How to be a Billionaire: Proven Strategies from the Titans of Wealth
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ISBN-13: 9780471416173
Media Type: Paperback
Publisher: Wiley
Publication Date: 05-23-2001
Pages: 336
Product Dimensions: 6.00(w) x 9.02(h) x 0.88(d)
MARTIN S. FRIDSON is Managing Director at Merrill Lynch & Co., Inc. and a member of Institutional Investor's All-America Fixed Income Research Team. He is the author of It Was a Very Good Year, Investment Illusions, and Financial Statement Analysis, all published by Wiley. He serves on the board of the Association for Investment Management and Research.
There is pain in getting, care in keeping, and grief in losing riches. —Thomas Draxe Mapping the Territory Congratulations! Simply by opening up this copy of How to Be a Billionaire, you have taken an important step forward on the journey to extraordinary wealth. In fact, you are already far ahead of where the self-made billionaires stood when they began their careers. Unlike you, they had no road map. There was no manual that systematically and objectively analyzed the methods of the individuals who preceded them. As you will find when you read about their strategies, many of the greatest accumulators of wealth struggled for years before finding the paths that propelled them to the top of the heap in net worth. No one would seriously suggest that they could have gotten rich by reading alone, but the right sort of book could have saved them a great deal of wasted effort. Most of the guides to self-enrichment that were available when today's billionaires began their careers were motivational books. This is not to say that they were without value. The self-help classics correctly emphasized that, just as in athletics or the arts, top-level achievement in the business world depended on exceptional internal motivation. A famous example of the genre, Napoleon Hill's Think and Grow Rich, offered role models such as Charles Dickens and Helen Keller, who overcame adversity to achieve greatness. Hill taught his readers how to envision themselves in possession of a vast fortune. Write a clear statement of the amount of money you hope to accumulate, he advised, as well as your time limit for acquiring it. Then read the statement aloud twice a day. In general, the self-enrichment literature provided lots of inspiration, but little in the way of specific fortune-building techniques. One of the more practical books, One Thousand Ways to Make $1,000, was a childhood favorite of Warren Buffett's. It offered suggestions such as creating a business from selling homemade fudge. To identify the actual tactics employed by the self-made billionaires, today's titans of wealth would have had to compile bits of information from scores of books and articles. In other words, they would have had to undertake the laborious process that How to Be a Billionaire conveniently spares you. If the seekers of wealth had actually gone through the exercise, they would have learned that there was considerably more to the story than hard work and big dreams. For example, a lot of tough negotiating underlies the great fortunes of the past. This simple fact would not be apparent from the autobiographies of the champion amassers of wealth. Typically, they have portrayed their success as a fair reward for a lifetime of bargaining in good faith. They never needed anything more than a handshake to seal a deal and, if their recollections are to be taken at face value, both sides generally profited. In the real world, many business transactions turn out to be rather one-sided. Clearly, the less-informed parties who wind up on the short end are not the ones who subsequently write autobiographies recounting their ascent to billionaire status. For that matter, those who do publish their memoirs tend to downplay their interest in wealth altogether. As H. L. Mencken observed, the businessman is the only sort of person who, when he obtains the object of his labors, namely, making a lot of money, tries to make it appear that it was not the object of his labors. Billionaires' autobiographies have also misled their would-be successors on the relative importance of shrewd financial techniques. To most people, taking full advantage of the tax code or presenting a company to the stock market in the best possible light sounds less heroic than risking one's future on an unproven technology. The founders of the great fortunes understood the popular disdain for pencil pushers. Therefore, they did not emphasize tax and accounting intricacies in the stories they told of their rise to extraordinary wealth. Nevertheless, being financially astute is a must if you hope to become fabulously wealthy, and How to Be a Billionaire will teach you how. This book is not a treasure trove of previously undisclosed facts about the lives of the billionaires. The surprises are the key aspects of the billionaires' careers that diverge from the images promoted in the financial media. For instance, journalists sell Warren Buffett short by portraying him merely as an investment wizard. In reality, he has done far more than make passive investments in underpriced companies and then wait patiently for the stock market to recognize the hidden value. Anyone who hopes to follow Buffett's model must be willing to take an active role, either as a corporate insider or by pushing companies from outside to exploit their assets more aggressively. It is also important to understand Buffett's reliance, throughout his career, on outright purchases of companies (especially insurance companies), as opposed to becoming a minority shareholder. Plan of Attack In setting out to write this book, I wanted to create a manual for future billionaires by analyzing