> Generally, someone’s wealth level can be inferred from their net worth.

> But also, “assets minus liabilities” offers some large shadows to hide behind.

> So a better quantity to measure would be: the amount of money someone could bring to bear on a problem if they had to. If someone they loved fell deathly ill, but the treatment would cost some large amount of money, how much could they pull together in a month or two? How much could they borrow, and from whom, and on what terms?

The following breakdowns are largely just people's net worth (assets minus liabilities) with the credit they can tap because of their assets.

Not sure I entirely understand the point. Yeah, people with assets are generally more credit-worthy and can tap lines of credit.

▲

saulpw 9 hours ago | parent | next [-]

(author here)

One of the main points of Mag World is that different orders of magnitude are qualitatively different. Yes, of course, with more assets you can get more credit. But the types of credit are so different as to be incomparable. At ^2 wealth, without greater wealth around you, you probably can only get a usurious payday loan. At ^5 wealth you can take out a HELOC against property you hold title to. At ^10 wealth, a person can apparently buy and control a social media platform, without even "spending" any of their own money!

As they say, quantity has a quality all of its own.

▲

Swizec 10 hours ago | parent | prev | next [-]

> The following breakdowns are largely just people's net worth (assets minus liabilities) with the credit they can tap because of their assets.

> Not sure I entirely understand the point. Yeah, people with assets are generally more credit-worthy and can tap lines of credit.

Liquidity is a useful concept to think about when evaluating your risk levels. Having 500k in stocks is different than 500k in your primary residence. Same net worth but if you need to tap into 500k of stock, you can do that tomorrow. Liquidating your primary residence takes a few weeks (or months) and you’re then homeless.

I think that’s what this article is getting at. Net worth + resilience to risk. You can take bigger bets (with higher rewards) when your risk is losing some paper money vs your car or house.

edit for everyone suggesting helocs: yes you can also take a margin loan against stocks. This lowers your net worth and is a great choice if you expect inflows to continue or come back soon. It is not a good choice in all scenarios. Again back to different risk profiles :)

▲

chollida1 10 hours ago | parent | next [-]

> Liquidity is a useful concept to think about when evaluating your risk levels. Having 500k in stocks is different than 500k in your primary residence. Same net worth but if you need to tap into 500k of stock, you can do that tomorrow. Liquidating your primary residence takes a few weeks (or months) and you’re then homeless.

This is well said and the main reason why when calculating if someone is an accredited investor they always exclude the value/equity of a person's primary residence.

Someone who is renting but has a large pile of cash is in a better position to repay than someone who has their equity in their home as selling equites vs selling their primary home have far different stresses on the person, all other things being equal.

▲

hammock 10 hours ago | parent [-]

Liquidity can be broken down further into volume profile and net proceeds.

1) There is a good likelihood that a house and a stock portfolio can both be sold tomorrow, no problem. But you may have to offload the house at “fire sale” prices , vastly lower than the price it would bear if you had it on offer for 30+ days.

2) T-bills and stocks can both be sold tomorrow, but if your stocks have cap gains then the net proceeds after tax are going to be much lower from the sale of stocks than the t-bills.

These are some of the ways “paper gains” and “market price” fundamentally lie to you (irrespective of bubbles etc), that are seldom broken down in too much depth in personal financial discussions.

——

Another dimension that is missing is financial freedom. The author says:

> These wealth levels have existed throughout human history, even though the unit of currency changes.

↑-1 Wealth: Destitute (less than $3) At the bottom-most level, a person can’t even scrape together a few bucks for some food. Societal services aren’t accessible unless they are completely free. Finding a toilet and shower may be difficult. They have no possessions; their shoes and coat are probably decrepit and dirty.

Hard disagree here. An indentured servant in the 17th century, with a negative net worth, might have a very decent standard of living. Nice shoes, coat, bountiful table, etc. But they are not free to leave the land and move somewhere else. They are not free to pick up a different occupation.

