David Koch $100 Million To New York Presbyterian and $600 Million to Charity

It seems as if David Koch is getting greedy with his charity giving. It was announced recently that Koch would donate $100 million to New York Presbyterian Hospital.  This is still a lot given his net worth (1984-2013 net worth here). As I pointed out here David Koch so far has given away $435 million. This donation would mean he has given away $600 million (including the $65 million given away in January to The Metropolitan Museum of Art) during his lifetime. This gift was the largest gift the hospital ever received. The donation will help build a 450,000 square foot ambulatory care center. As a result of the generous donation nine floors will have ambulatory surgery, cancer infusion services, radiation and oncology, along with a floor for gastroenterology. In addition to all of this, treatment rooms will be large and allow family members to stay together during a procedure. David Koch himself said he would rather give his money to “outstanding institutions” than give purchase a “bigger house or $150 million painting or things of that nature”.  Koch also said he will continue to give his money to great institutions as long as he is living.

What is interesting is that people decades from now will claim David Koch was a modern day robber barron. He and his brother Charles Koch expanded Koch Industries as I mentioned here. What people don’t realize is that David Koch help create jobs, helped employees put their children through college, helped employees put food on the table, and help employees purchase cars. In addition to this Koch Industries creates products that people use on an everyday basis (toilet paper, water, fabrics, etc) by selling those products at a lower price and higher quality than the competition.  People always seem to think that wealthy people owe something to society. The people who got rich only got rich by figuring out the wants and needs of society and giving it to them at a reasonable price.  One criticism you also might here is that David Koch is trying to buy good publicity. This is utter nonsense as David Koch has been giving to charities (hospitals, theater, arts for many years). One perfectly good reason he might give money to medical institutions is because he himself was is a prostate cancer survivor. The odd thing is because David Koch is self interested in his own health and gives money to these medical institutions he is not only benefiting himself but anyone else who uses these medical institutions.  

Keeping up With the Sarofim Family: Divorce, Drugs, and Lawsuits (Part II)

I covered Fayez Sarofim as an billionaire investor in this prior post. Fayez first married Luisa in 1962 (only 4 years after he started his company). However Louisa and Fayez were divorced on June 25, 1990. The cost of the divorce was $250 million the largest in Texas at the time. With this wife Fayez had a son named Christopher (who now works at the firm and had his own troubles).  Daughter Allison was born in 1968. She recently was sued by someone who was bit by her dog.

By 1979 Fayez who was then 50 met a 26 year old woman named Linda Hicks. Together they had a son named Andrew who was born in 1984 (here is a picture of him with an attractive blond). Their second son Phillip was born in 1986. Linda then had another son who was not Fayez’s (this gets confusing as the even the people who get cheated are getting cheated on themselves). Finally on September 30, 1990 Fayez and Linda Hicks were married.

Linda Hicks graduated from the University of Alabama Linda herself left her husband and moved with her young son (Sean who ended up going to TCU) to Houston and worked as an entry level clerk at Sarofim’s office for between $25,000 and $50,000. Sarofirm actually got to know Linda because he needed a babysitter and offered to pay anyone at the firm $25 per hour (which back in the early 1980’s was very good money). Fayez who was already married at the time began to meet Linda for some loving at a Houston hotel. Sarofim even asked Linda to come into his meetings to “size people up”. Fayez then bought a house for her in River Oaks. Fayez was generous and offered Linda $390,000 per year (tax-free) to be his mistress.  With a new house in River Oaks Linda seemed to like nice things and used Fayez’s money to buy a Jaguar, have frequent visits to Neiman Marcus, and almost purchased every dress on sale at a trunk show. Friends would say she would drop $100,000 per day at Neiman’s.

Despite all this money Linda didn’t seem happy. By 1995 she was an alcoholic and also a pill addict looking for Valium pills. She was taking 15 milligrams of Valium every 2 hours according to this story.  The house staff (nannies, maids, and security guards) took care of the kids while Linda would go on her drinking binges and then come home and yell at the kids for no reason. Fayez would come home and remain in his suit from work and at 6:30 P.M. to watch Wheel of Fortune with the kids. Also in 1995 while in Italy Linda had one too many drinks and told Fayez to get on his Falcon 900 private jet and go back to Houston (he took her up on that offer). Another divorce was looming. Linda wanted the same $250 million that Fayez’s first wife Louisa got. However it wasn’t cheap. Linda used lawyers Bob Piro and Earle Lilly which charged a non-refundable retainer of $50,000, in addition to $450 per hour (to work on custody for kids), and then the icing on the cake was a 20% of anything above and beyond the pre-nuptial agreement they had.  This story gets ever crazier as Earle Lilly was trying to have a relationship with Linda. Linda would buy him gifts like a $4,300 Hermes briefcase. She also made Lily the trustee of her estate (which in estate planning is a big no-no). Lilly could basically use her estate to pay himself whatever he felt was reasonable. 

