Building a Liberating Portfolio While Saving the World

Lately, I have been reading ever more frequently that 'nobody wants a job'.  That, of course, is ludicrous.  What is really meant is that most people don't want the job they have.  They spend 40 hours a week at a job and another 3.5 hours commuting to engage in an activity that they really would rather not do.  The problem is, everyone wanted to be a rock star.  The vast majority were not good enough to get one of the limited gigs, so,instead, they are changing brake pads at the local garage.  All day long they engage in the same dull and repetitive activity.

Within ten, perhaps twenty, years we will all have 'smart garages'.  We will drive in every evening and every morning the garage will have done the necessary maintenance, washed and detailed our car and we will be ready to go without ever thinking about the details.  No more changing brake pads for anyone. 

But for now, the rock star is an auto mechanic and he is selling five of his days per week to an economy that needs the work done.  In return, he is allowed to live two days per week. If you ask him if he wants his job, of course he'll say no.  However, if you tell him he can be a rock star after all, he will be in line, taking one of the gigs, before you can blink.

Almost everyone has productive urges.  They really don't want to be completely indolent.  They simply want to do the productive things that they want to do without concern for how much money they will or will not earn from it.  They want to do it as much as they want to do it, not how much they need to do it in order to have enough money.  It is from this frustration over inappropriate work rather than a desire to avoid work, that the attractiveness of The Venus Project and The Zeitgeist Movement originates.

One of the most extraordinary opportunities to work 'how you wish rather than how you must' arises from the dramatic changes that are taking place in the investment markets.  If you read the Abstract, The Death of Capitalism, you will, actually, have all the information you need to understand what it is.  However, I will summarize it here, as well.

In the Abstract I show you that Industrial Age companies had equity constrained growth of about 23% per year and typically had Market to Book Value Ratios around 2.5.  Information Age companies have equity constrained growth rates of 67% and Market to Book Value Ratios in the range of 12.  Because of this fundamental and dramatic change in the structure of Financial Markets, nearly everyone actually has their thinking about investing exactly backward.

Because the value of an Industrial Age company was so concentrated in the financial capital, both contributed and retained, people have thought about how much portfolio value they can have in Y years with an initial investment of X.  For example, suppose a 35 year old has a $10,000 portfolio that they might like to roll over into an IRA and pursue higher risk, higher return investment opportunities.  

If they set their return expectations at, say, 18% (historically the S&P 500 returns about 11%) they will expect a portfolio valuation of $1,996,292.77 thirty two later when they retire at the age of 67.  However, they understand that inflation will have devalued their portfolio and it will likely be, in today's dollars, valued at about $900,000.  They will need to lower their return expectations in order to prudently lower their risk, after retirement, likely to about 7% after inflation.  That means that they will have about $63,000 of retirement income in addition to their Social Security and/or pension income.

There is one more, very important aspect that most people don't know or don't think about.  As a mass market investor, when you buy stock, it is almost always from the secondary market.  What that means is that you are not investing in a company.  The company gets none of your money.  Rather, you are making a wager.  You are betting that the prospects for return on investment are more than supported by the purchase price.  With the fullness of time, if you are correct, you win and the seller loses.  If not, it is the other way around.  You lose and the seller wins.

It isn't quite a zero sum game because the value of stocks do tend to increase over time and most, though not all, dividend a portion of their earnings to the owner of record.  However, it has nothing to do with investing in the future economy or in the businesses themselves.  Wall Street, in this manifestation, which is by far its largest one, is essentially a huge casino where the house take, effectively, is negative.  If you win, you may be saving yourself, but you are doing nothing to save the world.  Also, above the growth in market valuation, it is a zero sum game and your win is someone's loss.

However, there is a primary market for securities, as well.  It is totally different from the casinos such as the New York, NASDAQ, London, Tokyo, Euronext, Deutsche Borse, Borsa Italiana, et al stock exchanges. It is private.  Your purchase funds the business itself.  This has been primarily a playground for the wealthy, either through Venture Capital partnerships or individually as 'Investment Angels'.  It is a very significant component of the phenomenon of 'the rich getting richer' and the resultant income and wealth inequalities.  The only significant exceptions are the IPOs where individual investors do get to invest in the company directly, at least in part.  Most IPO's also cash out early round investors and as such are secondary market purchases.

