If you search for investments, money, or wealth on the Internet and every social media platform, you’ll find thousands of posts on how to get rich fast. Most links will lead to a course, guide, training for marketing, flipping houses for Airbnb, investing in crypto, NFTs, or real estate.
The difference between wealthy and rich is not related to how much money you have but your lifestyle and legacy. Wealth is about assets and what you are going to leave behind. If you haven’t heard, you too are going to die.
If you read my previous blog, you would guess that I will inherit nothing; therefore, how the fuck can I write about generational wealth? I have two answers.
I am consciously working towards it, I did not start in my 20s, but it clicked in my late 30s. The first time I saved for my retirement was in my early 30s; I started saving because I witnessed how my father, in his mid-50s, was unable to find a job to pay the rent. I was investing in having something that could allow me to pay the rent if I was unemployed. Legacy, wealth, and generational wealth are today my everyday job since I tirelessly move startups’ chances to become successful companies.
The billions of likes of getting fast rich posts are an indication that you are interested in the subject, and my point of view as a professional investor might serve to achieve your goals. This is not a get-rich-fast post; it is a be mindful of your choices, your relationship with money, and a no-nonsense guide to leaving more than a pile of debt to your progeny.
While reading about the subject, I found great material out there. To my surprise, a meaningful amount advocating for financial freedom for women. Well done! Wealth inequality has historical roots, and the gap gets wider. According to UPENN, white households inherit 5.3 times over black and 6.4 times over Hispanic families. This is something systemic, but you and I can move the numbers. You can start anytime as I did and work towards a legacy.
Ok, Ocho, but I am buried in a debt pile with a terrible job, or I am already well off; what’s next. Let’s look at your probability to make it work.
If you are already a millionaire in the US, you are in the top 3%, the chances you are over 62 are 12.5%, and if you are under 40, you are part of the 1.78% of young wealthy Americans. Only 1 in 15 Hispanics is a millionaire compared to 1 in 5 white Americans. If you have a post-graduate degree, your chances of being a millionaire are over 32%.
80% of all millionaires inherit money. On the downside, if you are a non-white college-educated unmarried 30-year-old woman, your chances of reaching the poverty level are 4 in 10. And of course, if you are a divorcee or might get a divorce, divide all probabilities by 2.
There are some numbers that either can explain how you made it or how to get there. Your chances of being born a millionaire were 1 in 586,206.
If you are not there, what are your odds of becoming a millionaire by:
Marrying a millionaire – 1 in 215
Writing a New York Times bestseller – 1 in 220
Becoming a professional athlete – 1 in 22,000
By playing poker – 1 in 38,388
Becoming a CEO of a major company - 1 in 100,000
Becoming a successful movie star- 1 in 500,000
Becoming the POTUS – 1 in 10,000,000
Winning the lottery – 1 in 14,000,000
Surprisingly, the odds of running a successful startup are 1 in 200. That is how I keep on doing it, I also married a millionaire, and hopefully, someday, I’ll write a bestseller.
Another way to become a millionaire is to be associated with one of those startups. Our successful companies generate wealth for founders, executives, employees, and investors.
In our fund, we have different types of investors, all high-net-worth individuals, from different paths in life. From successful young executives with small kids to seasoned C suite executives with grandchildren. Successful entrepreneurs and billionaires, people from Harvard and Mexican public universities. For some, we were their first investment; also, for our team, this is the first time they are entitled to earn equity. Working in a startup or startup fund seems like a risky path, but it is more likely to be victorious than becoming a CEO of a major company. Access to the four-year vesting one-year cliff Silicon Valley traditional option pool model of a good company is a great way to do well by doing good. And the equity has a compounding effect, which is the only path to wealth generation.
Here are the 8a formulas for wealth generation and leaving something behind:
1. Equity = Generational Wealth – A C-suite Fortune 500 seasoned executive once told me how he moved from one company to another and the hiring process. I was shocked when I heard he declined the first offer because he wasn’t there to get a job; If he was working was because he was building a patrimony, a considerable salary was not enough; he wanted equity in the company. If you have a 9 to 5, you need to learn a lot or get equity. We all have heard how Beyonce asked that UBER pay for her performance in equity; she made 30X. Put your talents to work towards your business.
