that had gone public but was trading on the pink sheets.  He started a fund.  He invested.  The investment returned a billion dollars.  The only way that’s possible today is through having an early stage startup fund.  Only accredited investors can invest in that fund.  In other words, an artificial benefit to the 1%.

Companies that are in the startup world aren’t going public today.  Check out some of the highest flyers.  They all have valuations in the multiple billions.  Prior to Sarbanes-Oxley, companies would go public at pretty low valuations.  Many companies would go public at $20-$50M, which inflation adjusted would be $45-$100M.  Once they were public, the public could invest.  They could take a risk and see what happens.

I think we need to get back to that in America.   Free to choose.  Everyone should be free to do what they want with their own money.  No doubt, we will get snake oil salesman that steal a retired grandma’s life savings.  That’s horrible and I feel really bad about that.  At the same time, we are going to create a lot more wealth for the people that can use that wealth creation the most.  The reward is greater than the risk.