As I read this article at CNBC on where the wealthiest people are putting their money, it occurred to me to mention something. The really rich don’t gamble. Most of them are rich because they don’t gamble. They only bet on sure things.
They’re the house, not the marks. The house always wins because it’s not gambling.
No reason to gamble when you own capital that historically pays a 3-5% average return.
“Most of them are rich because they don’t gamble. They only bet on sure thing.”
One hardly knows where to start. In point of fact, most are rich because prior to accumulating their wealth, their risk tolerance exceeded the general population. (And please, skip the inherited wealth types like the Kennedy’s, Heinz/Kerry and soon to be C Clinton. They are few.) They move to less risk, generally fixed income, because they don’t have to take the risk of making their capital base work hard, they are already rich. Ben’s observation is closer; after all, Brown Brothers exists because of this. You can ride out the rising rate environment by holding cash (a MM fund) or minimizing durations or, best, holding securities to maturity. Now that last one is really not taking avoidable risk! Just inflation risk.
And the “sure things” look like a murderers row of risk. PE and RE are both at premium valuations just like public equities, but in addition they feature the ultimate risk: illiquidity. If I had to choose between the two right now, RE has a better chance of payoff with a 10 yr time horizon. PE not so much. As for public equities, other than Berkshire (for Buffet is a value investor, monopolist and regulatory capturist) I don’t see Amazon or Apple as riskless.
First, I am only talking about the weathiest here. They may have become wealthy by taking risks but once rich I believe they are able to mitigate their risks. Clearly, you think so, too, because you characterize Warren Buffett as a “monopolist and regulatory capturist”. Those are both strategies for mitigating risk.
Do those purchasing Amazon or Apple stock see them as risky? I don’t believe they do. I think their stockholders see their stock as the equities equivalent of a CD.
” their risk tolerance exceeded the general population.”
For some people maybe, but I doubt that is true of most.* It looks like most of these people come from upper middle class parents or better (parents are a professional of some kind). If you fail, you arent going to starve or go live in the slums. You might end up in middle mangement somewhere. For people who come from families earning in the bottom 3 quintiles, taking a risk really does mean that you might end up broke.
*I think the data showing that people in the top 20% seldom sink to the lower groups supports this, but not sure if this has specifically been studied.
Steve
If they had better risk tolerance they wouldn’t demand government subisdies and bailouts nor would they bribe politicians and pay lobbyists to write legislation. Nor would they organize their wealth behind extensive corporate structures for protection, structures given vast legal privileges beyond anything enjoyed by non-wealthy individuals.
Capitalism is not about risk or competition. It’s about competitive advantage and eliminating personal risk.
Have you looked at Apple or Amazon stock lately? Apple especially has lost it’s luster, if I owned shares, I soon wouldn’t.
They do advise on some general principles to accumulate wealth and keep wealth.
(A) spend less then you earn
(B) don’t leverage (ie borrow money)
(B) invest; but keep it diversified in different classes of assets that are not correlated in returns. Ie some in stocks, some in bonds, some in real estate.
It wouldn’t surprise if the wealthy tend to follow all three rules; otherwise they would not stay wealthy for very long.
Good comment
I suppose some definition would help.
Dave – I don’t know what you consider the wealthiest, but a billion qualifies with me. I think the passage of time and other circumstances allow me to make some comments without violating any confidences. I worked for a turnaround guy in Chicago named Mike Heisley. (Deceased). He started from nothing. Hocked his house to do his first deal. Eventually became a billionaire and started doing stupid things like buying NBA basketball teams. (Vancouver and then Memphis Grizzlies). He had no political influence. Had a risk tolerance like no one I’ve seen since. The stories have no end.
My wife was Director of Research for the “father of momentum investing,†Richard Driehaus. See The New Investment Wizards. Again, “soutsider†who started from nothing. She started when it was a six person startup. He believed in himself and his method. Now he’s a billionaire.
If that air is too rarified. Every time we close a deal we put after tax proceeds of $40-$100mm into the owners pocket. Perhaps not the wealthiest, but not bad. Almost all, like 95%, came from humble backgrounds. No silver spoons. Hard work, an idea and goal, and big balls.
So that’s my perspective, and I’ve spoken with and have relationships with enough PE guys and entrepreneurs over 25 years to know that’s the way the real world works. And there’s quite a few of these people. They are quite an engine. This obsession with, and commenting on, a handful of Bezos’s, Gates’s or Buffets (or how about Musk) financial status is unhealthy and misguided. They may have done some great things, (or not) but are all creeps to some degree or another. But you could confiscate their wealth then give them a fair trial before hanging them and the world wouldn’t really change. It’s pissing into the wind, and it clouds judgement on policy and attitudes toward the vast majority of value creators.
As for Apple etc. They are free to think what they want. I’m a value guy. I wouldn’t be loading up on those as safe investments. And RE and PE? Those two classes fall into pension and endowments “alternatives†class, the most risky portion of their portfolios. An allocation exceeding 10% raises eyebrows. These guys aren’t going to safe havens, they are speculating.
Steve – It’s true of most. I really don’t care if you believe me or not. But I travel in these circles. The risk averse with brains become doctors, lawyers, consultants and accountants. Fine people, but not the risk takers.
Curious – your Bullet points are a perfect prescription for accumulating a nest egg of $.5mm – $5mm. Probably the right course for most people. If you want to get to $20mm —-> infinity, you violate those rules and go for it. As I always say, it’s not for the faint of heart, and I wouldn’t recommend it for those who don’t want to work, literally, 15 hour days or who desire to do mundane things like sleep at night. That goes for entertainers, sports stars, PE guys, entrepreneurs, top flight corporates etc.
DREW- I dont doubt that these guys are risking safe, comfy jobs that would lead to their making 400k-500k a year. However, if they fail, they just end up as middle management somewhere, making 100k a year. So I dont see this so much as risk taking but rather a lottery mentality, wanting and willing to put in the effort to be rich.
Put another way, since you travel in those circles, how many of those people come from truly poor backgrounds? If they had failed, would they have lacked for family support and a social network that would have left them truly destitute?
Steve
The only official estimate I have, steve, is 98.5196834%, and that comes from the Democrat Party, although they refer to them as Dreamers. It would be 100% except for the wayward few committing vehicular homicide, manslaughter and drug trafficking.
I guess we need an agreed definition of rich. Growing up I thought 1 million was that point.
Today I could see 5 million; with that you could take 2%, get 100k to live on. 2% is thought to be a safe limit if you want the money to last forever.
By “wealthiest” (the topic of the linked article) I think I would mean a net worth of $100 million or more. YMMV.
I agree with Guarneri to the extent that I think the strategy he outlines is one that may place one among the wealthiest although, as the Clintons have shown us, there are other ways. I guess my point is that I strongly suspect after one has achieved great wealth one’s strategy changes. Warren Buffett, as he noted, is one example of that. When you limit your consideration to the very wealthiest people in the U. S., their wealth is either inherited (the Koch brothers, the Waltons), or they were once entrepeneurs but over time their strategy changed. Are Bill Gates and Mark Zuckerberg really still entrepeneurs?