By November of 1996 Fayez agreed to give Linda $12 million and she could keep the River Oaks house (of course she would have to pay the property taxes on it), along with $960,000 tax free forever. However the Piro and Lilly got $6.5 million total in fees. After the case was over Lilly suggested Linda buy him a $130,000 Mercedes for his great work. By this time Linda was crashing with her alcoholism. On February 19, 1997 she was taken to a hospital for drinking too much. It was in the hospital where Linda was admitted into rehab and met Mason Lowe (high school drop-out). Mason also had a criminal record stealing equipment from Compaq computer while working as a security guard in addition to public intoxication. Linda apparently saw something in Mason though as they bought a $4 million property in Hawaii and $2 million condo in Toronto. Apparently just like Fayez took care of Linda, Linda took care of Mason buying him a Bentley, took him to art galleries, and bought him nice suits form Neiman’s. Linda’s personal problems however got worse. In 1998 Linda had been drinking for 3 days and Mason had to call an ambulance. Fayez and Linda were still friendly and Fayez even invited both of them over for dinner. Lawyers Piro and Lilly found 153 phone messages (2 hours worth) that were threatening from Linda.

In May of 2000 while climbing Mount Kilimanjaro Linda who was having trouble breathing because she smoked for so many years passed away as she try to make it up the mountain.  Linda and Mason were asked before the trip if they wanted a satellite phone however they declined. One issue Linda had was that she had two wills. The last will usually invalidate previous wills. One will named Lilly has the executor and the other will had Mason as the trustee and executor which is somewhat scary given that Mason has a criminal record for stealing things. We shouldn’t feel too bad for Mason he currently lives in an $840,000 4,700 square foot condo in Houston according to property records.

These days it seems as if the kids of the Sarofim family are also causing trouble. In 1999 Christopher (son of Fayez) married Valerie Sarofim however in the late 1990’s filed for divorce and had court hearings to fight over their daughter Gillian Sarofim. The Sarofim nanny in an affidavit said that Valerie Sarofim would just vanish and party ignoring her kids. The nanny also claims that there was drug use by Valerie. However, Christopher Sarofim admitted in court papers that he and his wife Valerie both used cocaine and marijuana in 1996. Christopher also seems to like the ladies as he seemed to be interested in Courtney Lanier (adopted daughter of ex-Houston mayor Bob Lanier).  Here is a picture of both of them (Courtney is in the middle and Christopher is on the right).

Despite all of this Fayez Sarofim has been very generous with his wealth. He has donated to many different charities including giving $25 million to University of Texas-Houston for a research building. In 2008, he gave $15 million to Southwestern University according to this article. Also he has contributed to the Houston Ballet, Museum of Fine Arts, provide financial support to Sloan-Kettering Cancer Center, Texas Children’s Hospital, Houston Grand Opera, the Houston Symphony, and given over $1 million to Hobby Center of Performing Arts.  Wherever there is a named building there is usually a capitalist behind it. Truly the Sarofim family is interesting from Fayez Sarofim as an investor, to the history of scandal, and to whatever the future holds. The Sarofim family does make the Kardashians look rather boring though.

Fayez Sarofim: Houston’s Billionaire Wizard Investor (Part I)

One day when I was in the medical center in Houston and I looked outside and noticed a building that was called the Fayez Sarofim Research Building. I thought there must be some capitalist behind it. I did some research and found it was donated by billionaire investor Fayez Sarofirm. What interest me was that Fayez made a name for himself buying high quality stocks and has been investing since 1958 which is pretty long term in the investment world. Sarofim’s motto is to never sell. However, as I did more digging I found a very different side of the Sarofim family such as $250 million divorces, having children with between different people, an ex-wife who climbed a mountain and then died, estate battles, and even drug use. Sometimes the truth is stranger than fiction.

Fayez actually came from a wealthy Egyptian family and came to the United States in the 1940’s and earned his degree from University of California at Berkeley and an MBA from Harvard. His firm was founded August 1958.

What is interesting is the number of clients that Fayez seems to have lost over the years. According to data from his website. According to this performance posted on the website it seems as if the number of portfolios decreased from 270 in 1998 to just 95 as of 2012. The assets have also decreased from $57 billion in 1998 to just $22 billion as of 2012. The firm use to (not sure if they still do) manage the pension funds of companies like General Electric and Ford along with the endowments of Rice University and the University of Houston).  There was this story last year from the Houston Chronicle that the firm might lay off people. This ADV form discloses biographical information of many of the employees who work at Fayez Sarofim (educational background, prior work experience, etc).  Many of the employees have been with the firm for many decades which is rare these days. What is also interesting is the company has many entities like Sarofim Trust, Sarofim International Management Company, Sarofim Advisors Group, Sarofim Realty Advisors, and The Sarofim Group.  The company according to this Morgan Stanley statement has 21 employees.  According to the same document Sarofirm after fees over the past 10 years has under performed the market 4.67% (versus 8.01% in S&P 500). This Fortune magazine story from 1992 discusses how “Successful investing is the result of judgment and discipline”.  During the early 1990’s he had outperformed the market.  In 1993 he was worth $300 million according to this article.  From 1983-1992 Sarofim outperformed 94% of all money fund managers.  In 1993 however he moved into the bottom 20% because of Phillip Morris. Sarofim got a personal phone call from the treasurer of Phillip Morris to say everything was okay and the company could still pay out its dividend. Fayez likes stocks with low price to earnings ratio, high return on equity, and decent dividend yields. NASDAQ actually has a website that discloses all of the firm’s holdings here.  The biggest holdings are in Phillip Morris, ExxonMobil, and Coca Cola. Fayez even helped an artist invest according to this 1999 story from the New York Times.

