There was a time when college was only for the rich. It was a luxury afforded to very few who wanted to study rather than apprentice or work. John Adams, our second president, was able to go to college as the eldest child of a Deacon farmer (since his father had enough children to help him work the fields in Adams’ absence). After a while, society noticed that those who went to college were much wealthier than the rest. And thus began an impetus to afford this opportunity for the masses. Since the 1800s, the public of the world has made this happen. There are community colleges, state universities, loan programs, exchange student programs, accreditation organizations, massive bureaucracies, and gazillions of dollars spent and borrowed so that the masses can have a college education. As a consequence, our society is much more educated than ever before. As a separate consequence, though, an educated person is no longer the resource that it once was. And, in accordance with the law of supply and demand, a college education no longer guarantees wealth; in fact, it has now become difficult just to get a job [1,2]. (This varies, of course, based on what education is received, where it is received, and the student’s performance.)
This is a pattern that has repeated itself many times throughout history. Our society realizes how rich people are getting rich, and everyone wants to do that. Once that happens, once the public at large performs the same actions as the wealthy, those actions no longer lead to wealth. I’ll discuss several more examples of this here.
The stock market started out as a way for investors to mitigate risk on sea voyage investments. Rather than one investor backing a ship that would travel to the East Indies (which had a high probability of not returning), an investor could spread his investment across many ships. Any single ship was supported by multiple investors. This worked so well, that the stock market was used to mitigate risk for investments into other types of business ventures. Again, this led to increased wealth for the wealthy, and the public wanted to participate.
But investing takes skill. It’s not enough to put money into the stock market; one must have a good idea of where to put his/her money and how those investments should change (perhaps based on expected performance of the market, and one’s ability to tolerate risk). As JD Roth said, “Average performance is not normal.” So, even though the average rate of return for the stock market is relatively high (approximately 6% for the S&P 500), timing matters. Between 2000 and 2014, the S&P 500 underperformed that average rate. If one had invested in the S&P 500 at the beginning of 2002, for example, they would have immediately realized a -23% gain that year, which may have taken a lot of time to recover.
Nevertheless, the masses have begun investing. Retirements moved from pensions to 401k accounts . Shortly thereafter, one could start managing his/her own portfolio for the first time with online trading companies (in the early 1990s). Prior to that, the work required to trade required a significant enough investment to cover the large trading and management fees. Once computers could do the work, those fees were drastically reduced, and anyone could invest. There came a huge influx of capital, and stock prices shot up (what we now know was the “dot com bubble” ). In 2005, president Bush announced that he wanted to permit people to invest their social security into the stock market . This, of course, was a bad idea; the whole point of social security is to insulate the public from the burden of supporting people who did not adequately manage their own finances . Luckily, the dot com bubble burst before this idea finished moving through congress. And, instead of the masses becoming rich by following the actions of rich people, many people lost their life savings . This is just another example of wealth disappearing once the masses attempt to follow the wealthy.
We didn’t learn though. Rather than evaluating and considering, the whole world then asked “How are rich people getting rich now?” The answer was real estate, and the public promptly lost its next round of life savings in the real estate market . (We now blame the banks for issuing sub-prime mortgages, but that market only existed because people wanted to borrow money in order to capitalize on real estate investments.)
What’s the latest? Where is the public moving now? What’s the next bad investment? I have a part-time job where I review applications for extremely unbelievably advanced high school students to enter into a prestigious summer program. One of the application questions asks the applicant to describe his/her ambition. Almost every student proudly describes how he/she is going to start a tech company that will change the world. They each describe Steve Jobs, Bill Gates, and Elon Musk and talk about self-driving cars, alpha-go, artificial intelligence, and machine learning. And so here comes our next investment; people are going to create “startups.” (I put startups in quotes because they don’t say they’re going to invest a massive amount of time and energy into a risky venture with little probability of success, which would be a much more accurate description.) Engineering programs seem to have become the latest get rich quick scheme; students are enrolling in the programs for their economic potential rather than for a love of science and tinkering. And so, I foresee the next round of wasted investments. Few of these ventures will succeed, and people will exit their failures with little earned and little in savings. Sadly, if the past is an indication, they will not even leave these experiences with the wisdom to avoid the next blind following of rich people. I think that those who will benefit from these ventures are the extremely rich who can spread their wealth across many startups; and when a few of them take off, their average return on investment will be relatively high.
I don’t know how the wealthy are becoming wealthier now. I suspect, though, that by the time I find out, it will no longer be a viable method for me to increase my wealth.
 Lewis, The Big Short