"I make more money giving advice than taking it." ~ Malcolm
Forbes
The Forbes 400 Richest People in America issue just arrived in
my mailbox last week...
I pay careful attention to this issue when it comes out every
October, for two reasons. The first is personal: I've met and
befriended two dozen members of the Forbes 400 over the years.
The second is professional: The list can teach me - and you -
some valuable lessons.
Here are three vital lessons that I gleaned from the latest
issue...
Forbes 400 Lesson # 1
Ever hear of Franklin Otis Booth, Jr.? He's the great grandson
of Times Mirror founder Harrison Gray Otis. In 1963, he joined
Charles Munger in a small real estate deal in Los Angeles, and
met Warren Buffett. His original $1 million investment in
Berkshire Hathaway (NYSE: BRK-A) is now worth $1.4 billion. I
hear Mr. Booth likes to hunt and fish...
Otis Booth is the only person to make it on the Forbes 400 list
by being a passive investor. Your chances of imitating his
success are very slim - the same as winning the lottery. I don't
recommend putting all your eggs in one basket, even if that
basket is managed by Warren Buffett.
Yes, you can make millions by turning over your hard-earned
wealth to a financial wizard. But there are two problems with
this high-risk approach. First, it is highly unlikely that
Berkshire Hathaway, a $127 billion fund run by a 74-year-old,
can continue its incredible track record over the next 30 years.
Second, because of problem #1, you will need to find the next
Warren Buffett, and there's the rub. It ain't easy, as I pointed
out in IU #473 - Mutual Fund History - the Terrible Truth.
Finding the next Warren Buffett is like finding a needle in a
haystack, and even if you luck out in finding him, will you have
the guts to stay with him when he suffers a bad year or two?
Forbes 400 Lesson # 2
Instead of investing in one fund and letting it sit there, why
not be an active investor, switching from one hot investment to
another? Warren Buffett fits this category, along with 33 other
Forbes honorees. Buffett has been an active investor for 50
years, despite his statements to the contrary. He was once asked
how long he was planning to hold Coca Cola stock in his
portfolio. "Forever," he said. Yet, the truth is that Buffett
buys and sells stock all the time in his company, and today's
Berkshire Hathaway portfolio is quite different from what it was
10 or 20 years ago. You must be willing to change with the times
to be successful over the long run.
Forbes identifies a growing number of investment gurus or "money
men" in its survey, a total of 66, or 16%, of the Forbes 400.
The breakdown of their source of wealth is as follows:
Investments (34), including Warren Buffett. Hedge funds (12),
such as George Soros and the Ziff brothers. Leveraged buyouts
(seven), such as Henry Kravis and Ed Lambert. Mutual funds
(six), including Edward Johnson III (Fidelity) and Michael Price
(past owner, Mutual Shares). Money management (five), including
new members Ken Fisher and Mario Gabelli. Investment banking
(one) and brokerage firms (one). Note that only 34 of the
wealthiest Americans made it as pure investors, and all of them,
except for Mr. Otis Booth, are active investors searching for
maximum profits. The other half of the financial group made
their billions not from managing their own portfolio, but from
managing other people's portfolios.
Ken Fisher, for example, a friend of mine, made the Forbes 400
list this year for the first time. He didn't do it by writing
columns in Forbes or by buying stocks in his own personal
account. He hit the jackpot by marketing Fisher Investments, his
managed accounts in San Francisco. Admittedly, he has a good
track record in picking stocks, but more importantly, through
his aggressive advertising, he now manages $27 billion, and
earns a tidy million dollars each year in management fees.
Which brings me to the most important point...
Forbes 400 Lesson # 3
Every issue of the Forbes 400 repeats the same lesson over and
over again: The best way to build financial independence is
through your own business.
The evidence is overwhelming. Of the Forbes 400... only one made
it as a passive investor. Some 33 wealthy citizens made it by
being active investors. A larger number (around 40), inherited
their wealth, but the inheritances came from successful
businesses - David Rockefeller from Standard Oil, the Waltons
from Wal-Mart, etc.
The vast majority (294) made it by working overtime and building
great businesses in insurance, oil, technology, consumer
products, entertainment and real estate. And a surprising number
did it from scratch (such as Subway founder Fred DeLuca, who
started with $1,000, and is now worth $1.5 billion).
The fastest way to amass a fortune is to create a highly
profitable business and take it public. That what's the Google
guys did. Larry Page and Sergey Brin made the list after going
public last year, and are now worth $11 billion each.
About the author:
Dr. Mark Skousen is a professional economist, financial advisor,
university professor, author of over 20 books, and
Chairman/Editor of Investment U. In the IU e-Letter, Dr. Skousen
helps nearly 300,000 readers become better investors with
actionable investment advice, including the Forbes
400 article above.
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