Sarofim owns multiple properties in Houston. According to property records he owns a 14,700 square foot home in River Oaks worth around $11.4 million. Also he owns a 8,700 square foot house in Houston that is worth $5.4 million. However, it seems like all this wealth comes at a price. (Part II Keeping up With theSarofims: Divorce, Drugs, and Lawsuits) 

Patrick Soon-Shiong: Billionaire Taking Genome From 8 Weeks to 1.47 Seconds

Since I am always interested in new technology I thought it was pretty cool when I saw this story about Patrick Soon-Shiong who is a billionaire are selling companies he started. Currently, he is worth $7.3 billion and is chairman for Nanthealth.

What Patrick wants to do is launch a genomic supercomputing platform that would reduce the time needed to sequence a cancer genome from currently 8-10 weeks to just 47 seconds. Soon-Shiong just presented some data that showed that after collecting 6,017 cancer genomes from 3,022 patients (having over 19 different types of cancer) they were able to be analyzed in 69 hours which is very quick. This was also a lot of data coming in at over 96,000 gigabytes of data. The idea is to provide real-time information to doctors and patients to help them make better decisions when it comes to health. Nanthealth who worked with oncologist (cancer doctors) saw incorrect recommendations drop from 32% to basically 0%.  

I have always wondered why supercomputers where modeling climate change, weather, or the earth’s crust. Putting a supercomputer to use for things like helping patients is a much better use of taxpayer money if it can lead to timely information that can be used by patients. As the number of people on the network grows, doctors will gain more information, meaning they will be able to help more people.  In 2012 it is estimated 1.8 billion people will get cancer and the supercomputer will be able to analyze about this amount (5,000 patients per day). The cost of the genome has dropped dramatically and will continue to drop as the quality increases (one thing I worry about right now is how accurate the genomes are however this should prove over time).

 I discussed in this post the failure of the war on cancer from the government. This has the potential to also help sequence other types of diseases that could give doctors and patients again more data. Trial and error will give quick feedback to what really works and what doesn’t work. This is how a market system works. I suspect however privacy groups will be up in arms about sharing any type of information as they always are. One question I always ask if they are so concerned about privacy why do they post about their bowel movements on Twitter or Facebook?

Larry Ellison and Billionaire Spending

As someone in the financial industry personal finance is something that is always interesting. If you are really interested in how even the rich can go poor I suggested Robert Frank’s “High Beta Rich” which has great stories of how even the top .01% can become the bottom 99% or even in some cases bankrupt. When I saw this story about Larry Ellison increasing his line of credit to $4.5 billion I began to wonder why he even has a line of credit.  Basically Ellison was using Oracle stock (company he founded) as collateral in order to pay for things he shouldn’t be buying (an island for example). According to Bloomberg Billionaires Index Ellison is worth around $38 billion. Larry Ellison is one of the highest paid CEO’s. For the past fiscal year Ellison made $96 million ($90.7 was due to stock option awards which few people actually know take years to get since they are actually restricted stock where an executive may have to wait 3 to 7 years even before they can cash out the options). Essentially 95% of the stock price is tied not the short term performance of Oracle but the long-term (3-7 year period) after the shares are awarded that matter. People forget the options Oracle gave Ellison could be worth less than the $90.7 quoted in the future if Oracle were to tank or not create shareholder wealth. According to this WSJ article Ellison between 2001 and 2010 made roughly $1.84 billion being the CEO of Oracle. If I do a performance chart of ORCL (Oracle) over the same period of time the stock was down close to 16%. Is Mr. Ellison overpaid?

