🍞 The Money Games - Part 2
A 5-Part Guide to Earning, Saving, and Investing Money Wisely
Hello Loyal Bread Crumbers 👋🏻,
Merry Christmas Eve!
I have some exciting news. I’ll be writing and sharing an annual letter in the next few months. In the letter, I will give you an update on what YM2 (and Bread Crumbs) has accomplished this year and where we are headed. It’s been a blast writing these longer pieces and I expect to continue doing so in 2024.
To improve these pieces for next year, I will be releasing a survey to better understand what topics you would like me to explore. I also want to hear your ideas for YM2 in-person events. Some rough draft ideas I have include book clubs, happy hours, field trips, lecture series, or some fun but useful professional or personal development workshops.
So, look out for the upcoming annual letter and survey!
With that house keeping out of the way, let’s dive back into Part 2 of our 5-Part Series. If you haven’t checked out Part 1 of “The Money Games”, I’d recommend reading that essay first. Here’s the link.
If you read Part 1, welcome to Part 2! This essay is all about earning money. In Part 1, we covered why money exists and its role in society. In Part 2, we’ll cover how to earn more money and avoid being exploited for it. I left a brief description of each essay below.
The Money Games
I. A Discussion on the Origins of Earning, Saving, Lending, & Investing Money
Learn a robust foundation for comprehending the intricate dynamics of the financial world.
II. An Exploration into the Science of Earning Money & The Labor vs Capital Conflict
Gain insights into why certain individuals wield more control over the financial landscape than others.
III. An Argument in Favor of Ramit Sethi’s Philosophy for Saving Money
Discover the straightforward steps outlined in this essay to enhance your savings with minimal effort.
IV. A Simple Man’s Analysis of Investing Accounts
Receive a comprehensive overview of investing and retirement accounts, and learn how to leverage them for your financial benefit.
V. A Quick Word on Why Ignorance is Bliss in Finance
Find tranquility in managing your personal finances through insights shared in this essay.
Without further ado, here’s Part 2!
The Money Games - Part 2
Perceived Value
Why are lawyers paid so much? In the United States, the average lawyer makes 17x more than a barista. Why do we pay a lawyer $269 per hour and a barista $16?
Is this phenomenon caused by the evils of capitalism?
It could be, but maybe the culprit is less sinister? Let’s do a thought experiment to see.
Which situation would you prefer? A or B?
A.) You are trying to win a court case that could sentence you to 50 years in prison. Your lawyer is out sick so a barista shows up in her place.
B.) You are on your way to grab your morning coffee. Your barista is on vacation but a lawyer volunteers to fill his place.
Avoiding a prison sentence beats a good cup of coffee in my book.
This thought experiment highlights a concept I covered in The Money Games - Part 1, perceived value. Perceived value is a measure of how important a good or service is to you. The greater a good’s perceived value, the more stuff you will trade to get it. Money just happens to be the best instrument for making trades. So, the purchase price of a good or service (in most cases) is a representation of its perceived value.
I mean no disrespect to baristas. You still have value. It’s just that value is a comparative measure. If my local barista could make coffee that turned me into Superman, I’d happily choose option A. I mean in 2050, maybe a free ChatGPT bot can represent me in court. In that world, a barista may provide more value than a lawyer.
For now, though, a lawyer provides more perceived value than a barista. All else equal, that perceived value will lead to higher pay. What’s a barista to do about this predicament?
The Equation for Earning Potential
The barista needs to increase his perceived value. He can do that by learning new skills. Learning new skills takes time and time is finite. So, how should the barista decide which skills to learn? He should identify and learn skills that are in high demand and low supply.
As my eccentric high school AP Economics teacher, Mr. Potts, would say, “High demand and low supply tell you that prices will reach the sky!” High demand and low supply create a shortage. Shortages cause prices (and wages) to rise. Every GM in the NBA wants a guy like Steph Curry but Steph is 1 of 1. There is a shortage of “guys like Steph Curry”. in the NBA. That’s why he’s the highest-paid player in the NBA ($50 million per year). His skills are in high demand and low supply.
What drives high demand for a particular skillset? Whether or not the skill in question helps solve the problems of today’s consumers, businesses, and communities.
