(This is the first in a series of posts where I’m looking at the possible changes we’ll see in investing and other financial pursuits in the not too distant future. It’s inspired by reading (well, listening to the audiobook version of) Future Wealth, an interesting book about possible changes we could see in the how wealth is considered in the future. I’ll look at some of the ideas raised, starting with the idea of people ‘going public’.)
There are plenty of investments out there, a fact to which my Investing 101 posts will readily attest. Stocks, bonds, and mutual funds, among numerous others, are all available for the individual or corporate investor to add to their portfolio. As a result, you can invest in corporations, investment firms, even government debt.
But for most of history, you couldn’t invest in individuals. There was no way to buy stock in Thomas Edison, or get a bond backed by the earning power of Andrew Carnegie. Sure, it was possible to invest in the companies that they founded, but the men themselves (or rather, their financial activities and money making potential) were not up for bid. The same goes for all there employees; from the highest ranking vice president to the lowest man on the assembly line, the only way to profit from their productivity was indirectly, via the companies they supported. But lately, that’s all been changing.
The Market for People
Yes, lately it’s become possible to invest in individuals, in much the same way as you do in companies. While it’s still not nearly as common (or as easy) to buy bonds backed by the earning power of an individual rather than a company, there’s an increasing ability to invest in your fellow people directly. In general, there’s two possible ways such an investment could be structured:
1) Bond-Like: The more popular method, where investors loan money to the ‘bond’ issuers. The loan recipients have the obligation to repay the loan with whatever interest and other agreements are put into place, but have no obligation to share a portion of their future earnings, from activities made possible by the invested money or other, unrelated endeavors. The first, and probably one of the more famous, example is ‘Bowie Bonds‘, a bond issue backed by the musical catalog of David Bowie prior to 1990. The purchaser of such bonds would get interest generated by the proceeds of those songs in various forms, but had no claim on Bowie’s future income from other sources.
More recently, and much more widespread, are personal loans made through websites like Prosper and Lending Club. If you are an investor in such services, like myself, you’ll buy portions of another person’s loan, and receive regular payments in return (which cover both interest and principle). As with corporate bonds, that’s all you’re entitled to receive; you have no claims on the future earnings of the person, even if your investment made it all possible.
2) Stock-Like: If you do want to have the upside potential when investing in other people, you need to have more of a stock-like investment, trading your money for partial ownership of the person (or at least, of their future income; owning people is largely illegal, and entirely immoral, in modern times). There aren’t too many people who have done arrangements like this, but one woman who is trying to trade her future income for money now is Kjerstin Erickson, who is offering six percent of her future lifetime income in exchange for $600,000. The upside possibilities are impressive; by getting in at the start of her entrepreneurial career, if Ms. Erickson manages to become a billionaire, her investor (or investors) could wind up with $60 million, for example.
Of course, that’s far from a guarantee, as any number of would-be billionaires can tell you. If Ms. Erickson doesn’t earn at least $10 million over the course of her lifetime, the investors won’t even recover all of the initial investment, let alone any profit. If she chooses a low paying profession (she’s currently working at a non-profit) or happens to die *knock on wood*, the prospects for recovering the investment look even worse. Things aren’t all cheers and roses for Ms. Erickson in this situation, either; besides the inevitable sense that she should do something with the money (or otherwise take more risks in her financial life), there’s the fact that her earnings will be decreased throughout the rest of her life. Presumably, she’s considered these facts and decided it was a trade worth making, but allowing others to invest in you might not be for everyone.
Where We’ll Go From Here
So, since our focus is on the future, what does the future hold for investing in people? Well, as mentioned, bond-style investing in people seems to be here to stay, with companies like Lending Club making it a fairly big business already. Peer to Peer Lending, as it is otherwise known, is still not considered as vital a portion of your investing portfolio as, say, stocks, but do represent a useful way to diversify your holdings.
Stock-style investing, though, is rather unproven. Depending on what happens with Ms. Erickson’s bid for investors (along with those of Saul Garlick and Jon Gosier, who are offering three percent of their future earnings in exchange for $300,000), this may be a viable way for up and comers to raise funds. Of course, as mentioned, future entrepreneurs might have to accept more modest levels of income and/or offer a higher portion of their future income for such arrangement to take place.
From there, it’s possible to open up secondary markets in human investments, buying and selling contracts for future income streams in individuals. Perhaps in the future, you’ll be buying and selling ‘people’, or at least, portions of their income, more often than companies. Or perhaps mutual funds will develop that allow you to invest in recently graduated business majors or biochemists. Or maybe college will be funded entirely by selling shares of your future income to interested investors (maybe that will cause incoming freshmen to spend more time studying).
The future is hard to see for certain, but there is a good chance that it will involve investing in people.