It seems though that even though Larry Ellison is raking in the dough he is also spending a lot of it as well.  Usually people never change (even if they say they have). I found this great article published in 2006 from the SF Gate detailing Ellison’s ridicioulous spending  (even by billionaire standards). Phillip Simon who was Ellison’s accountant in 2002 told Ellison “I’m worried, Larry…I think it’s imperative that we start to budget and plan”. Apparently Ellison was living the really good life. He was spending $20 million on his “lifestyle”, $75 million on interest, $25 million on a villa in Japan, $194 million on a new yacht, $80 million on the American Cup and a random $12 million on UAD (which no one seems to know what it is).  He did build an insane $200 million Japanese style house. He is also charitable and wanted to increase the funding from $35 million to $100 million per year. This is all of course excluding the money he spent on Gulfstream and Cessna jets, cars (McLaren F1 car), Armani suits, and financing all these purchases by borrowing against his Oracle stock. I just hope Larry doesn’t one day face a margin call. Keep in mind at the time Ellison was worth closer to $17 billion. Not only was Ellison spending a lot but breaking one of the first rules of personal finance which is diversification. No one should have their net worth tied to one stock no matter how high quality it is since you never know what can happen in the future. Larry’s financial advisor was trying to diversify him out of Oracle stock however Ellison was increasing his ownership interest. 

Ellison started his company with only a dozen employees and had software that was being used by credit card companies, hotels, and airlines to process transactions. Now Oracle’s s software is used by over 70,000 government and commercial customers and has 115,000 employees.  Ellison was no whiz kid in school either. He left the University of Illinois during finals and ended up not taking them. He in fact remembers one exam where he just sat for an hour because he knew he had to spend 3 hours answering the questions. Larry did end up taking some physics classes at the University of Chicago which seem to interest him and lead him to actually lead him to computer programming. More of Larry’s story is told in the book “Softwar”.

Ellison basically came from nothing to build a business that earns billions of dollars per year. I admire this since he wasn’t given a business or just an inheritance to build it. Although, Ellison has built a successful business there are still laws of financial planning he has to follow like diversifying his stock, trying not to use Oracle stock as collateral, and not spend so much. I just hope that Ellison doesn’t end like other CEOs who financed themselves so much that they lost everything. 

Trevor Rees-Jones on Uncommon Knowledge

Very interesting interview given by Trevor Rees-Jones who rarely does interviews and his worth close to $1.5 billion. He is very interesting and should really do an autobiography. He is also on the board of trustees for TCU.

David Koch Team Builder and Generous Guy

I am across this interesting article a while ago published in the Summer 2012 Philanthropy Magazine about David Koch. Koch started at MIT when he was 19 years old in 1958 and was team captain of the MIT basketball team leading the team to a 17-4 record his senior year. What is interesting is that his final game was played against the University of Chicago (home of Milton Friedman) which is known for free-markets. David was the second highest in scoring average and had 545 rebounds. Not bad for a future billionaire and philanthropist.

The article talks about how even before Koch Industries became large David was still philanthropic. In the mid-1980’s he joined the New York University-Presbyterian board. He became more interested in medical boards in the 1990’s when he was diagnosed with prostate cancer. Koch first went through radiation therapy, then had his prostate removed, then the cancer came back again and he had hormone therapy. That didn’t work so now Koch is using Zytiga for his cancer. In addition to this not too long ago Koch suffered from diverticulitis. To treat this Koch received intravenously antibiotics which if they were not available would have torn up his colon and might have killed him.  I am not sure if the media truly understand the battle David Koch has already fought. This has caused him to pore millions into cancer research ($25 million to M.D. Anderson where he is treated), $30 million for Memorial Sloan-Kettering, and $20 million for John Hopkins. He has also had 10 special surgeries at Hospital for Special Surgery in New York. Koch has donated since 1998 close to $400 million to medical research. His donations have even created jobs to help fight research. His gift to MIT to create a cancer institute has 650 researchers after his $100 million gift. Koch believes that in the next decade or so we will see breakthrough discoveries and treatments. As long as the FDA can limit their involvement everyone will be better off.

 Much of the money David Koch makes comes through his dividends. As I pointed out in this post in the 1980’s William Koch was getting what would be today equal to an $11 million dividend and that was when Koch Industries was much smaller than it is today. I have no way of knowing but if the company still does pay 7% dividend and you take a modest return (7%) on $110 billion in revenue and factor in 42% ownership from David Koch I would estimate maybe $200-$250 million in dividends per year (again back of the envelope calculation ). This is also in line with the analysis I did of the Koch net worth from 1984-2012 here. Koch does plow back 90% of their earnings into the company so 7% may be reasonable for a dividend. Also David Koch has around $25 billion in net worth in addition to his dividends which makes him pretty flush with cash. If taxes for dividends increase then he will give less. Dividends on taxes next year will jump from 39.6% up from 15% if Congress fails to act.

I think sometimes people forget that people respond to incentives. People forget that John Rockefeller with a little less than 5% of his net worth created the University of Chicago. M.D. Anderson was named after a successful cotton trader who gave his estate to charity. Capitalists are needed in building future charities.

