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Comment by duxup | Hacker News Reader

I remember someone telling me something about how 'hard' it is to get a good return when you have a massive amount of money. I suppose they meant beat the market or something like that...

But there are so many examples of folks with massive amounts of cash trying to hit it big(er) ... maybe at some point that big wad of cash really is better off in some index fund or some mixed fund that offsets risks or whatever. It seems like shooting for the moon makes people make bad choices because they feel they have to do things differently.. and ignore some obvious missteps.

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> how 'hard' it is to get a good return when you have a massive amount of money

The real problem with scale close to whole countries is that if your money isn't contributing to the growth of the entire economy, you can't really get a return at all.

You can't extract value out of an economy that is stagnant, if the money you are pumping in is merely recirculating in zero-sum mode.

At the small scale this can work, because there are enough small-time losers who lost money when you got it without hurting the balance of the economy, but at the large scale this cannot since there aren't enough losers to lose money to pay you off (or alternatively, there is a war going and/or the government is buying).

So any investment portfolio big enough which doesn't move the economy to be more productive is bounded by the entire economy and in general do worse, because the market might be reacting to the fund & preying on it.

Also "more productive" is a very weird term - giving people public transportation, fast internet or cheap child-care can make a society more productive. Underemployment of intelligent people into subsistence levels of productivity is basically a crime perpetuated by well intentioned folks from the pre-automation era.

The real problem is the idea that you need a return on your money.

You don't. If you're a multi-billionaire you can spend the rest of your life wasting millions a year on super-expensive toys and prestige houses and whatever else you feel like amusing yourself with, and you're not going to run out.

The irony is that this kind of gameified wealth chasing is itself paper-pushing makework. At best it's a financial version of Minecraft - building a pointless but showy thing just to prove you can - with the markets as the gaming environment.

WeWork, WagLabs, and most VC investments contribute absolutely nothing of value to the world. If they didn't exist, no one would even notice their absence.

Meanwhile real problems - climate change, political stability, creating a dynamic culture of scientific innovation and creativity - go unaddressed.

The LPs in VC firms are rarely "multi-billionaire" individuals. They're generally institutions like school endowments, or pension plans. These institutions absolutely do need a return on their money to support the needs of the organizations they support.

But do they? Some of these LPs (especially college endowments) are so large that they are the tail that wags the dog.

Yes, they do. CalPERS is way larger than any college endowment....but it also has obligations that are way larger.

I'd make the argument that something like Calpers is quite different to a college or hospital endowment.

Calpers has a huge deficit, whereas Harvard has far more than they're likely to ever spend (especially considering the fact that colleges with the largest endowments also attract enormous donations from wealth individuals).

You're basically making a point about the Harvard endowment and like maybe....5 other college endowments? This is a small percentage of the LP pool, so....not all that important to the discussion.

Isn't a large part of CalPERS problems related to the fact that they ended up being the one holding the potato when the housing crisis started? I thought before that they were very solvent.

> WeWork, WagLabs, and most VC investments contribute absolutely nothing of value to the world. If they didn't exist, no one would even notice their absence.

The irony of posting this on Hacker News...

Snark aside, to a first approximation, voluntary monetary transactions happen when one party gives another party something of value. If you move money around and end up with more than you started, that's because you moved money around in ways that provided real value to people. Now obviously this is an incredibly crude approximation, but the onus of proof is firmly on you to prove that VCs aren't providing value to the world. And please don't go the "I only said most investments contribute nothing of value" route, unless you also have a way to only pick startups that'll actually provide value (hint: if you knew how to do this, you'd be richer than Masayoshi Son).

No, that isn't true at all.

In this economy you make the most money by creating the perception of value through psychological manipulation.

Actual use-value creation is different and economically secondary.

WeWork is a perfect example. It's an IPO-brand - barely failed, but it was close - instead of a sustainable business. Like competitor IWG/Regus.