Software developers are a great example. Computers and the internet have become essential to our daily lives. They make solving problems easier, faster, and cheaper. The people who make it possible for us to use computers are software engineers. They create the applications we use to interact with computers. For that reason, coding skills are in high demand. That demand is reflected in the wage price; entry-level software engineers can make $100k!
You might think, “Okay but aren’t a barista’s skills also in demand? Everyone drinks coffee. Why don’t they make 100k?” You’re right! Baristas’ services are in demand. But you’ve only solved half the puzzle. You forgot about supply.
Making coffee is not a difficult skill to learn. You could become a decent barista in a couple of weeks. If I grabbed 100 random people off the street, 99 of them could do the job of a barista with two weeks of training. If I did the same thing but replaced “being a barista” with “being a software engineer”, maybe 2 (who were already coders) could do it.
Becoming a decent software engineer takes years of intense study. That time commitment reduces the supply of software engineers. The skills of a barista and programmer are in high demand but only programmers are in low supply. Both conditions need to be met to drive up wage prices. If we had to write a formula for earning potential, it might look something like this.
Earning Potential = (Intensity of Demand x Size of Demand) / (Number of Competent Providers)
This formula rings true in entertainment and professional sports. The number of people who would love to see Taylor Swift sing or Michael Jordan play basketball is massive. Demand for their skillset is intense and large.
How many other people have Swift’s musical range or Jordan’s athleticism? None. The number of competent providers is small. Both individuals maximized their earning potential.
That’s a huge W but it’s only the first step of mastering the Money Games.
The Class Divide
The second step in mastering the Money Games is rarely talked about. We don’t discuss it because it’s uncomfortable. It flies in the face of the notion that “everyone is equal”. In a moral sense, we are all equal. In an economic sense, we are not. Class systems exist whether or not we acknowledge them. If we fail to see them, we can’t improve our station in life.
Taylor Swift and Michael Jordan both recognized this reality and took action to change their economic standing. They completed the second step of the Money Games. They moved from the labor class to the ownership class.
The history of human civilization is the history of class struggle. Typically, a society forms two classes: The Ruling Class and The Working Class.
(1) The Ruling Class - A small group of people that control the majority of society’s resources
(2) The Working Class - A large group of people that are enslaved or employed by the Ruling Class
In ancient Rome, it was the aristocracy vs the slaves. In the Middle Ages, it was the kings vs the peasants. In the 21st century, it’s Big Machine Records vs Taylor Swift.
The power dynamics of class struggles shape society. The Communist Manifesto guy, Karl Marx, understood this dynamic better than most. He noticed that because private business owners controlled the tools and resources used to make things, they controlled the profits created by selling those things. Naturally, they used the profits to better themselves. They’d allocated a small % of profits to the workers and a large % to themselves.
This unequal distribution of profits creates dependency. The working class never receives enough money to create and own businesses. They get just enough resources to survive for a few weeks or months. They must work to live. By doing so, they become dependent on the ownership class to survive.
Owners, on the other hand, have two distinct advantages:
(1) They have built up savings from the excess profits
(2) They own and control the means of production
Owning the Means of Production
Owning the means of production is power. A music label, like Big Machine Records, owns the production equipment, distribution channels, marketing resources, merchandise, and musical recordings (aka “masters”) of artists.
If a new artist records an album but leaves the music label, the label can continue to sell and make money from the recorded music. If the artist has no royalty rights or masters ownership, the label gets 100% of the music’s profits. The artist is left with nothing.
So, why do class dynamics matter to you? Because you’re probably in the working class. You don’t own the products that your labor produces.
For example, let’s say you work as an accountant at PwC. Unless you’re a partner, you’re not an owner. Your labor drives revenue and profits, but you don’t control how those profits are distributed. A PwC associate makes $87k per year. A PwC partner makes $850k per year.
It’s okay that you’re a PwC cog. You aren’t stuck. The first step in taking back power is studying those who have already done it. Cue the walkout music for Michael Jordan and Taylor Swift.
