How to make a fortune

The Forbes 400 list of richest Americans came out recently (you can see it here).

I enjoy looking through the list each year (and have for 20) to better understand how people become wealthy. We are not talking about the mass affluent, the affluent, high net worth, or even ultra high net worth, here. We are talking about billionaires. The highest on the list is at $81 billion and the lowest is at $1.55 billion. These people haven’t just become wealthy, they have become fabulously so. How?

That’s the question I ask myself each year, and this year I decided to keep track.

I wasn’t interested in finding out how many inherited wealth. Inheritance does not create wealth. With this in mind, I kept track of how the Forbes 400 made their fortunes.

One category is entrepreneurship. These are people who come up with an idea and then put it to work by starting their own company. The Forbes 400 is dominated by these folks at 52% of the list. Some did it through technology, others through retail, some with restaurants, some with medical devices and pharmaceutical products. These people create the new products and services we all enjoy. They had to be smart and hard working to succeed, but also had some good luck. Think Bill Gates, Larry Ellison, Sam Walton, Michael Bloomberg, Mark Zuckerberg, Larry Page and Sergey Brin. Not only do the dominate the list as a whole, they dominate the highest rungs of the list.

Next are the business fortunes, clocking in at 20%. These are people who instead of starting companies, either worked at businesses or bought businesses from others and put themselves in charge. Looking over the list, I see that they frequently fix broken businesses or make okay businesses great. Think Steve Ballmer at Microsoft, the Koch brothers, Rupert Murdoch, Richard Kinder, George Kaiser and Meg Whitman.

Next are the investing fortunes, coming in at 19%. These are people who don’t start or run businesses, per se, but invest others and their own in such businesses. They may influence the businesses, but they don’t run them. In some cases, they are completely separate from the business. This can be done through a holding company, with a hedge fund, through private equity, or running money through mutual funds. Think Warren Buffett, Carl Icahn, George Soros, Len Blavatnik, Ray Dalio, Ron Perelman, John Paulson and James Simons. 

Next are the real estate fortunes, coming in at 9%. These fortunes were built by buying real estate–usually with leverage–and rolling the dollars made back into more real estate. These fortunes are high risk/high reward because of the leverage usually required, but also require smart business moves and an understanding of where and how real estate will succeed. Many Americans, I think, over-estimate how successful this strategy is. The list includes names like Donald Bren, Andrew Beal, Stephen Ross, Richard LeFrakand and Leonard Stern.

I was surprised to see there is a lawyer on the list: 1. So, being a lawyer comes in at 0.3%. Way to go Joe Jamail: The King of Torts.

There you have it. Entrepreneurs top the list. You can make a massive fortune by finding an unmet market need and meeting it through hard work, long hours, and a good piece of luck. Or, you can be a successful businessperson joining the right company at the right time or by fixing broken or sub-par businesses. Or, you can invest other people’s money through lots of research and a knack for understanding when markets become irrational. Or, you buy and sell real estate with a lot of debt, some good luck, and a keen sense of location, location, location.

Or, you can be the King of Torts.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

How to make a fortune

The economy’s white knight

There’s been a lot of talk about what will pull the world economy out of the funk it entered a year ago.

Most of the focus has been on the U.S. consumer and what they can do to pull us out of our economic malaise. After all, consumer spending is usually 60%-70% of the economy.

Others, instead, focus on the governments of the world, whether U.S., Chinese or European. To this way of thinking, the economies of the world have come off the tracks, and only government can get them back on the again and moving forward.

But, I think this misses the most likely source of future economic growth: businesses.

Consumers are tapped out, they have to pay off debt and build up savings. Most governments are tapped out, too, they are simply borrowing from others in hopes that spending now will produce growth sooner rather than later. The financial sector, which can usually spur growth with lending and investment, is even more highly in debt than consumers or governments, so they don’t seem likely to be the impetus for growth.

Businesses, on the other hand, are in relatively good shape. Businesses faced a very tough recession in 2000-2002, and they have since lowered their debt and learned to react quickly and decisively to tougher economic times. They tend to be leaner and more flexible than they were a decade ago, and many have large cash hordes they can put to work.

In my opinion, this is where growth will come from sooner than any other place. In fact, I believe it’s already happening.

Now that demand seems to be stabilizing, businesses will start hiring again. The U.S. economy needs to shift from a consumption to a production focus. China needs to shift from a production to a consumption focus. Businesses will lead the way in this shift because they will see the most profitable ways to benefit from the new landscape. The smart businesses, the lean and flexible ones who see the future first, will expand production and meet business demand first. They will then have the profits to hire and expand more. And, thus, the upward cycle will grow and expand.

This will not happen quickly. Production won’t go from 30% of the U.S. economy to 50% overnight. And, 30% of the economy will not make up for the 70% of consumption all at once. It will be a slow, steady growth that will build a more stable, more production focused economy.

This will be a good thing. For, as Jean-Baptiste Say said almost 200 years ago, supply creates its own demand. Production, after all, must precede consumption–you can’t consume what hasn’t been produced. Having an economy more focused on production than consumption will grow more steadily and resiliently.

The economy’s white knight is riding to the rescue, and below the radar of almost everyone. Businesses will lead the way.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.