A Simple Framework for Wealth
Create, capture, compound, avoid catastrophe and over-consumption.
Hello everyone,
I’ve been working on a few more reference posts to create a framework with which to analyze stories and extract valuable fragments. Beyond looking at investors, I was trying to formulate a broader ‘lifecycle’ formula for financial wealth that would quickly highlight key drivers in someone’s journey. The simplest one I could come up with looks like this:
Factors determining the increase of wealth:
Creation of economic value
Capture / control of that value
How much leverage is being applied
Period of time during which the capital compounds
It’s analogous to thinking about whether a company is a “wonderful” business that creates shareholder value:
Does it create value for its customers?
Is it able to capture this value (does it have pricing power and a moat to protect against competition such that it can preserve a high return on capital)?
How much can it grow, how much capital can it employ, and with what capital structure?
And for how long (when does either the moat crumble or the value creation get disrupted)?
Factors determining the decrease or transformation of wealth:
Over-Consumption (the Vanderbilt model)
Charity
Catastrophe (substantial loss of capital, not part of the ordinary course of business)
Whatever is left eventually becomes part of one’s legacy