In 2010, Michael Jordan did something Karl Marx likely believed impossible. He moved from the working class to the ruling class in his industry. In the eyes of Marx, NBA players are still part of the working class. They provide their labor in exchange for a wage, even if it’s a substantial one. The NBA owners are the rulers. They own and control the team, the arenas, the broadcasting rights, and all the other revenue-generating assets.
The minute Michael Jordan purchased the Charlotte Hornets (f.k.a. Charlotte Bobcats) in 2010, he officially entered the NBA’s ruling class. During his 15 seasons as a player in the NBA, Jordan’s gross earnings were $94 million. During his 13 seasons as an owner in the NBA, Jordan pocketed $2.7 billion. Ownership-class MJ made 27x what working-class MJ made.
The Hornets deal wasn’t Jordan’s first taste of ownership. Jordan lost his ownership virginity to Nike.
The Financial Genius of Michael Jordan & Taylor Swift
The deal MJ struck with Nike in 1984 was brilliant. Not only did he receive a fixed yearly payment for creating a shoe brand with Nike, but he also got a royalty of 5%. In exchange for working exclusively with Nike, he would get 5% of every dollar the Air Jordan brand made. In 2022, the Air Jordan brand generated $5 billion of annual revenue and MJ collected a cool $250 million.
Like Jordan, Taylor Swift also realized the power of ownership. In 2018, Swift left her label, Big Machine Records, and signed with Universal Music Group. Universal offered her ownership of the “masters” created from any new recordings. Big Machine refused to give Swift ownership of the masters of her existing and new albums.
Masters are the first recordings of a song, and controlling them gives the owner power over how the music is used and sold. Without ownership of her masters, Taylor was dependent on Big Machine. By obtaining the masters, Taylor took control of the means of production. Now she was in the driver’s seat for negotiating licensing deals.
She went a step further in 2021 by re-recording her first six albums which Big Machine still owned the masters of. Releasing new versions of her albums enabled Swift to redirect fans and revenue toward the re-recordings that she owned. This move had the double benefit of also devaluing the masters that Big Machine owned. Chef’s kiss for that strategic move, Taylor!
Equity Ownership for Normal People
If you are a PwC cog, you probably don’t have the basketball talent of MJ or the musical ability of T-Swift. No one wants your shoes or masters of your albums. Don’t worry, there are other paths for mere mortals. You could launch your own venture and sell the skillset you have. If you’re not in a position to start a venture, you can join one and get equity.
Getting equity in the company you work for makes you a partial owner of the stuff you create. You could do by becoming a partner at a firm or receiving stock options at a company.
If you aren’t an executive or part of a start-up, those options may not be available. Luckily, the public markets exist. You can become an owner of publicly traded companies. Owning shares of publicly traded companies makes you a minority owner. You don’t control the company but you participate in its success (and failure). Owning stock provides an ownership interest in the economy your labor helps create. If your economy expands, you see the benefits in the value of your public equity shares.
For example, imagine if you bought stock in American companies in 1923. If you bought $100 of the S&P 500 index fund (this is an index that tracks the largest 500 companies on the S&P exchange) in 1923, that $100 investment would be worth $119,941 today!
Even better, the investment returns required no labor from you. You benefitted from labor done by people working for companies in the S&P 500. We can do the same thing today. To become a public shareholder, you need three things: cash, patience, and a margin of safety.
You need cash to buy shares of a public company. You need patience to weather market volatility. You need a margin of safety to manage the financial risks of equity ownership. As a general rule of thumb, only excess cash should be used for investment. You don’t want to purchase a public company’s shares with the money you need to pay your next utility bill.
Finding excess cash is simple to understand but difficult to do. You create excess cash when you earn more than you spend. Earning more than you spend is an art form. It takes discipline and deliberate practice to master. I’m still trying to figure it out myself. Lucky for you and me, a guy named Ramit Sethi exists.
In the next essay, we will explore the best ways to master the art of saving money. Ramit’s system will be our Bible.
Have A Merry Christmas & A Happy New Year,
Paul
P.S. Love that you made it all the way to the end of the essay. That’s no small feat and it doesn’t go unnoticed! If you found this essay useful, please reply to this email and cc paulclancy990@gmail.com. Let me know what you liked and what you want to learn more about. Thanks :)