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

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Where do you find yourself in this framework?