Forbes recently published its annual Forbes 400 rankings of the wealthiest people in the world. This list is a classic – a list of the estimated wealth of some of the richest and most powerful people in the world.
We always hear the same familiar names in the 400 rankings – Carlos Slim, Bill Gates, Warren Buffett. Those names are almost always the perennially ranked top three people in wealth.
Carlos Slim owns massive telecom businesses in Mexico and Latin America; Bill Gates has a large slice of Microsoft, and Warren Buffett’s investment performance at the helm of Berkshire Hathaway makes him a god of the financial markets.
Bring on the Boring!
The financial press likes to stick to recent newcomers like Mark Zuckerberg of Facebook or John Paulson of Paulson & Co. hedge funds, two people who accumulated billion-dollar net worth statements in a matter of a few years.
But when you start looking through how the wealthiest people in the world got rich, the paths are varied. In general, there are two common denominators:
- Time – Not surprisingly, it takes time to build up a billion dollar net worth. Most on the list are well over the age of 50, with many people on the list at 70-80 years old and decades of good investment and business decisions.
- Boring businesses – Technology companies and hedge funds may allow for quick leap frogging up and down the list of the 400 wealthiest individuals, but it is the boring business that keeps people on the list. In the top 100 are Waltons of Walmart, the Koch’s of Koch Industries (Industrials), and countless mining, oil and real estate tycoons.
Walmart couldn’t get a headline unless it were to fight off a new attempt at a union or be party to a new lawsuit. Mining companies stay off the radar, unless some journalist needs a quote for a Cash4Gold article. Oil companies hit headlines only when oil prices hit new highs, or oil spills threaten the industry.
These are all boring businesses that put people to sleep – yet they are the greatest sources of billionaires. Boring makes billions – never forget it!
It’s all Finance!
From top to bottom, the common denominator in wealth is finance. Microsoft, Facebook, and Oracle are outliers. These are real businesses that require a real product and real business concerns. But by and large, the greatest source of wealth is found in finance.
Oil production is all finance – companies buy existing wells with interest rates lower than the expected yield of an oil rig. The many real estate moguls made billions by leveraging their real estate holdings with cash less costly than the yields from tenants. Miners clean up by purchasing mines with inexpensive cash to reap the rewards of mining over the very long haul.
You don’t have to convince people to rent apartments. You don’t have to convince people to buy your oil instead of a competitor’s. And it doesn’t take much push or shove to sell gold or silver removed from mining operations. These are all commodity goods, for crying out loud. No one cares if gold came from a Barrick Gold mine or Goldcorp’s production. Few people care which real estate mogul cashes their rent checks.
Don’t Work too Hard for Wealth
You need not be a master coder to become a billionaire, or a marketing genius like Steve Jobs to become a wealthy entrepreneur. These make great stories, but not great billionaires. Having a basic understanding of finance, and an interest in a business to which you can apply that knowledge is really all you need.
Finance is not the same as Wall Street. Finance is not all high frequency trading and courting new investors for your latest hedge fund. Finance is the ability to grow assets at an exponential rate, period. Those that employ the power of exponential growth and intelligent financial decisions in boring, mostly uncompetitive businesses like mining, oil, real estate, and other scalable industries dominate the list of the wealthiest billionaires.
And these people sleep well at night because finance is simple. I know a guy who owns several hundred oil wells in the Midwest. He never worries about a new competitor opening up shop down the street, or a “new great product” that is going to destroy his business. He’s going to sell oil until the day he dies, and he’ll never have to roll out some goofy ad campaign to sell his product or prove his product is better than the competition. He doesn’t need to know a single thing about traditional business! His business is all finance – oil is just one step removed from cash.
Give me two people, one who understands corporate and institutional finance and makes only $50,000 per year and another person who makes $1 million annually as an elite surgeon with no understanding of finance. I’ll show you who is more likely to be the billionaire – and it isn’t the surgeon. In the grand scheme of things, the power to compound returns at a 20% annual clip will always beat a safer, substantially larger annual cash flow growing at a much smaller annual rate.
Bottom line: You need to be a business genius to make a Facebook, or a Microsoft, or even a L’Oreal, and keep it on top of the competition. But you need not be a genius to understand that borrowing at 4% and investing at 8% will make you rich. The difference between me, you, and the Forbes 400 list is action. We come across all kinds of opportunities to borrow at 4% and generate 8%. But the difference is that the Forbes 400 members were smart enough to say “hell yes!” to the opportunity in front of them.