2. Human Capital + work = FIAT. Hustle is the word, but in reality, it is education plus hustle; if you cannot get a job where you get equity, your next investment needs to be education. You need to have an ability that the market loves. In our current era, Computer Scientists are becoming millionaires. Getting trained formally or informally is what is required. This also works while allocating your assets. “An education in knowledge pays the best interest.” This should be your life pursuit, becoming more educated and knowledgeable. More extensive libraries lead to larger outcomes. Start reading. If you have kids, give them the best education you can afford; if you want them to be more successful than you are, the easiest path is a better education. The Indian diaspora has turned into education for social mobility; look at the size of their companies and their impact worldwide. Who is leading the top tech companies? I have some names for you: Pichar, Nadela, Agrawal, Narayen, Krishna, Mehrotra, Arora, Ullal, Singh Banga, etc. Do they ring a bell? Your family could be inheriting human capital.
3. [P (1 + i)n] – P – This is the compound interest formula and Warren Buffett’s wealth source. The interest after a certain period is credited to the existing principal as well as to the interest already paid. For simplicity is interest over interest. A small investment amount with a yield over a long period creates a disproportionate amount compared to the initial amount. The S&P, on average, returned 7.45% the previous 20 years. If it follows the same behavior for the next 20 years, investing 100 dollars a month over that same 20 year period would produce over $52,000. Some companies doubled their valuation every year, making the return over 100%. If you only have human capital, start compounding it.
4. > Risk > Reward – This one seems obvious; let’s break it down into two scenarios, you are putting money towards an investment; if your money is safe, it most probably is paying way less than 1%. If the money can be lost, your return could be 100% or more. The same applies to starting up; if you have a secure paycheck every month, that is probably it. If you are doing somersaults finding money for your payroll, most likely you own the company, and when successful, it will be a source of wealth. If you were part of the first ten employees of a unicorn, you are killing it; if you were part of the first 100, you are doing great; if you are part of the first 1000, you are ok, unless your human capital is so extensive that you are part of the C-Suite or upper management. Human Capital translates into higher equity compensation.
5. 2+2=4 – Learn to add. This is only half a joke. You can’t fix what you can’t measure; you hated math and numbers in school; your heirs are doomed. We all need financial literacy, but it starts with math. Math is not hard; you need to put in the work. Founders, investors, executives, everyone should understand compounding interest, IRR, TIR, NAV, MOIC, CXC, EBITDA, dividends, and all the ratios that apply to business and calculate them. This is simple fucking math. The same thing applies to debt. Know your math, be comfortable with your figures, know where they come from; that is the only way to adjust the outcome, measure, adjust, iterate, and measure your wealth. It is not a sin. Talk to your kids about money; it is ok; in my culture, when people speak about money, they lower their voice; it is laughable, I know, but it is perceived as unpolite to talk about the subject.
6. 100 in investments > 120 in income. Learn about taxes; everyone hates the subject. I believe it is because it involves math and, of course, you must pay. It is a fascinating subject, from the difference in states to estate tax, long term, short term, etc. Back to formula #2, enhance your human capital. As one of our investors says, “if you are paying taxes is because you are making money.” You can also offset some of your taxes by donating to your favorite charity and helping someone. This is my favorite one www.8latinxfoundation.org.
7. Y = k Xα ≠ e−(x − μ)2/2σ2/σ √2π – Probably I lost you here, but this is my favorite one. Keep reading 😀. In English, it means that Power Law distribution is not the same as Normal distribution. I will tie two ideas here; one is the probability of a very improbable event, and the other is the power law. We are used to a normal distribution; common values lie in the middle, outliers on the outside. We use this distribution or approach for almost everything that we grade, it is called NORMAL, but it can be called typical. Also, for humans, it is hard to think in exponential terms. In the power-law, you have one outsized winner, a second good player, and everything else is a longtail.
Peter Thiel explains, “Indeed, the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from principles instead of formulas.”
– I love this paragraph; we believe as a society that our approach to investments should follow a normal distribution that leads to returns; yes, S&P ish returns that are great. In contrast, atypical returns come with a power-law approach to investment.
From Peter Thiel's Zero to One, “Given a big power-law distribution, you want to be fairly concentrated … A better model is to invest in maybe 7 or 8 promising companies from which you think can get a 10x return”.