William “Billy” Koch: My Own Private Koch Colorado Town

In my previous profile of William Koch here I mentioned that in 2007 he began to purchase land in Beaver Creek Colorado. Koch purchase land near the Ragged Mountains. Now Koch is actually going to turn it into his own private wild west town complete with a saloon, jail, church, firehouse, livery, train station and his own 21,000 square foot house (a wing had to be removed so the house would not be “obtrusive”) as detailed in the Denver Post here.  Koch already owns four properties in Castle Creek Valley which include a 17,000 square foot home that he has turned into a house. This house along with three other properties were purchased for $51 million in 2007. Apparently, 1/3^rd of the mansion will be underground and be blocked by a hillside. I can only imagine the approval process Koch had to go through to get this approved. Koch is also trying to swap land in order to get more privacy. The trade would be the government would get properties near Blue Mesa and in addition to this a Dinosaur National Park while Koch would get a public swatch that would cut through his ranch.  The house will be situated on top of a hill so I guess Koch can oversee his creation. Forbes apparently now estimates William Koch’s net worth to be close to $4 billion (I guess I didn’t get the memo on the updated figure).  William is the Koch brother who enjoys collecting everything (art, memorabilia, houses, etc).  He plans on moving his Western Art to this new Western town.  Koch’s wife claims that he should be on hoarders since he does buy a lot of art work, wine, and use to have some boats. In 2011, Koch paid $2.3 million for a photo of Billy the Kid.  Koch’s city however will not be open to the public. If people buy something they should be able to decide how it is used. Although, this Wild West town would be pretty cool. What is even more interesting is that people seem to want to decide how to spend William Koch’s money yet have not done the work needed to earn that money to make the decisions he can make. 

Charles Koch: Why We Fight For Economic Freedom

I enjoy talking about Charles, David, William Koch, even a family history. Charles Koch recently wrote a letter that was published in Koch Industry’s July Discovery magazine here. The article talks about when Charles visited Russia in 1990 (formerly known as the Soviet Union) he quickly noticed how many shortages there were. I actually did a research project for one of my MBA courses where I shortages of products when the country was rationing products. Not only did the rationing lead had to study Russia and why a company should open business there (I ended up picking Wal-Mart). In my research I remember reading about to shortages if you could actually find food it was priced much higher than you could find elsewhere.

Also he points out that even though the country had “free” healthcare but the quality was very poor compared to standards of the United States. He then goes on to discuss how the Soviet Union is a prime example of why economic freedom is important. Also people who depend on government are not as free as they think because as Charles points out “Citizens who over-rely on their government to do everything not only become dependent on their government, they end up having to do whatever the government demands.  In the meantime, their initiative and self-respect are destroyed”. Charles Koch and understands the welfare system. As Thomas Sowell would say Democrats want to help the poor while they are poor, while Republicans want to help the poor from stop being poor.

Not only do people ask for handouts but companies and industries also ask for handouts. Companies don’t directly ask for handouts however they may get special treatment that other companies don’t get. For instance farmers enjoy subsidies (which represents only a handful of farmers) meanwhile they artificially increase the price of crops that go into many different products we use. If we got rid of these subsidies the prices of inputs like corn, cotton, sugar, and wheat would not only decrease but any end product that used these inputs would also decrease which would save Americans billions of dollars per year. The people who are truly hurt by these subsidies are the poor and even middle class families who see food prices increase because the government enjoys subsiding farmers. If a business cannot meet the needs of their customers they should be forced to go out of business. As Milton Friedman use to say business is a profit and loss system. The profits encourage wise behavior while the losses force people to realize reality is not optional.

Charles Koch also points out that disparity not only exists in America but even in other countries that have dictators. He is absolutely right. In these countries you have a small class of people who are really rich because the government can hand out favors or blocks certain people from entering (modern day Russia seems to be like this with various oligopolies) while the vast majority of people have a lower standard of living. The United States is much more transparent than most developed countries but still has issues from time to time with this.

I was a little sad to here that Mr. Koch is not seeking political office like his brother did in 1980 on the libertarian ticket with Ed Clark. What Mr. Koch seems to understand is that economic freedom does in fact create economic prosperity. I am not sure why this is so hard for many people to understand. When discussing his legacy Mr. Koch says “I want my legacy to be greater freedom, greater prosperity and a better way of life for my family, our employees and all Americans.  And I wish the same for every nation on earth.” Mr. Koch has done a great job of creating jobs, running a company, and helping spread the word of limited government with its main ingredient of liberty. I just wish now he would write an autobiography so we could learn more about this great individual!

Bottom 99% Are Already Top 1%

I think it is interesting when people show graphs of income inequality over time between the top 1% and everyone else. One thing I think people fail to understand is that the top 1% of today is not the same top 1% of yesteryear. Recent data from the Tax Foundation drives home this point. The Tax Foundation looked at tax returns between 1992-2008 and looked at the top 400 taxpayers. The results are somewhat interesting.

