Global Value Investing

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A multifaceted approach to value investing with stock valuation based on intrinsic value estimated from cash returns, appraised value of assets, and other facets of value.

 

 

Are You A Wealth Builder?

The answer to this question depends on the definition of wealth. To most people, wealth probably refers to an abundance of material possessions. One way of measuring the material wealth of a person, household or other economic unit is net worth. The accounting definition of net worth is the current market value of owned assets (with full discretion and fully vested legal rights) less owed liabilities. In spite of the declining purchasing power of the US dollar due to continuing inflation, a popular threshold of being considered wealthy is a net worth of US $1 million or more.

Stanley and Danko (see the citation in General Books) offer another way of defining wealthy based on the expected level of net worth based on the person's income and age. They suggest that for most people in the U.S. with annual realized incomes of $50,000 or more and for most people 25 to 65 years of age, there is a corresponding expected level of wealth, and those who are significantly above this level can be considered wealthy in relation to others in their income/age cohort. Realized income is based on taxable events and is contrasted with recognized income that is not yet realized such as increases in the value of investments over their cost basis.

From years of surveying high-income and high-net worth people, they developed several multiple-factor wealth models. They also found a simple rule of thumb that roughly approximates a person's or household's expected net worth.

Estimate of Expected Net Worth

First

Multiply your age times your realized pretax annual household income from all sources except inheritances.

Second

Divide by ten.

Third

This, excluding any inherited wealth, is what your net worth is expected to be.

For example, if Ann E. Oakley is 50 years old, earns $80,000 a year, and has investment income of another $20,000, she would multiply $100,000 by 50. That equals $5,000,000. Dividing by ten, her net worth is expected to be $500,000.

Given your age and income, what is your expected net worth? Where do you stand among the distribution of wealth outcomes? According to the classification of Stanley and Danko, if you are in the top quartile (75% to 100%) for wealth accumulators, you are a PAW, or prodigious accumulator of wealth. If you are in the bottom quartile (0% to 25%) for wealth accumulators, you are a UAW, or under accumulator of wealth. If you are in the inter-quartile range (25% to 75%) for wealth accumulators, you are an AAW, or average accumulator of wealth.

They developed another simple rule. To be well positioned, you should be worth twice the level of wealth expected. In our example, Jane O. Berger's net worth should be approximately twice the expected value or more for her income/age cohort, or $500,000 multiplied by two equals $1,000,000. If her net worth is about $1 million or more, she is a prodigious accumulator of wealth. Conversely, what is her level of wealth is one-half or less than expected for all those in her income/age category? She would be classified as an under accumulator of wealth if her level of wealth were $250,000 or less (or one-half of $500,000).

Those who build wealth during their most productive years will have the opportunity through gifts and bequests to support those persons and organizations that they want to see prosper. More philanthropists are giving the bulk of their fortunes to their favorite social causes than ever before.


How can you build wealth?

The steps to building wealth are to (1) plan, (2) budget, (3) learn, (4) earn, (5) save, and (6) invest. Wealth builders typically value financial independence over displays of high consumption. Wealth builders typically emphasize the defensive (be frugal and cut consumption) rather than the offensive (maximize income). Wealth building requires discipline. If you really want to build wealth and are having difficulty achieving the level you desire, you might consider professional guidance.


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