Tuesday, July 21, 1998

The Pyramid Scheme Fribble
by Selena Maranjian

This is a Fribble that advocates pyramid schemes. That's right. We should all be involved in a pyramid scheme. (No, this is not an April Fool's joke.)

Before you think I've gone off the deep end, let me assure you that I'm not inviting you to hear a free talk at a local motel meeting room. I'm not asking that you start driving around town with samples of household cleaners in your car trunk. I'm not suggesting that you make a list of all your friends and acquaintances and their phone numbers. No, no, no.

I'm talking about a different kind of pyramid scheme. One described very effectively in a powerful little book called The Richest Man in Babylon. This sensible 144-page treatise on how to create wealth Foolishly (originally published in 1926!) presents a bunch of parables that drive home some valuable lessons.

For example, a chap named Arkad, Babylon's version of Warren Buffett, explains that not only do you need to set aside a portion of all the money that you earn, but you have to put that money to work for you. This is a big deal. Too many people think that merely saving is enough. Or that saving and investing in any old mutual fund is enough. It's not. You need to have every dollar working for you as efficiently as possible.

As Arkad pointed out: "Learn to make your treasure work for you. Make it your slave. Make its children and its children's children work for you." (p. 19) Later, he notes, "A man's wealth is not in the coins he carries in his purse; it is the income he buildeth, the golden stream that continually floweth into his purse and keepeth it always bulging." (p. 31)

What he's describing here is a sort of pyramid scheme. A virtuous one, though. Imagine that you plop $1,000 into an Standard & Poor's 500 Index fund, which grows at an average of 11% per year. In one year, 11% growth will turn that $1,000 into $1,110. While your attentions were elsewhere, your 1,000 little soldiers were working for you. In fact, some of them must have been human resources soldiers, as they hired 110 of their friends to come work for you, too.

Naturally, you want to keep adding to your pile of soldiers by earmarking part of each paycheck for your portfolio. But realize that real wealth happens when each dollar you deposit toils for decades, growing into many more dollars.

Arkad illustrates this point well, although a modern-day sensibility would probably have chosen a less ethically objectionable example: "Behold from my humble earnings I had begotten a hoard of golden slaves, each laboring and earning more gold. As they labored for me, so their children also labored and their children's children until great was the income from their combined efforts." (p. 32)

If, like me, the idea of a "hoard of golden slaves" doesn't appeal to you, let's just consider other possibilities. Imagine a young company -- like the Motley Fool, even. When there are only a handful of employees, only so much work can be done, only so many readers can be served. As the company grows to employ more and more Fools, the amount of total output increases significantly. Eventually, the world is changed. This happened with Intel. It began in 1968 as three engineers with some ideas and it kept growing. Today it employs some 63,000 people (up from around 20,000 ten years ago) and it rakes in more than $20 billion per year. Could the initial three people have generated that much on their own? Probably not.

The Richest Man in Babylon has a few other valuable lessons to offer. You might want to check it out at your local library, or part with a few dollars at your favorite bookseller. It should prove effective with kids, too.

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