Close to 73% of individuals were only in the top 400 taxpayers for one single year over the 17 year period. Only 3% stayed on the list for 5 years. Only .4% of people stayed on for 15 years and .1% stayed in the top 400 taxpayers for 17 years. This would say only 4 taxpayers were in the top 400 taxpayers for 17 straight years. People might complain that even 4 is too high. The evidence shows that an overwhelming majority of people only stay in the top for a short period of time. One explanation is that people do sell their businesses or they retire and have options that get exercised. So what is actually happening is that people are high income earners and then drop out of the top 1%. In fact, according to

a report entitled “Income Mobility in the U.S. from 1996-2005” 57% of the people in the top 1% had dropped into the bottom 99%. For the top 5% around 46% moved into lower income groups. The major point is that the top 1% or even top 5% are not some elite group that stays constant.

An even better point is that even the bottom 99% have a higher standard of living than many of the people in 10% in other countries. Real per capita GDP over a longer period of time has been increasing. When people complain how things are today the question should be would you rather live today or in the 19th century? The things people had to worry about in the 19th century are much different than things we worry about today. Infant mortality was much higher during this time period. People had to worry more about sanitation and also worry if there would be enough food. People during this time didn’t even shower daily. Today, these are things even the homeless don’t really have to worry about (if they seek a homeless shelter) I have seen people at stores purchasing their groceries with food stamps yet they have IPhones. No one a decade ago had an IPhone. The amazing thing about markets is that it brings creative destruction. Entrepreneurs and inventors figure out what people want and bring it to the masses. Competition keeps out bad products and services while ensuring high quality and low prices. The bottom 99% should be embracing markets and income inequality should be an incentive to want to work hard to get in that top 1% (even if it is only for one year).

"Old Americans are 47 times richer than young"

A story I recently saw was titled “Old Americans are 47 times richer than young”. Data shows that in 1984 people 35 and under had a net worth of $11,521 while people who were 65 and older had a net worth of had a $120,457. This numbers for 2009 show a different picture. The net worth of people under 35 in 2009 was decreased to $3,662. Meanwhile, people 65 and older had a net worth of $170,494 (numbers adjusted for 2010 dollars). What this would say is that older Americans now have a net worth that is 47 times that of younger people. Why are not people shouting about net worth inequality?

What people forget is that people who are 65 have had 30 years more to income to accumulate net worth. It would make sense that older people have more assets than younger people. Also another interesting data point is that 37% of young household have a zero or negative net worth. In 1984, this same percentage was only 14%. Perhaps this generation is spending more than previous generations.

One argument I find very interesting is how we can’t afford to cut back on Social Security payments to senior citizens when the data clearly shows they have a larger net worth than anyone else. A large majority older people are in low tax brackets because they are not working. The income they earn usually comes in the form of dividends, interest, and other fixed income. Not only are these older people using their income from all these sources to live on, but also can sell assets if they need money to live on.

Having a net worth of a little over $170,000 is still not a lot to live on. If you consider health care costs and nursing home costs it could be hard to live with this net worth. If a 22 year old started with a $1 and saved $3,000 per year until the age of 70 invested it in the market (average return of around 7.5% over the long-term), that individual by the time they turned 70 would have $1.34 million. If the individual become ambitious and saved $5,000 per year they would have $2.23 million. I have a feeling very people consistently save year after year. People nowadays have credit cards and can charge almost anything. One of the rules of personal finance is never to put anything on a credit card that you will consume before you get your next bill. The best way really to reduce spending is to just spend the cash you have on hand. This way you feel the “pain” when you pay for things out of pocket. When you buy things on credit you might have an idea of what something costs, but you don’t feel how much it costs. The key to accumulating wealth is saving.

The True John D. Rockefeller Sr.

 
Even Rockefeller was unemployed....
“Each morning, he left his boardinghouse at eight o’clock, clock in a dark suit with a high collar and black tie, to make his rounds of appointed firms. This grimly determined trek went on each day-six days a week for six consecutive weeks”-Page 44

John D. work ethic from the early days…
“Starting each day at 6:30 A.M. he brought a box lunch to the office and often returned after dinner, staying late. One day he decided to throttle his obsession. “I have this day covenanted with myself to be seen in [the office] after 10 o’clock P.M. within 30 days”-Page 49

Charles Koch Responds to Warren Buffett

Direct from Charles Koch...

“Much of what the government spends money on does more harm than good; this is particularly true over the past several years with the massive uncontrolled increase in government spending. I believe my business and non-profit investments are much more beneficial to societal well-being than sending more money to Washington". -Charles G. Koch, Chairman and CEO, Koch Industries, Inc.

I really wish Charles Koch would do more interviews to push back the frontiers of ignorance.

Warren Buffett: Higher Taxes Please

Warren Buffet in a New York Times op-ed yesterday said that rich people should pay more in taxes. Buffett points out that he paid 17.4% (or $6.9 million) in taxes last year. The reason Buffett is in a low tax bracket is because nearly all of his income comes from capital gains (buying and selling stock) which is taxed at a much lower rate than ordinary income (wages from a job). Warren Buffet claims he doesn’t mind paying higher taxes. Interesting that Buffett doesn’t voluntarily paying his highest marginal tax rate of 35%. In fact if Buffett felt really patriotic he could make a gift to the U.S. Treasury Department to pay down the United States national debt. I have a feeling Buffett isn’t going to be making a gift any time soon.