Our fund is precisely like that, an outsized 100X+ return company, three 3-10x range, a couple in the 1x neighborhood, and four that went to zero. We have concentrated more capital through SPVs in our top performers, creating atypical returns. One example of the power law is compounding; the return difference is related to the yield. What if your investment doubles its valuation one year? What if that happens during the first five years? Imagine it grows five times in year three and 17 times in year four. Outsized returns are coming. How could this happen? In our fund, it comes from investing in fixing systemic problems in a massive and fragmented market.
Imagine you invested in a company that promises to cure cancer, and it finds the cure. Your company is creating something with a vast market; how much do you think your company’s valuation could grow? It is highly improbable, but it can happen. Nassim Taleb would kill me if I say that curing cancer is a black swan event, but it is an extremely rare event that leads to atypical returns. If you want to learn more about Power Law and read in, I wrote this blog in Spanish in 2015, and here is the English translation.
8. limx→∞f(x)= ∞ – The term of your investments should tend to infinity; the official answer to how long depends on whether you are investing for your kid’s college or leaving something behind. The minimum for me is eight to ten years. There are meteoric rises, but even the fastest-growing companies take ten years to be ripe. Ten years allows you to go up and down the economic cycles. If you are starting up, the 7-year mark will shed some light on your economics, and the 10-year mark will tell you if it is time to move on or keep on. This is one of the reasons why entrepreneurship is brutal; not only your probability of succeeding is 1 in 200, but it will take ten years of your life. Be encouraged by statistics if you pass the 5-year mark, most probably you will make it to the 10-year mark and collect. Twenty years sound better than 10, and 40 years way better. Starting up is still the fastest way of creating wealth; it took only three years for Mark Zuckerberg to become a billionaire, ten years for Bill Gates, and 33 years for Warren Buffett, who is only an investor. The fastest self-made billionaires and millionaires are startup founders.
a. Gross Income – Expenses = Net Income – I know, statistically for 97% of Americans and around 60% of you, this is bullshit; you are barely above the expenses line, with meager savings and poor retirement accounts. The reality is that 51% of Americans have less than three months’ worth of emergency savings, and this is the US, imagine third world countries. If you are on the younger side, I understand the desire to look like you are making it, showing the world your worth with your outfit, car, house, etc. I know because I experienced it. It is not worth it; I spent hundreds of thousands on designer clothes, expensive vehicles, and expensive rents. I still have over sixty pairs of Ferragamos that I never wear, around 100 sunglasses; everything is worth ZERO, NULL, NADA. It is not an investment. I used to tell that lie to myself; it didn’t reflect my worth, just my insecurities. Victor, my former partner (Suggestic’s founder), told me a long time ago that we need to show off our people, profit, processes, clients, pipelines, and know-how, not our offices. The same thing applies to you as a person; show off your knowledge, your skills, your abilities, your performance, your preparation, your charisma, your mindfulness, your intelligence, your graciousness, your kindness, your insights, your investments in impact, and why not, your returns. If you are brown like me, you will probably feel tempted to wear Gucci loafers to play the part; I strongly recommend wearing your best mind and something comfortable. I assure you that the Gucci loafers will come, and you won’t wear them.
There is no formula for this one, and it potentially is the hardest one; your legacy will be tainted if you don’t take good care of this point. Educate your heirs in financial literacyand how you got the assets if you are leaving assets, in your business, if you are leaving one behind. Even if it is just the family home, educate them on their responsibility with the house, income, or financial assets you are leaving. Once I went to Père-Lachaise, the famous Paris cemetery, I recognized only 10 to 15 names, Jim Morrison, Oscar Wilde, Balzac, Moliere, Max Ernst, Proust, Bugatti, Chopin, Marceau, etc. It probably was just my French history ignorance, but what I remember was experiencing a sense of deep sadness, not because I was in a cemetery, but because just a few really make a dent in the Universe, and fewer are remembered and commemorated. You probably don’t know who invented the computer or the phone or the ones behind the first stock market. Steve Jobs, Bill Gates, and Buffet will be forgotten in 150 years. The education, values, and principles that you live by and teach to your heirs are your most important legacy and the only way that you can be remembered. That by itself makes you wealthy. Keep on making the world a better place.
Un abrazo.
Carlos (Ocho) Ochoa