The risks in the private, primary markets are, indeed, higher, but the rewards are also higher.  When the Industrial Age companies could not grow faster than 23% per year without additional equity infusions, for the small investor, the risk was not justified by the potential return.  However, with the 67% equity constrained returns of Information Age companies, the dynamic is totally different.
In the wonderful SAP panel discussion on the future of business, X Prize Chairman, Peter Diamandis introduced the idea of an Age of Abundance.  He said that billion dollar companies will go bankrupt overnight to be replaced almost as quickly by new billion dollar companies.  In this, he is absolutely correct.  In fact, during the Transformation, Real Gross World Product (GWP) will likely grow 70 fold.  Not only will new billion dollar companies emerge, there will be seventy of them for every one that goes under.  In other words, during the Transformation, new billion dollar companies will arise everywhere.  So, let's think about how much it will cost to get into one.

In The Death of Capitalism Abstract, I show that Industrial Age companies typically will have an equity constrained growth rate of about 23% and a Market to Book Value Ratio of 2.5:1.0.  On the other hand, Information Age companies typically will have a equity constrained growth rate of 67% and a Market to Book Value Ratio of 12:1.0.  You will know whether you properly appreciate the difference based upon whether it stuns you or not.  If it doesn't, you need to think about it more.  If it does, then you understand that the world of business and investment markets is undergoing its greatest upheaval in history.  It will enable a democritization of wealth. 

An Industrial Age company with a billion dollar Market Value will likely have a 400 million USD Book Value.  Suppose that the company had been started ten years earlier and the first round of investors got 50% of the company for 100% of the equity contribution.  A simple calculation tells us that the investors must have put in 400 million USD / (1.23^10) =50,467,161.90 USD.  Their current market value is 500 million USD which translates to a respectable 25.77% annual return.  In order to buy a $1,000,000 portfolio ten years hence, the cost would be 50,467.16 USD today.  Most of us don't have that amount of risk capital available to us.

Now let's consider the billion dollar Information Age company.  Its book value will be 83,333,333 USD.  At a 67% annual equity constrained growth rate, the contributed capital ten years prior would have been 83,333,333.33 / (1.67^10) =493,917.08 USD.  However, because of the high competition for the very high ROIs that will typify Information Age companies, the initial investors only received 20% of the company for a Market Value of 200,000,000.  The annual return is 82.28%.  More importantly, you can buy $1,000,000 of portfolio ten years hence for just 2,469.59 USD today!  Many, probably most, of us do have that amount available for risk capital.

As we discuss in The Future 101, it is also very significant that in the Information Age scenario, the entrepreneur kept 80% of the company versus keeping 50% of the company in the Industrial Age scenario.  It not only enables entrepreneurship in the Information Age, it makes it much more attractive. 

So that is the light switch that needs to be flipped in your world view.  Don't think, 'I've got X to invest.  What return can I realistically expect?'  That is thinking Industrial Age.  Rather think, 'I want a X million USD portfolio in Y years.  How much is it going to cost me?' Because Information Age companies have Market to Book Value Ratios of 10:1.0 or above, the invested financial capital is actually less than 10% of the value of the company.  In order to get in, you will need to contribute a nominal amount of money, but that is minor compared to the knowledge capital you are bringing to the table. 

Now, let's get back to that 35 year old with a $10,000 IRA and a desire to get high returns while accepting higher risks.  The numbers we have been using are overly simplistic.  There will be losses.  However, one does not hold the same position indefinitely.  The increase in Market to Book Value from an initial 5:1 to 12:1, increases your return every time you change positions from a mature investment to a new one.  Taking everything into account, a realistic Industrial Age return is about 18%.  In other words, the return for pre-IPO investments in the Industrial Age were not much different than for the more liquid and generally lower risk publicly traded investment strategies.

