There is an ancient Chinese proverb that states, “Wealth does not sustain beyond three generations.” It is sometimes expressed in English as ‘rags to riches and back again in three generations’. In Japan, the expression goes, “Rice paddies to rice paddies in three generations.” The Scottish says “The father buys, the son builds, the grandchild sells, and his son begs.” There are many variations on this theme in all cultures around the world, all used to describe the tendency of the third generation to squander the wealth obtained by the first and second generations. The “First Generation”, born into a life of hardship, is determined to make a better future for themselves. They are willing to work hard and make the sacrifices necessary in order to achieve their dream. In time, their efforts pay off and they are able to enjoy the “fruits” of their labor, often with assets to pass on. Their children, the “Second Generation,” grow up a witness to their parents’ struggles and understand the importance of hard work. Although they live a more comfortable lifestyle, they may still remember a childhood filled with frugality. Because of this awareness, they make sound financial and educational choices that help them build upon the foundation their parents worked so hard to create. By their later years, the “second generation” has acquired even greater wealth. The “Third Generation” has no memory of want or struggle. They only know a life of plenty and often lack an understanding of and appreciation for the work that went into building the lifestyle they now enjoy. It is this “third generation” that is known to squander the wealth their parents and grandparents worked so hard to build. This “three generation rule” seems to be a conventional wisdom that appears to transcend cultures.
According to an estimate by The Family Business Institute, about 97% of family businesses do not survive past the third generation. Or at least, some of the businesses themselves may continue to exist, but they are no longer in the ownership of the family. And data does back up these aphorisms. A 20-year study conducted by wealth consultancy, The Williams Group, involved over 3,200 families and found that seven in 10 families tend to lose their fortune by the second generation, while nine in 10 lose it by the third generation. Perhaps the most commonly-cited statistic about family businesses is their failure rates. Most articles or speeches about family businesses start with some version of this “three-generation rule,” which suggests that most don’t survive beyond three generations.
No doubt, there are exceptions. Some rich families defy this ‘three-generation rule’. Certainly, there are steps that families may take to preserve their wealth. The point here, however, is that wealth is not permanent. The impermanence of material wealth is an undeniable and inescapable fact of life. No wonder then that most religions try to steer people towards virtue and away from the pursuit of wealth by positing the impermanence of wealth. No, this is not to say that wealth creation is wrong. It is just that nothing is permanent in this world. Further, the ‘three-generation rule’ also teaches us that it is wiser to teach values to our children instead of doing everything for them to make their lives easier.
