The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

Families and Investment Risk

Investing is the process of putting out money today in the hope or expectation that we will receive more money in the future. If the expectation that we will receive our capital back is very high, the return we can demand on it will be very low. This is because many, many other investors are happy to take very little risk and still receive a return.¹

Likewise, if the hope of having our capital returned intact is more speculative, we can demand a much higher return, because few other investors will have the appetite or ability to put their capital at significant risk. It's a simple matter of supply and demand, but mainly supply: There is always a great deal of demand for serious risk capital, but rarely much supply of it; there is a fairly static demand for low-risk capital (to finance the routine operations of governments and corporations), but there will always be a large supply of it.

Virtually every American family that is wealthy today got that way because someone in the family at some point took very serious risks. Yes, they also worked very hard and had a good idea. But one can work very hard and not become rich—coal miners, for example. And one can have brilliant ideas and not become rich—tinkerers and dreamers of all kinds. (“In the end, a vision without the ability to execute is probably a hallucination,” as Steve Case once put it.) It is the combination of hard work, a good idea, and risk that generates wealth on any significant scale.² The ...