Are You Really Worth $230 Million? And if not . . .

Larry Jensen: “Your April 30 column played with the long-term power of compounding. I have another example that might temper this ‘astounding’ power:

“Suppose, while the three wise men were travelling to Bethlehem, a fourth wise man stayed home and deposited the equivalent of just one dollar in a trust fund for humanity. Suppose the trust fund earned a very modest return of 2.16%. (I’m choosing this rate for convenience. Using the Rule of 72 — or some more complicated math with exponentials — 2.16% will double your money every 33.3 years, or three doublings per century.) After two millennia, that dollar would have doubled 60 times, to the mind-boggling total of 1.15 billion billion dollars, or about $230 million for every man, woman, and child on the planet!”

[My own calculations show that the Rule of 72 is not completely precise, and that, over 2000 years, small discrepancies can magnify. It actually comes to 3.6 “billion billion” dollars, and change.]

“But it’s reality-check time. While I don’t know of a source that lists the net worth of the planet, it’s reasonable to guess that it’s not nearly $230 million [let alone $600 million] per person. That clearly implies that one dollar has NOT been able to remain invested, compounding at even this tiny rate of return, for the last 2,000 years. Consumption, inflation, depreciation, wars and disasters — what a physicist would simply call entropy — are processes that have been more than able to dampen the powers of compounding over the centuries.

“Something to remember when Wall Street implies that everyone will be able to retire a millionaire by investing just a few dollars each week.”

Larry believes that to have a comfortable, secure retirement, it will be necessary to save and invest more than a few dollars.

“As a late Boomer,” he concludes, “I remain concerned that the great bull market of the Eighties and Nineties will turn into an equally long bear market, when money starts flowing out of private retirement accounts at the same time that Washington is called upon to redeem, out of current receipts, all of the IOU’s that are piling up in the Social Security trust fund. I also worry that the philosophy of ‘soak the rich’ will find ample opportunities to penalize me for my thrift.”

These are reasonable worries.

Our hopes for avoiding that equally long bear market are: continued peace (well, relative peace) combined with continued astonishing technological advance spreading increasing productivity and prosperity throughout the globe (free trade and market economics being imperatives if this is to happen) — and, ultimately, 500 million middle-class Chinese and Indian 40-year-olds, mere teenagers today, who will by then be eager to buy our shares of Coca Cola and Gillette in hope of financing their retirements.

It’s also worth pointing out that the pace of productivity growth in the first 1500 of the 2000 years Larry has chosen to look at was essentially nil. And what wealth there was accumulated went mainly into building churches and forts and stuff, not labor-saving machines or research and development. (Well, a lot of R&D in the alchemy department, but this proved to be a long, unproductive dead-end.) But you start adding the printing press and the steam engine and electricity and microchips and suddenly you’re in a whole new ball game. Can investors reasonably expect 15% or 20% a year? (Or, as of late, 10% a month?) No way. Need they expect a reversion to some 2% Dark Ages mean? Not that either. (But might the market at some point drop 50%? Sure. It always used to. And rarely has it been as robustly priced as it is today.)