Money isn’t everything

by Russ Roberts on September 7, 2011

in Work

I always like to tell my students not to take the job that pays the most money. Or at least don’t take it for that reason. Most people don’t take the job that pays the most money. We trade money for satisfaction, meaning, leisure, beauty, pride, and honor. Here is the story of a man who paid $72 million to have a meaningful life. It was a bargain.

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{ 20 comments }

purplefox September 7, 2011 at 11:43 am

Peter is doing something he really enjoys and is making a good living at it. With a lot of hard work these sorts of “miracles” do happen, good for him!

Frank33328 September 7, 2011 at 12:15 pm

Viewed from another direction, I would say this is unbridled selfishness (and good for him).

veritasrex September 7, 2011 at 12:56 pm

It’s amazing what happens when individuals are left to make decisions on how to manage their dreams, talents, lives and careers as opposed to a brain trust in Washington. Do people really believe that with a higher capital gains tax that Washington politicians would have done a better job at allocating his weath?

Methinks1776 September 7, 2011 at 1:25 pm

I’m not sure what wisdom we’re supposed to glean from this. Are we supposed to give him a biscuit for being productive despite the impediment of being a billionaire’s son?

Let’s not let the hereditary Buffet folksiness cloud the reality of the Buffet put. A put his dad was able to provide precisely because tax policy while dad was acquiring wealth was not as aggressive as dad advocates for now. .

In addition to the Berkshire stock, young Peter had the option to go back to his billionaire father’s home if he failed. Sure, Warren is not a fan of coddling his children, but he wouldn’t let them starve in the street or live in a hovel either. Young Peter could afford to roll the dice on any career he chose.

The other thing money buys is security. Most people not only don’t have such a generous inheritance but they also don’t have a Buffet put either. And if Buffet has his way, nobody except cronies will ever be able to provide their children with either the inheritance or the put he provided for his children.

purplefox September 7, 2011 at 2:23 pm

While reading the article, I had the mental image of the farm that provided Peter his seed money came from some other father who didn’t avoid inheritance taxes for his children. His children had to sell the farm to pay the taxes. Buffet bought and sold the farm, then gave the money to one of his children.

Anyone is capable of making a living with their dream job, but for those without a golden cushion it will generally take longer because they will be less able to take risks early in life before they’ve built up a safety net. It also takes more work than most imagine, or want to put in.

I’m more impressed with the people who go from nothing to millionaire in their lifetimes. There aren’t as many stories about them, though. They’re probably too busy working!

Methinks1776 September 7, 2011 at 4:21 pm

I have no opinion on Peter’s career move. I’m neither impressed nor unimpressed by him and I am just as happy for him in his (successful?) music career as I am for any other productive person. It’s not all that easy to be chained to your daddy’s legacy your whole life either.

His daddy is a massive rent seeking hypocrite who, for reasons I cannot understand, would love to rob your children of the opportunities he provided for his. And I wouldn’t be me if I didn’t take every opportunity to point that out.

Folksy Peter could relax and follow his dreams because Folksy Warren had his back. Security? He had it. Peter wasn’t exactly panicking over how he was going to pay the rent. That’s great for him, but it’s worth mentioning that it’s a lot easier to give up $72 Million when Dad’s worth billions – even if he isn’t going to bequeath all those billions to you when he dies. The act is a little less heroic than Russ is implying in his post.

Jim September 7, 2011 at 3:17 pm

Actually, the son also made a put; against his father. Instead of borrowing money against his Berkshire shares, counting on his father to increase the size of the asset, he sold them.

If he would have kept the shares, and followed his dream, he would be both happy and incredibly rich. That he laudably followed his dream does not diminish his short-sightedness when it comes to his father’s savant like ability to pick stocks.

Methinks1776 September 7, 2011 at 4:31 pm

Jim,

I don’t know what you’re trying to say. Selling shares of stock is not a put. A put is an option. When you sell stocks you do not receive a put option in return.

Like most parents, Warren provided his son a free put option. That is, if Peter failed, he could rely on his dad to support him. His downside was limited. His risk was subsidized.

I have no opinion about his sale of Berkshire Hathaway. In retrospect, to you it may seem stupid, but these are very personal decisions that can only be made by the stock holder for his or her own reasons. He doesn’t seem all that torn up about the foregone profit, so it must be the right decision for him.

But, here I will once again point out that even though he sold his Berkshire shares, children are almost always long their parents. So, he remained long Warren Buffet even though he no longer owned shares in Berkshire.

Mesa Econoguy September 7, 2011 at 5:08 pm

Exactly, and Peter most definitely benefited (and no doubt still benefits) from daddy’s position.

Jim September 7, 2011 at 10:26 pm

You’re right; I used the wrong term. But the gist of my thought while I read the article still stands.

Despite his either/or story, the fact remains that the son did not have to sell the shares to follow his dream. The son shorted his father’s ability by selling his stock. He bet the present value of the cash was going to be worth more than his father’s return on investment less interest on a loan against the shares.

Given his father’s proven ability, I wonder why he did that. Surely anyone in the world would have given him more than favorable interest terms.

