I was reading about the Himalayan expedition by Edmund Hillary and Tenzing Norgay and was surprised to find that there was a support staff of over 400 working with them to a make the expedition a success. Two people got all the glory while there were about 400 support staff who will never see any glory, this has a significant parallel in the investment world.
Let’s start with the premise that rewards are, for a large part, linked to the value one creates. Value creation can be broadly looked at as two activities – 1) Risk taking and 2) Providing services. One who is reaching for the peak is taking a risk of dealing with the unknown terrain and weather – but will be rewarded with glory if successful. The support staff will get compensated for their effort, their compensation could be slightly better if they are part of a successful campaign, they get rewarded in either case, but will not have a share in the glory.
Let’s first look at just financial capital. There will be a few who want to start a factory, hospital, school etc., they are the risk takers, they bring in their bit of capital – a.k.a Equity, but they are also supported by debt. Worldwide, the size of debt market is about 3 times the size of equity market. Therefore, every unit of equity is being supported by 3 units of debt. Capital like effort is fungible, entire capital (both equity and debt) is working to make the business successful. Debt will get a fixed compensation (interest), while equity has claim on profits that remain after paying off the debts. If we look at the entire history of finance, in the long run equity has captured much more value than debt.
Let’s see how this translates for people. Almost everyone either works for a business or an establishment that supports business. Less than 5% of the people are business owners, other 95% are providing services to the businesses.
Let’s look at wealth and income distribution. Richest 1% of the people have 50% of the world wealth.
Yearly income of the wealthiest 0.1% is equal to the income of the bottom 90% (Thomas Piketty – Capital in 21st century). The richest people are business owners (Bill Gates, Amancio Ortega, Warren Buffett, Carlos Slim Helu). We can safely say that the effort of 95% is going to make the 5% rich, this is because the 95% does not want to take a risk, but are working hard to make the risk taker successful. Most people are also supporting businesses indirectly by putting their money in bank or some debt products, which is eventually lent to business.
In mountaineering the support staff may not have any shot at glory due to lack of skills, capital, the dynamics of mountaineering etc. In the financial world the 95% have a chance to participate in being business owners through investments in equity. Most people would be better-off financially if they invest about 30% of their savings in equities. Yes this is a bit of a risk – but it may help if one remembers that the richest people have almost all their wealth in equities (Bill Gates, Amancio Ortega, Warren Buffett, Carlos Slim Helu).
Taking an informed, consistent, and disciplined long term approach to equity investments can help individuals participate in the rewards of wealth creation.