the careers of past and present billionaires. I did not attempt to discuss every billionaire. Forbes lists 268 individuals with net worth of one billion dollars or more in the United States alone, as of 1999. For readers interested in biographical sketches of the founders of great fortunes, books such as The Wealthy 100 provide a comprehensive treatment. In contrast, I have focused on a short list of individuals whose methods can be generalized into models for the billionaires of tomorrow. To round out the story in places, I have included pointers from a supporting cast of titans to whom I have not devoted full-blown profiles. I have found that the best vehicle for communicating a broad concept is a highly specific case. For example, an abstract recommendation to keep abreast of changes in the competitive environment sounds like a mere platitude. The immense power of this simple idea becomes clearer when it is illustrated by the multi-billion-dollar insight that led Sam Walton to switch to discount retailing, instead of concentrating his energies on maintaining his position as America's largest independent operator of five-and-ten-cent stores. To comprehend how Wal-Mart's founder recognized his great opportunity, it is critical to understand the evolution of new retailing formats over the past several decades. Therefore, this profile has more industry-specific information than you will need, unless you intend to seek your fortune in the chain store business. Regardless of the industry you choose, however, it is vital to absorb the broader principle that Walton applied—namely, staying in front of the parade. Keeping tabs on industry trends is especially important in the high-technology sector, where entire industries rise and fall within astonishingly short periods. I have deliberately omitted from this book the overnight billionaires churned up by the Internet boom. The long-run sustainability of their fortunes is too uncertain at this point. On the other hand, I have traced Bill Gates's path to billions in great depth. By its nature, computer software is an industry that must be examined in considerable detail in order to understand how one competitor achieved a commanding position in several segments. You do not need to master every technical point on the first read-through of the Gates profile, but it is worth returning to for closer scrutiny. After all, high-technology fields probably will generate a disproportionate share of tomorrow's billionaires. It is likely that at least a few of them will come from nontechnical backgrounds, as did Microsoft president Steve Ballmer. The Road Ahead for Aspiring Billionaires In the succeeding chapters of How to Be a Billionaire, I study the careers of all-time greats, living and dead, in the field of wealth accumulation. My object is not simply to tell their stories, but to isolate and highlight the methods underlying their extraordinary success. Each chapter is organized around a specific strategy or tactic that turns up repeatedly in reading about self-made billionaires. Extended profiles of 14 titans of wealth appear in chapters devoted to specific methods with which they are respectively associated. These individuals, along with other self-made billionaires whom I examine, generally appear in more than one chapter, because they have pragmatically combined several different methods of building fortunes. Fundamental strategies constitute the bulk of this book. The study begins with the strategy "Take Monumental Risks," an essential ingredient in every self-made billionaire's success formula. Next, the analysis fo-cuses, in sequence, on "Do Business in a New Way," "Dominate Your Market," "Consolidate an Industry," "Buy Low," "Thrive on Deals," "Outmanage the Competition," "Invest in Political Influence," and "Resist the Unions." Key principles shared by the self-made billionaires are highlighted throughout. These include: A summary chapter, "Your Turn" (Chapter 12), pulls together the methods illustrated by specific examples throughout the book. It provides a clearer road map than the self-made billionaires had when they began their journeys to unfathomable wealth. Your task is to follow the map to the charmed circle of 10-figure net worth. Overcome the Levelers The power of the self-made billionaires' simple-sounding key principles will become clear as you read about specific ways in which they have been applied. You can assimilate the ideas most quickly by keeping in mind the one objective that ties them all together: Overcome the levelers. You must vanquish the mighty economic and social forces that conspire against your rise to massive wealth. Originally, levelers were people, rather than the inanimate social and economic forces to which the term refers in this book. The Levelers formed a political faction during the English Civil War (1642-1648). They proposed to abolish the nobility's privileges and establish complete religious and political equality. As their once-radical ideas won general acceptance, the Levelers of old faded from the scene. Today, the levelers against which you must struggle are the Menace of Competition and the Obstacle of Social Conventions. If you succumb to them, you will never rise above a comparatively modest level of wealth. The Menace of Competition The most insidious leveler of all is also the supreme virtue of the free enterprise system, namely, competition. As most politicians of both the left and right nowadays concede, competitive markets promote the general welfare. Wherever competition thrives, producers of goods and services vie to increase their profits by reducing their production costs. Reduced costs translate into lower prices to consumers and, ultimately, a higher standard of living