This why branding and marketing are a thing. You use them to increase the perception of value. An unbranded widget or service can have identical use-value to a branded one, but the perception of value can be manipulated to make one far more expensive.

As for VCs - VCs are destroying value, because VC culture is geared towards unicorn farming and IPO cash outs, not stable-but-unspectacular business development.

See e.g.

https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...

There's a huge amount of potential value being lost because sustainable but unspectacular businesses are starved of growth funding.

There's very little capital available anywhere for these businesses. Banks won't touch them, they can't go straight to IPO, and VCs aren't interested.

In fact VCs are mostly a subset of the investment industry, which makes its money from client fees, not from returns. Clients are tolerant of mediocre returns as long as there's the prospect of a lottery-winning unicorn jackpot somewhere in the portfolio.

As for Masayoshi Son - I have no idea what his game plan is. Nor does anyone else, clearly.

I appreciate this is framed as "incredibly crude approximation", but here's a contrived counter example to try to highlight ugly detail that language such as "providing real value" may gloss over:

> If you move money around and end up with more than you started, that's because you moved money around in ways that provided real value to people.

If I drive the getaway car for my friend's bank heist in return for a 30% cut of the spoils, we can argue I'm moving money around in ways that provide real value to other people (where by "people" we specifically mean my bank-robbing friend).

> providing value to the world

By "providing value to the world" do we mean "providing value to at least one other person ignoring other parties who may have lost value"?

I think as a general rule of thumb it is quite dangerous to conflate "profitable activity" with "providing value to the world".

That's a good point, and one that can't be made often enough.

Conventional accounting excludes externalities, including consequential losses to third parties. AirBnB can pride itself on "providing value" but in fact it massively distorts local economies, and has a very detrimental effect on the availability of affordable long-term rentals.

Tenants in that market suffer directly because their rents are higher, and there are fewer properties available to them.

That's a net cost to them, as a group, and of course it doesn't appear on AirBnB's accounts.

If you want to claim you're "providing value" the burden of proof is on you to provide an economic summary that accounts for externalities and is demonstrably non-zero-sum.

Doing this realistically would reveal that many corporations are essentially rent-seekers, oligopolists, and trivial arbitrageurs, not value creators.

IMO it's going to be impossible to avoid making this change to accounting standards - probably by the middle of the century, at the latest.

Which is good, because genuine value creation is a wonderful thing and deserves all the support it can get.

The money you are talking about belongs to pension funds, sovereign wealth funds, university endowments, etc. If the money went missing, people would notice. People wouldn’t be able to retire, schools would shutdown, countries would face hard times, etc. The idea that institutional investors get their money from primarily individuals is a common misconception.

I don't think anyone is saying anyone NEEDS to do anything. These people with a bunch of money simply decide that they WANT to.

Are you proposing they not be allowed? That after you hit some arbitrary number of accumulated wealth that you are forced to watch paint dry and disallowed from engaging with the rest of the world? How would that even work?

Your personal sense of morals may label this as undesirable but it's very hard to think of any consistent legal framework for enforcing it past maybe "take their money if you think they have too much money (ie more taxes). Even in that scenario they are allowed to invest what they've got though.

> At best it's a financial version of Minecraft - building a pointless but showy thing just to prove you can

Well, except that with real money you get real power, and having real power is far from a pointless endeavour. See for example those nerds who after earning real money they went off to build electric cars, buy NBA teams, and even build spaceships.

the wework office in durham nc has contributed a lot of value to a lot of peoples' lives

I think one way to think about it is:

Almost anyone can turn $1 into $2. But if you want to turn $100,000,000 into $200,000,000 you can't just do the first thing one million times. Maybe it's easy to find 1 customer, but one million customers will require different approaches.

The people investing in such companies already have massive wads of cash in index funds, hedge funds and just about everything else. A portion of the portfolio is also usually dedicated to more risky investments (such as this) for the small chance at a 10-100X return vs the usual ~1.05X or similar.

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