However, with the Information Age percentages and ratios, a realistic return is in the 65% range.  So $10,000 X 1.65^32 = $91,093,253,745.  Of course, you are not likely to actually achieve such a result.  While GWP will grow dramatically over the next 30 years, it will not support everyone achieving such results.  In fact, because that isn't possible, the Investment Markets are going to have truly profound shocks as they adjust to the new economic realities of the Information Age.  We explore these shocks and the new points of equalibria in The Future 101.  For now, however, look at the following chart:

Age	Beginning	Income	Ending
36	10,000	6,500	16,500
37	16,500	10,725	27,225
38	27,225	17,696	44,921
39	44,921	29,199	74,120
40	74,120	48,178	122,298
41	122,298	79,494	201,792
42	201,792	131,165	332,957
43	332,957	216,422	549,378
44	549,378	357,096	906,474
45	906,474	589,208	1,495,683
46	1,495,683	972,194	2,467,876
47	2,467,876	1,604,120	4,071,996
48	4,071,996	2,646,797	6,718,793
49	6,718,793	4,367,216	11,086,009
50	11,086,009	7,205,906	18,291,915

What will happen in reality is that sometime prior to the age of 50, the investor will decide that the portfolio is large enough, there is no reason to continue to work at their current productive activity that is not optimal and they will choose to 'retire' with a seven figure income and an eight figure net worth.  Retire, of course, means to work how one wishes, not how one must.  Additionally, the amount that needs to be reinvested each year keeps increasing and, at some point, the investor will have neither the time nor the opportunities to continue the exponential growth in portfolio valuation.  However, many will choose to continue to allocate a portion of their income to new opportunities, thereby assuring, albeit at a lower rate, continued growth in portfolio value and income.

This is a fundamental and profound change in how investments affect personal finance.  Rather than preparing for retirement, which will actually be closer to 80 than 67 for the 35 year old of today, the person will be earning their liberation.  Long before reaching the end of their productive years, most people will be liberated from the need to consider personal finances when considering their preferred productive activity.

Of course, the sooner you begin your investment program, the sooner you will reach your point of liberation.  In the example above, it takes 15 years.  In order to start, you will need three things.

1. You will need a more complete understanding of the Information Age investment markets.
2. You will need a superior knowledge of futurity so that you can make superior investment decisions.  
3. You will need an opportunity rich and success prone productive environment that can bring you a steady stream of superior Information Age investment opportunities.

The first two can be easily acquired by subscribing to The Future 101.  You are at an Abstract site and this is an Abstract.  In The Future 101 we will discuss all aspects of building a liberating portfolio.  You will gain knowledge that will directly improve the quality of your investment decisions.

Additionally, our alumni will have the opportunity to collaborate with entrepreneurs, investors, strategic partners and advisers through Fellowship in The Polymathic Institute.  It is specifically designed to be the opportunity rich and success prone environment that you will need.  It will not only provide you with a steady stream of investment opportunities, it will also provide you with the network and infrastructure you need to successfully enter a Knowledge Class career.

Parenthetical to this article, it will also provide you with an intellectually rich social environment.  Unlike high IQ societies, there is no test score required for Fellowship although the median IQ of Fellows will undoubtedly be very high.  Rather, it will be a community characterized by extraordinary intelligence, unrelenting drive, well tempered vision and a bias toward excellence.

The information presented here is in complete conformity with the 'save the world by saving ourselves' strategy that I discuss often here and at the premium service.  As you build your portfolio, you will be enabling Information Age enterprises that will move people out of the Industrial Age economy, thereby indemnifying them against the worst of the 'train wreck.'  Simultaneously, by reducing the supply of Industrial Age job seekers, you will be putting downward pressure on Technological Unemployment and putting upward pressure on Industrial Age wages.

If you are a 'look before you leap' sort of person, I suggest that you read the Abstracts here and then subscribe to The Future 101.  It is a nominal risk for the opportunity to place yourself on a far superior career, wealth and life track.  Some of those of great vision and a high level of self confidence may wish to move directly to Fellowship.  If you wish to consider this option, contact me at Michael.W.Ferguson@hotmail.com.

I look forward to your continuing involvement in this, a great personal and societal cause and adventure.