This story sounds like the lion who roared for acclamation because he had a lame paw. One variation of that theme is that at the time he wanted nothing to do with his father, and so made a questionable financial decision which he now rationalizes.

I’ll word it another way; I sold my shares in the private equity firm where I worked to go to graduate school; the owners were firing fantastic managers to place their kids in the business. I had no confidence our exemplary returns would continue. If I had owned appreciated Berkshire shares, I would have borrowed against them. That his son did not do that mystifies me.

Economiser September 8, 2011 at 11:20 am

According to the timeline in that article, Peter Buffett sold his Berkshire shares in approx. 1977. Warren was very successful by that time but was by no means the investing legend he is today. And $90,000 then, adjusted for inflation, would be about $320,000 today. That’s a lot of money for a 19-year-old kid who wants to take an unpaid job.

Methinks you’re criticizing him using perfect hindsight, which is unfair.

Methinks1776 September 7, 2011 at 10:56 pm

If I had owned appreciated Berkshire shares, I would have borrowed against them. That his son did not do that mystifies me.

That’s because you don’t seem to grasp that even if he sold the stock, he is still long Warren Buffet by virtue of being his son. Why would he care about the golden egg when he still has the goose that laid it?

Peter’s values, interests, circumstances and preferences are different from yours, so he made a perfectly rational decision for himself that you would not make for yourself. Just because he chose differently from what you imagine would have chosen doesn’t mean he chose unwisely or that he’s rationalizing. Trust me, from what I’ve heard, he is not suffering.

He bet the present value of the cash was going to be worth more than his father’s return on investment.

Peter bet that the opportunity the cash would buy him would be worth more than the money he might make by holding the stock. Perhaps even under the most generous assumptions. And before you start with the loans again, I remind you that loans are not free. They are a terrible obligation for someone who is starting out in a business that doesn’t pay well and often nothing at all (at least in the beginning). Obligations plus no cash flow is a pretty bad combination.

JS September 7, 2011 at 2:21 pm

“Methinks you doth protest too much.”

I’ve been waiting for the opportunity to say that for some time now. Thanks for it. It’s as close as I’ll get to an appropriate usage.

kyle8 September 7, 2011 at 4:08 pm

money isn’t everything, it’s the only thing, Wait! I am mixing metaphors again.

vikingvista September 7, 2011 at 4:56 pm

I thought the best things in life were free. No, wait…

Mesa Econoguy September 7, 2011 at 5:06 pm

I had the opportunity to do a recording with Peter years ago, and while he certainly has walked a path very different from his father’s, he was able to tap into some of daddy’s capital (and likely connections), as he ran his own very well-stocked studio and production co., and lived in one of the most extravagant lakefront homes in Milwaukee (also with a studio, which required a crane to remove the equipment when he sold, if I recall).

Kudos to him for not feeling obligated to join the family business, though I question his timing on his BRK.A sale.

Huxley September 7, 2011 at 8:38 pm

I read that the Buffett children inherited tens of millions of dollars from their mother so all is not lost. :)

Mark September 8, 2011 at 12:13 am

In regards to politics and economics, I dont often agree with Warren Buffett. But I do admire him as a person and businessman.

I agree with many of the other commenters that Peter Buffett was probably never at risk of living on the street if his music career did not work out. However, Warren did make his childeren be responsible for their own lives. Peter went on to have a productive musc career and has won an emmy award. Alternatively, Warren Buffett could have endowed his children so they did not have to be productive, as the Hiltons have famously done with their daughter Paris.

but. . . . .with a 45% estate tax, there is always a work around in finding ways to pass your wealth on to your children. About five years ago, Buffett famously gave the majority of his wealth to the Gates Foundation. At the same time, he funded charities ran by each of his children with about $1.2 billion each. Peter Buffet’s foundation is called the Novo Foundation. And large charities and foundations need managers, and managers get paid.

Peter does not take a salary from the Novo Foundation, but his wife Jennifer does.

Page 31 of the Novo foundation 2009 tax return reveals that Jennifer Buffett takes a $203,021 salary and $42,750 in benefits. Not chump change. . . . And inheritance tax free. (http://www.guidestar.org/FinDocuments/2009/470/824/2009-470824753-0642eebd-F.pdf)

You can download the tax return for any non profit at http://www.guidestar.org. I often review the data aggregated on this website before I make decisions on which charities I donate to each year.

John Doe2 September 8, 2011 at 1:02 pm

To me, this story is classic survivor bias. Following his dreams worked out great for Peter because he was lucky: If he hadn’t got the lead from his neighbor and if the cable channel hadn’t turned out to be MTV, we probably wouldn’t be talking about him today. People who follow their dreams (and work hard) but aren’t lucky don’t write books about it.

Greg Webb September 8, 2011 at 3:57 pm

I am pleased for Peter that he gave up the opportunity to make $72 million to pursue his dreams of being a musician. But, he did not know at the time that he was giving up the opportunity to make $72 million. It is also, as Methinks1776 pointed out, great to have the Buffett put to provide you with the downside security to make basically a risk-free decision.

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