In partnership with

One of the missing questions in wealth inequality discourse is: where are all the Astors? John Jacob Astor owned a few percent of Manhattan, Manhattan was worth about $1.74tr a few years ago, so call it a hundred billion dollars or so worth of real estate. Now, assume that over the last two centuries, that real estate has been throwing off some income—people have been complaining about high Manhattan rents for a long time—and you can imagine a pretty big fortune. Suppose the family earned a 4% cap rate, and reinvested the proceeds in bonds earning about that same return. That gets you to a total family fortune of a little under a trillion dollars, plausibly divided between a few hundred to a thousand heirs. Naïvely, as long as your fortune compounds faster than family size—e.g. if you expect heirs to have two kids by thirty, they need to earn 2.3% real returns just to keep up—then we should have a lot more high net worth Astors these days. There's at least one who's rich by UK standards, and a Viscount.

The Missing Billionaires: A Guide to Better Financial Decisions, which should be studied carefully by anyone who wants to stay rich and used very judiciously by anyone who wants to get rich, estimates that if the millionaires identified by the US census in 1900 had invested their money in a balanced mix of equity index funds and bonds, we'd have 16,000 billionaires today. Yet only 10% of the Forbes 400 list today either are or are descended from people who were on the original list in 1982, let alone 1900.

And , the net worth of the very richest has gone up, and gone up a lot more than the average person's salary or net worth. It's hard to reconcile these, but there's one simple factor that is wildly underused in inequality debates: most rich people get rich because they own a single asset that performs very well. But even if the aggregate appreciation of assets-owned-by-rich-people is impressive, any one of these will be much more volatile than broad equity indices. And if you fund an even modestly expensive lifestyle from an undiversified portfolio, you're doing the equivalent of levering up a single-stock portfolio. Even if you're right, drawdowns will aggressively eat into returns.

One of the simplest ways to illustrate this is to look at leveraged ETFs as a proxy for getting typical equity returns with more volatility. This post backtested them to 1927, and found that while owning the S&P 500 with 2x leverage is a bumpy ride to a higher net worth, owning it with 3x leverage actually makes you poorer: you lose so much in the Great Depression that you can never really recover. Add in a fixed cost, and it's easy to get to zero.

Of course, if you diversify a bit, you can mitigate that problem, and some rich people have done so pretty effectively. Bill Gates has been systematically selling down Microsoft and buying other assets for decades, and has a portfolio that's less sensitive to the day-to-day drama of what will happen to Microsoft. But that's one reason he's now worth less than Steve Ballmer. (The other is that he's donated so much to charity—and, in a way, this diversification is downstream from his charitable giving. It's just a lot easier to allocate $x billion a year to charity than to donate some uncertain lump-sum.) The Ballmer bet (and that of folks like Larry, Sergey, Jensen, Ellison, etc. who also have 90%+ of their wealth in one company) has been insanely aggressive, in that there are plenty of decent-sized tech companies where keeping all of your net worth in that company would have eliminated most of it. Nobody compiles the counterfactually-not-so-rich list of executives who made the daring decision to put all their money into a company whose share price stagnated for a decade, or went to zero.

But Ballmer's status as one of the richest people alive illustrates why volatility drag is so important to these discussions! Most of the people who make the same basic asset allocation choice end up poorer for it, and aren't part of the discussion. But there are some companies that deliver superior returns over long periods, and there are investors who are unusually good at identifying them and backing them. If you could own a portfolio of these investors, you'd probably get great returns—you'd harvest the equity risk premium, plus a kicker from owning the right equities, and many of the durable-outperformer companies do particularly well during recessions.

But that investment product isn't available; some of the assets in question are private, and some of the people making these bets are rich because of luck and leverage, not because of skill; if you take a snapshot of the rich at any given moment, that's some of what you'll see. In other words, what you'll consistently see is one group of people who are needlessly bleeding money, either out of ego or because they're repeating a mistake that paid off. You'll also see some people whose biggest category of consumption is the volatility drag from not diversifying: someone like Elon Musk is extraordinarily wealthy because, rather than just buying 1% of every listed equity and putting the rest in bonds, he builds, borrows, buys, and continually roles the dice (he has an edge, sure, but there's still some randomness). So, to the extent that the problem with inequality is any given rich person, there's a good chance that that rich person is busy solving the problem for you, by not diversifying. But if the problem has to do with the rich in the aggregate, that same concentration makes the problem worse: it raises mean outcomes by giving people exposure to the biggest power-law winners, even if it reduces median outcomes by giving them all access to a bunch of big drawdowns from which they won't recover. But those beneficiaries are, necessarily, a heterogeneous bunch: if lots of people can do the same exact thing, doing that thing is no way to get rich, and even in categories where there's more than one person with the same listed source of wealth, they did a different variant on it ("software" is a broad category; "real estate" is necessarily heterogeneous since no two properties can occupy the same location, location, location). So when wealth is durable, it's informative, and the presence of super-rich people tells you something about what previously-unexploited opportunities there were. That's not always a good thing; there have been plenty of fortunes made from addictive products, bad externalities, exploiting government policies, etc. But it's still something that you want to conclude on a case-by-case basis.

The Diff is not really a newsletter about the doings of various rich people, but they do overlap with the newsletter’s topics. Including:

• What does it mean to have a trillion dollars?

• Why most people should diversify more while active managers should diversify less ($).

• Funds that make big bets add value by convincing their backers not to redeem during drawdowns ($).

• There are fewer paths than there used to be from the very bottom of a company to the top.

• Consider the wealth-creation speed limit.

• Why do more people get rich owning equities than bonds, even though their risk-adjusted returns are similar?

• Thoughts on the big Texas oil fortunes, and where they went ($).

No theory. No slides. Just pipeline.

Most founders know their product. Few know how to get it in front of the right people. In this hands-on session, Clay + HubSpot for Startups walk you through ICP definition, prospect list enrichment, and AI-personalized outreach. You launch your first sequence before the session ends. June 18. 11am ET / 4pm GMT.

Register Before June 18.

Join the discussion!