Our tax system is extremely progressive. The top 1% (people making $380,000 and up) pay an average tax rate of 23.3% this is higher than any other bracket. Meanwhile the average tax rate for the bottom 50% is a mere 2.6%. In addition to this, the top 1% of taxpayers are paying 40% of all income taxes. This percentage has only been increasing since 1980 not decreasing. The top marginal rates since 1980 have also decreased. If politicians wanted the top 1% to pay “more of their share” of income taxes all they would have to do is lower the marginal rates.

No doubt Buffett is probably one of the best investors of all time. However, I find it surprising that someone with an economics degree from Columbia doesn’t understand demand for anything slopes downward the higher it is priced including taxes. If Buffett was really serious about paying his fair share he would voluntarily pay more in taxes. Buffett can say how he wants to pay more in higher taxes, but until he voluntarily does so it’s all talk. Talk, rhetoric, and blame are all great tools for politicians. Blame in fact is an unlimited resource.

Poor Getting Richer

Poliliticans often say how the rich have been getting richer but the poor have remained poor. Although, this makes for great rhetoric if politicians cared to look at some data they might change their minds. According to the U.S. Census more than 40 million people are in “poverty”. However, the term poverty is somewhat misleading. Most of us when we think of the word poverty think of people who are homeless, struggling to get by, and maybe even malnourished. Robert Rector in a paper from the Heritage Foundation using data from 2005 shows that the poor nearly all have refrigerators, televisions, stoves and ovens, air conditioners, and DVD players. With summer time here there are always stories about how poor people don’t have air conditioning. In 1980, only 41.2% of poor households had air conditioning. By 2005, 78.3% of households had air conditioning. Also 46% of poor households live in their own homes. 75% of poor people own one car and 30% own two cars. Clearly, the poor are not living on the streets starving to death but have things that even middle class people in other countries wished they could have.

The poor people in America have it better than in most countries around the world. People at the bottom of the United States socioeconomic ladder are still higher than some of people in the top 10% of other countries.

Another myth is that the people at the bottom of the socioeconomic ladder never move up. This type of nonsense should be forbidden. Panel data (meaning tracking people over years and decades) from University of Michigan Panel Study of Income Dynamics shows that only 5% of families that were in the lowest 20% of income earners in 1979 were still there in 1991. However, 52.7% of the income earners in the top 1% in 1979 were gone by 1988. Real incomes have not also stagnated as some people claim. Real incomes for households have increased 29% despite household size getting smaller. Also if we look at wealth in generations more than 66% of Americans born a generation ago have greater income than their parents. So if we look at income groups and people over time and we see the poor have gotten richer not poorer as some like to say. Also the standard of living of everyone has increased through those greedy entrepreneurs. Twenty years ago hardly anyone had a cell phone or internet connection. Today these things are abundant with quality improving while prices keep dropping. People in every income class are benefitting from this. Truly the poor aren’t as poor as some people would make you believe.

Tiger Woods and Money Problems

So it seems as if Tiger Woods is now in different kind of trouble. I saw a recent article that speculated that Tiger Woods might go broke. Although, no one has the full details of his balance sheet his expenses seem to be increasing while the amount of money coming in is decreasing. Forbes in 2009 estimated Tiger Woods to have a net worth of $600 million. True, this seems like a lot, however has some other issues going on as well. The most costly error was Tigers’ boogey off the golf course that cost him $100 million. So now we are left with $500 million. In addition to this, according to the PGA in 2009 Tiger was making $10.5 million. The next year Tiger made $1.29 million and year to date Tiger has only made $571,363. I thought the top 1% only got richer? The main reason why Tiger is making less is because his ranking has decreased which means less money. Perhaps maybe his divorce not only wrecked his marriage but his career as well. Tiger has other money from endorsements, but is hard to pinpoint with any accuracy what these numbers are or will be.

I am surprised that Tiger is living such a luxurious lifestyle after his divorce. Last year Tiger took out a $54 million mortgage. The house has property taxes of over $400,000 per year. Tiger had to also add three different pools, a tennis court, golf course, and an elevator. In addition to this Tiger also pays property taxes on his mother’s $2.6 million house.

Time will only tell if Tiger goes broke. The ironic thing was Tiger majored in economics at Stanford. I guess he never took a personal finance course. Someone could easily write a book on the celebrities who have made fortunes only to see it all gone.

The Rich: Why We Need Them

I enjoy when people say we should try to "soak the rich" and try to extract money from them since they have so much. People forget that the only way people get rich in this lifetime is by creating value. The only way you can create value is by building companies that provide products and services that people like. The only way to build these companies is by hiring employees.

