Claim Checks
Viewing money as "claim checks" that can be exchanged for goods and services is a very useful concept.
“The truth is, I have got a lot of wealth, little pieces of paper that say Berkshire Hathaway on it. They are claim checks on all kinds of goods and services in the world. They can buy anything. I can buy 400-foot yachts and have 20 homes and all that. I wouldn’t be happier.”
Consider a young man who starts with no wealth at all.
The only way to accumulate the claim checks required to live a decent life is for the young man to trade the only asset he owns, his time and energy, in exchange for claim checks. Young people normally have a great deal of excess time and energy, and directing that time toward earning and accumulating claim checks builds character along with wealth.
At first, the young man will have to exchange a great deal of his time just to scrape by because he can only offer unskilled manual labor. Over time, his skills will develop to the point where each hour of his time is worth more, and he will have the option of exchanging the same amount of his time for more claim checks. Of if he is satisfied with his current income, he could opt to work less in exchange for the same number of claim checks. The choice is his to make.
Every claim check that the young man earns can either be exchanged for goods and services today or saved for the future. If the claim check is saved, it can be invested wisely and the result is that the claim check will earn additional claim checks over time.
If the man is industrious, he might save the majority of his claim checks. This could result in reaching financial independence at a very early age, at which point the man has the choice of continuing to exchange his time for more claim checks or opting to retire when the claim checks generated from his investments are more than enough to buy all the goods and services he desires.
If the man decides to retire, he will have the luxury of never having to sell his time again.
More than enough claim checks keep coming in and, since saving and consumption are two sides of the same coin, it is likely that the same thrift that led to financial independence will result in a surplus of incoming claim checks. The man, who might now be middle aged, will increasingly find his net worth rising over time to the point where he might spend just one or two percent of his assets every year. At this rate, the chances of running out of claim checks drops to virtually zero.
As time goes on, the man will find that the utility of claim checks has serious limits.
While one can exchange claim checks for services, represented by another person’s time, or for a wide array of goods, it is not possible to exchange claim checks for everything one might desire. Claim checks can make it possible to remain healthy for longer, assuming the man has some self-discipline and good habits, but there remain a variety of diseases that cannot be cured with any amount of claim checks. This same reality affects family and friends who the man may wish to help.
Claim checks cannot be used to purchase genuine human relationships. In fact, the possession of claim checks can hinder the formation of human relationships, or at least make the value of these relationships suspect. This is because the presence of wealth is a factor that motivates other human beings and could influence their decision to associate with the man. This is not necessarily a conscious factor in the minds of the man’s newer friends, but could be an underlying factor. The reality is that a man who has great wealth can have great difficulty knowing whether new friendships or romantic relationships are genuine or driven by his possession of claim checks.
There is no doubt that claim checks can purchase companionship, but companionship is not equivalent to friendship. The man might find solace in friends and family who knew him prior to his acquisition of wealth, but he may never be sure whether new people in his life are genuine or not.
A man who owns a significant number of claim checks but consumes a tiny percentage of them annually will naturally see his net worth fluctuate greatly if it is invested in marketable securities. If the man is spending less than two percent of his claim checks annually, there will be plenty of days when market action causes his wealth to rise or fall by more than his annual consumption.
A strange numbing sensation will likely affect the man when market fluctuations cause the value of his accumulated wealth to change by amounts that vastly exceed his annual spending.
While such rises and falls might have had a psychological impact when the man was poorer, they will have little effect at this point. This is particularly true with increases in wealth assuming that there is no desire to increase the use of his claim checks. After all, what is the practical utility of claim checks other than to exchange them for goods and services?
Obviously, Warren Buffett is an extreme example of this phenomenon. Recently, Berkshire Hathaway stock reached all-time highs, and Mr. Buffett’s net worth increased by many billions of dollars. But what practical utility does this increase in wealth have for a man who is nearly ninety-four years old and continues to live a modest lifestyle? The answer is that the utility is close to zero, except as a means of keeping score.
But perhaps claiming that the utility of additional claim checks is “close to zero” overstates the case. We know that Warren Buffett continues to care very much about Berkshire Hathaway which is directly tied to his wealth. This is due to two main reasons. First, he has a fiduciary duty to other shareholders of Berkshire Hathaway who have entrusted him with their capital. Many of those shareholders very much care about the accumulation of claim checks. Second, Mr. Buffett’s claim checks will end up in foundations set up to benefit causes that he cares about.
Not everyone is interested in leaving their claim checks to charitable foundations, but assuming that there is some final destination in mind, the utility of amassing additional claim checks should never fall to zero. It could very well be that there is no longer a motivation to optimize for amassing as many claim checks as possible. But the desire to invest wisely most likely remains for anyone who has in mind heirs who will eventually inherit their wealth.
But now we have come full circle.
We can view the young man who started with no claim checks as disadvantaged because he had to trade his time and energy for claim checks at the start of his life. But we must also acknowledge that his need to do so was a formative experience and, at the very least, made him respect the value of claim checks since he understood what it took to get them in the first place. Those who inherit great wealth will not have such motivations.
The wealth a person accumulates throughout life, after paying taxes, is the cumulative result of countless decisions to work and save and must be respected. It is his to dispose of as he chooses.
I see nothing wrong with passing along wealth to future generations, but the effect on the industry of the recipients should not be ignored. At the very least, passing wealth to young people should be accomplished in the form of a trust that restricts distributions in such a way as to encourage industry and thrift early in life. Inherited wealth at a young age could be destructive, and that would be a terrible legacy of claim checks accumulated over a lifetime.
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