	▲	danaris 7 hours ago \| parent [-]
		It sounds like you may simply be misinterpreting or assigning different values to wealth levels than the author? There were unquestionably many people in the 17th century who fit the description there. Just because you can come up with an example of someone who might plausibly fit the basic "has negative personal net worth" criterion who doesn't fit the rest of it doesn't refute that.

▲

trollbridge 10 hours ago | parent | prev | next [-]

Rather obviously someone can simply take a heloc against their home, and the payment from that will still be less than comparable rent.

The same is true of stocks - loans can be taken against them, and in the form of certain options leverage can hit 100%.

▲

bossyTeacher 6 hours ago | parent [-]

> The same is true of stocks - loans can be taken against them

this is only available to the richest of the richest.

▲

kingofmen 23 minutes ago | parent [-]

Most brokerages will offer you a margin loan if you have say $100k of stocks held through them. Not pocket change, but easily available to magnitudes 4-5 on this scale.

▲

jandrewrogers 14 minutes ago | parent [-]

The interest rates often make those unattractive. You also expose yourself to the risk of a margin call with its many implications. It isn’t something the average person should be doing casually.

	▲	dmoy 2 minutes ago \| parent [-]
		IBKR will loan you vs your stocks at a cheaper rate than pretty much any place will for a heloc on your house. Not like a lot cheaper, but maybe 0.5%-1% cheaper if you have <<$1M, and a little better at higher amounts. Most other brokers, even Schwab and Fidelity, will not. Agree it's probably not a good idea for most people. (I might argue the same for a heloc, depending on what for, what emergency savings, what level of job security, etc)

▲

rufus_foreman 10 hours ago | parent | prev | next [-]

>> Having 500k in stocks is different than 500k in your primary residence. Same net worth but if you need to tap into 500k of stock, you can do that tomorrow. Liquidating your primary residence takes a few weeks (or months) and you’re then homeless.

I have a HELOC. I've never used it. Hopefully I won't need to, but it was free to apply for and a good thing to have in case you do need it. I can tap into about 50% of my house's value any time I want instantly by writing a check or transferring money to one of my other accounts.

▲

forrestthewoods 10 hours ago | parent | prev [-]

Uhhh if you have $500k in house equity you can setup a HELOC line of credit in a week. If you want to fully cash out the equity you can do that too.

Liquidating 500k in stocks also takes more than a day to get in the bank.

	▲	0_____0 9 minutes ago \| parent [-]
		I was unable to use a HELOC to pay for renovation costs. The banks wanted basically the same assurances as you'd need with a conforming mortgage. I had investment assets several times the loan amount, and a fully paid off house. I ended up having to go private money at a higher cost in order to not liquidate more investments than I wanted to.

▲

jandrewrogers 10 hours ago | parent | prev [-]

Liquidity matters. Net worth is a notional value in most cases. Without an extremely liquid market it will not be realizable. There can be very large gaps between notional value and realizable value.

A non-liquid asset may effectively be unusable as a security for credit, which is the point being raised. You can have a large net worth on paper and literally no way to leverage those assets into cash should the need arise. In financial economics this is commonly called a "liquidity crunch"[0].

I recently read somewhere that in the US something like two-thirds of assets are non-liquid. Startup founders should understand this pretty intuitively.

[0] https://en.wikipedia.org/wiki/Liquidity_crisis

▲

aprilthird2021 10 hours ago | parent [-]

Can't you borrow against relatively illiquid assets though? Like a house? It's only when you max out the line on those that you might hit a liquidity crunch

	▲	jandrewrogers 9 hours ago \| parent [-]
		A house is a liquid asset outside of rare cases e.g. towns that have been severely hollowed out. Non-liquid assets are typically small businesses or physical assets with no market. This can be because there are no buyers e.g. there are some asset markets where there might be a single transaction per decade on average. This can also be because there are contractual or statutory restriction on salability, which often extend to use of the asset as a security for credit purposes. Another common reason is that the value of the asset is inextricably connected to who owns it. Selling the asset doesn't convey the value because that value is conditional on the current owner owning it, rendering it nearly worthless unless it is never liquidated.