Looking at the 2010 Forbes 400 list and seeing who the richest people are it seems evident that these uber rich people have to hire people if they want to create more value.

1. Bill Gates- Microsoft (89,000 employees)
2. Warren Buffett-Berkshire Hathaway (260,519 employees)
3. Larry Ellison (108,429 employees)
4. Christy Walton (Wal-Mart 2.1 million employees)
5. Charles Koch (70,000 employees)
5. David Koch
7. Jim Walton
8. Alice Walton
9. S. Robson Walton
11. Sergey Brin and Larry Page (24,000 employees)

(Note I didn't include Bloomberg number 10 because it’s hard to figure out exactly how many employees Bloomberg has because they have so many subsidiaries)

The richest people in America create over 2.6 million jobs. If you think about it for a moment though it would make sense that some of the wealthiest people in society would have to manage large organizations. Companies can only grow if they hire employees that add value. CEOs and executives of large companies are compensated so well because they are overseeing tens of thousands of employees. Managing means more responsibilities means longer hours which means more stress and misery for executives and CEOs. Businesses create more employment than any government agency could dream of. A capitalist creates a job for someone who didn't have a job. I have yet to see a poor person give a rich person a job or even a middle class person a job.

People might argue that the rich people really don't create jobs and just count their money. The only way people can continue to be rich is by investing their money in productive assets (stocks, bonds, real estate) or working. Investing money in a company gives that capital which allows them to build more factories, buy more equipment, and or hire more people. In addition to this the rich also do spend money (in fact some rich people spend so much money they end up being broke). According to Moody's, the top 5% of income earners account make up 37% of all consumer spending. If 70% of GDP is based off spending then in theory close to 24% of the GDP comes from the top 5% of income earners. Note to be in the top 5% one would have to earn a little over $160,000. If not only are these super rich people creating jobs they are also spending money! Also an important point to consider is that the richest people pay the most taxes. According to the Tax Foundation, the top 1% of income earners in 2008 paid 38 percent of all federal income taxes. The top 1% paid more in federal income taxes then the bottom 95%.

The rich are not only creating companies that make products that people enjoy, but employing many people to help create that product or service people want or need. In addition to all of this the rich are paying a large share of taxes. To say we don't need the rich is just utter nonsense. The top 5% of income earners earned close to 35% of the nation’s adjusted gross income yet paid close to 59% in federal individual income taxes. Clearly, the rich are a net benefit to a government that wants to continue to spend money.

Rich Nonsense

In a Gallup poll when asked if America had the “right” number of millionaires. In this poll, 31% of people stated that we have too many millionaires. While 42% of people said that we had just the right amount millionaires. What I find shocking is that people act as if there is a predestined number of millionaires. Wealth is not predestined. If people want to be rich they have to work hard and make something that other people find appealing. What is really maddening is that 31% of people believe that we have too many people with money. Millionaires did not take anything away from anyone. If anything these millionaires made the lives of many people better. The popular belief is that millionaires somehow became successful at the expense of others. Clearly, this is not true. People voluntary are getting out of chairs, drive to a store, select an item, and telling the company that made that product “Look I need your product more than I need x amount of dollars”. This process is an exchange and not coercion of any kind. People get wealthy figuring out what products and services people want. Going back to the study I really believe that this 31% is just envious or jealous of people that make more than they do. We all try to compare ourselves to other people on many different things, but what is not taken into account are the inputs the wealth have to sacrifice. In a way it’s like a song that went “I will do anything but I won’t do that”. The people that become wealth go the extra mile and make sacrifices in order to make sure other people are satisfied. Corporate executives and CEOs often get to work very early (6 A.M.) and stay late into the night. The people making extraordinary amounts of money are not on their behinds watching TV all day. No, these people are making deals, flying around the country, calling people, and creating wealth.

Not only the wealthy creating jobs and increasing the standard of living for everyone but they are also spending a lot of money as well! According to Moody’s Analytics, the top earning 5% of Americans make up 36% of consumer outlays. Note this is income and not net worth which shouldn’t be confused. People can have high incomes but low net worth. So the top 5% makes around $342,000 yet has only a 1.4% savings rate while the rest of the country has a savings rate of close to 8%. Many of the people we believe to be rich really aren’t. People often try to “signal” that they are rich. I would imagine doctors and lawyers have high incomes yet maybe not a high net worth.

To say we have too few or too many millionaires is rich nonsense. In a voluntary market these millionaires can only improve our lives by thinking of better ways to improve their product or service. I don’t see anything wrong with people making money for making our lives easier or more enjoyable. Money isn’t simply distributed by some money man. Income is earned. As Thomas Sowell would say newspapers and not income is distributed. In a sense, we get these great things like computers, televisions, and other products and we really don’t have to do anything to develop them. All we have to do is earn enough to buy them (if we can afford them).