The Values Gap

Recently, I have been listening to Ray Dalio, creator of the world’s largest hedge fund, opine about lessons he has learned from life, investment strategies, and our current economic situation. He believes that our economic stability faces two major threats the wealth gap and a values gap. The wealth gap has been discussed endlessly over the last ten years. Basically, the current economy works well for the top 20%, but not so well for the bottom 40%. In addition, the middle is being squeezed out of existence by the deindustrialization of America, free trade, and other macroeconomic forces that are beyond the control of any single individual. My ears perked up when I heard the term, “values gap.” How was he going to define that term? I couldn’t imagine a deeply analytical investment cyborg, like Ray Dalio, launching into a Dave Ramsey rant about debt, thrift, and hard work. He went on to explain that 50 years ago, almost all Americans basically shared the same Judeo-Christian understanding of morality. Today, as in the book of Judges when Israel had no king, all the people are doing what seems right in their own eyes. Dalio believes that a culture that is so deeply divided on a fundamental understanding of good and evil will be fundamentally—unstable.

While I understand and agree with Dalio’s “values gap,” there is another values gap at work in the economy that correlates strongly with individual outcome. Our personal financial values drive our behaviors. Our behaviors become habits. Our habits eventually define the outcome of our lives. Of course, there are exceptions. Winos win the lottery. Hardworking honest families can be wiped out by war, illness, or even by something like a factory closing. We live in what is basically, a cause and effect universe that has been corrupted by the fall. Given there are limits to free will, the question becomes, what kind of values based actions that are within the control of an individual can lead to financial freedom?

Family is most fundamental value that leads to financial freedom. The dice are loaded against a child born into a single parent home. A Stanford study discovered that children from single parent homes are 5 times more likely to grow up in poverty than children with intact families featuring both a father and a mother. The absence of a father also correlates with drug addiction, teenaged pregnancy, and criminal behavior. Beyond the nuclear family, our culture has forgotten about the importance of the extended family. Although grandparents are still sources of high quality, free day care, it is unusual for multiple generations to live in the same house or work in the same business. There are exceptions to this rule. Asian immigrant families frequently live in multi-generational households. One of the main reasons Asian unemployment tracks below that of other ethnic groups are family owned businesses. When junior losses his job that required a college degree, he can always come back to work at his parents’ convenience store until the economy turns. Strong family connections are one of the reasons I have seen first generation Asian immigrants move from poverty to the upper middle class in less than a generation. There are some groups that have a history of extending the definition of family to those who share their belief system. Mormons are well known for supporting church members who have fallen on hard times, not only by bringing over a casserole when the news hits the church email chain, but by providing them with employment in some business owned by a fellow member of the Church of Latter Day Saints. Jewish Americans refer their customers to other businessmen in their community. I guess that any group that has faced so much persecution understands the concept of, “We are all in this together.” Would that all churches understand the importance of supporting one another’s financial wellbeing as well as worrying about correcting our brother’s understanding of theological minutiae.

I am privileged to know a young man who is always hustling work, no matter what the current economic condition. If he cannot find work he invents it. As far as I know he has walked dogs, been a house sitter, worked, installed, and maintained sound boards for various organizations and events, installed car stereos, and even driven my wife’s car to our new home in SC. A killer work ethic is almost enough all by itself to raise someone out of poverty. I am frequently amazed at the number of ways excellence can find to generate wealth. Yesterday, I watched a reality TV show about a man who makes his living rebuilding and flipping cars. In this particular episode, he paid the best car detailer in his city $3,500 to clean a 1938 Aston Martin that had been sitting in a barn for over forty years. That was all it needed to net the car guy a handsome profit. Imagine paying someone $50.00 an hour to wash your car and believing that the price was a bargain.

Solomon observed, “Do you see someone skilled in their work? They will serve before kings; they will not serve before officials of low rank.” Traditionally, this trait has been called the Protestant Work Ethic. It includes the ability to defer gratification, a critical component in staying out of debt and finding your way to financial freedom. Now the name of this value is changing to the Confucian work ethic. Asian American have highest median household income of any racial group in our country. They are simply outworking other Americans.

Although I left the workforce for a few years to get an engineering degree, my work life has been limited because I never really learned how to take a calculated risk. There is a very famous story about the owner of the largest chain of truck junkyards in the Southern United States. After graduation with a MBA, he found employment in a fast track program for young executives with a major manufacturing company. His first assignment was at a dealership. There was a wrecked truck in the dealership’s lot. His boss told him to sell it to a local junkyard. He received $600 for the truck. Two weeks later his boss sent him to the same junkyard to buy a used part to repair a similar truck. The junkman went to the same truck sold to him two weeks earlier, removed the part, and sold it to the young man for (you guessed it) $600. The young man found the love of his life. After buying his first wrecked truck for $2,000 he quit his job and never looked back. I was raised and trained to be a cog in a great corporate or governmental machine. I never learned how to take the kind of risks that make a successful entrepreneur. I think in the future, this skill will become more and more valuable.

Education is no longer a guarantee of a good job, but the love of and respect for education and educators seems to be a common thread in the lives of people who are generally employed. I won’t waste your time with stories about overeducated failures I have met. I am sure you have seen plenty of these unfortunate stories in your life. However, communities that traditionally placed a high value on education (Jewish and Asian come to mind) have lower unemployment rates than the general population.

Keith Cameron Smith discovered one of the significant differences between the rich and the poor is their sense of time. We all plan, but our timescales are different. Smith makes the following observations concerning different groups.

“The very poor think day to day.” At the extreme end of the scale drug addicts have a time horizon limited to the distance to the next fix, but many of the world’s poor are forced by circumstance to think on a day to day basis. If they are unable to obtain food today, they will die. Making it to sundown is an accomplishment in this world.

“Poor people think week to week.” I have seen this in the factories of South Carolina during the 1970s, people literally living paycheck to paycheck. If they had money they spent it, sometimes irresponsibly and extravagantly. The idea of deferred gratification only appeared when Christmas was drawing near. Starting sometime around November 1 everyone, especially the moms, wanted overtime. Their time horizon jumped from a week to a couple of months.

“The middle class thinks month to month.” Smith believes the middle class focus is on comfort. What can they buy today to make their life comfortable? If they think they can make the monthly payments, “It’s all good, bruda.”

“The rich think year to year.” Smith believes one of the key strengths of the rich is an ability to defer gratification in order to achieve freedom. This long term thinking gives them an edge over time.

“The very rich (like Ray Dalio) think decade to decade.”

Sometimes, one wise decision is all that it takes to escape poverty. If you live in sinkhole of poverty in rural West Virginia, moving over the mountains to a city with jobs can change a life in a few hours. Sometimes, a single minded commitment to changing your family tree can move a man, like my grandfather, from extreme poverty to more than enough wealth to provide all his children with their own farms. He achieved this goal over the course of a couple of decades. The math, as well as numerous examples, demonstrate that a two income family can reasonably expect to achieve millionaire status over the course of a working lifetime. Holding the right financial values and acting upon them can change not only the destiny of an individual or a family, but an entire nation. Ray Dalio notes that in a single generation, Lee Kuan Yew turned Singapore from an impoverished city with serious drug and crime problems into one of the Asian Tigers, a center of global commerce, finance, and transportation, known as the most technologically ready country in the world. All of these considerable achievements required some combination of a stable family, a strong work ethic, the ability to take a calculated risk, a love of and respect for education, and a willingness to change your sense of time.

Look around, then ask yourself the questions, “What is working? What doesn’t work?” Sometimes, you might find the answers surprisingly obvious and simple.