as their incomes buy more goods and services. Consumers' steadily rising standard of living, however, contrasts sharply with another by-product of vigorous competition: stagnation in producers' profit margins. In absolute terms, certainly, profits rise as the economy grows. But competition keeps a lid on rates of profit, measured as a percentage of sales or as return on capital. When a company finds a new way to lower its costs, the resulting increase in its profit margin usually proves short-lived. Competitors quickly copy the cost-saving technique or devise equally effective economizing measures of their own. With all producers now earning high profits, it is inevitable that one competitor will cut its price to capture a bigger piece of the market. The others will be forced to match the price cut, lest they lose customers. Before long, profit margins will be back to where they were before the cost-saving innovation appeared. Consumers will continue to benefit from reduced prices, but the producers will be right where they started. Students of economics will recognize this brief narrative as a description of perfect competition. As its name suggests, perfect competition is an idealized state that does not precisely match what is observed in the real world. Nevertheless, perfect competition is depressingly close to reality in most industries. Companies strive mightily, year after year, but never succeed in boosting their profit margins over any sustained period. Competition keeps driving profits toward the minimum rate required to induce investors to risk their capital in equity investments, rather than accept the lower but safer returns of high-quality bonds. Over a long period of time, entrepreneurs trapped in this system may prosper through general growth in the economy, but they will not become fabulously wealthy. To pull out of the pack, they must earn much higher profits than the economy as a whole is generating. In short, if you hope to become a billionaire, you must overcome the scourge of competition, one way or another. The most obvious antidote to competition is collusion. Suppose all producers make a solemn pact not to reduce prices as their costs go down. More important, assume they actually honor their solemn pact. By cooperating, they can retain the resulting increased margin between production cost and selling price, instead of passing it along to consumers. Unfortunately, consumers have long since figured out this stratagem, known in legal parlance as conspiracy in restraint of trade. Unless you are willing to break the law and lucky enough to get away with it, collusion is not a real option. Besides, the preferred method of overcoming the leveling effect of competition has migrated over the years from collusion to monopolization and from monopolization to market dominance. During the nineteenth century, oil refiner John D. Rockefeller Sr. experimented with collusion as a means of controlling output. He saw a collective benefit for refiners if they could coordinate their production to avoid the recurring episodes of oversupply that vigorous competition inevitably seemed to produce. Periodic gluts decimated everyone's profits, so Rockefeller reasoned that producers would act sensibly and embrace his scheme. In fact, though, they repeatedly broke ranks and exceeded their quotas. Disgusted with the refiners' obstinate refusal to act in their own self-interest, Rockefeller devised a more efficient way to accomplish the objective he had failed to achieve through collusion. His new solution was to create a monopoly. By acquiring most of the oil refining capacity in the United States, the Standard Oil trust was able to manage supply to its benefit. Unlike monopolists in other industries of his era, Rockefeller did not exploit his position to extract artificially high prices from consumers. Instead, he managed prices with an eye toward reducing the gluts and shortages that formerly made the business so risky. He also kept prices low in order to discourage new competitors from entering the refining industry. In the neat, orderly world that resulted, Rockefeller earned excellent profits through the efficiencies of operating on a vast scale. He further leveraged his market power, and fattened his profit margins, by extracting preferential shipping rates from the railroads. This particular cost saving had to be obtained covertly, through secret rebates to Standard Oil. For a time, it appeared that Rockefeller and his counterparts in industries such as steel and tobacco had licked the problem of competition. It turned out, however, that the levelers had not abandoned the battlefield. Ambitious politicians capitalized on popular resentment against the economic power that the trusts had amassed. Early in the twentieth century, the U. S. government largely undid the monopolists' work by stepping up enforcement of the antitrust laws. Most sectors of the economy were subjected once again to the rigors of genuine competition. During the early years of the New Deal (1933-1935), major industries enjoyed a brief respite. In an effort to pull the country out of the Great Depression, President Franklin Roosevelt encouraged the formation of cartels to boost prices and raise corporate profits. The United States Supreme Court, however, eventually ruled the scheme illegal. Today, there are essentially two strategies available to companies for overcoming the leveling effect of competition. One alternative is to fix prices and hope not to get apprehended by the Antitrust Division of the Justice Department. The other choice is to obtain unusual pricing power while still playing by the rules. This gambit in turn has several variants: Lawful Sources of Pricing Power 1. Brand identity. 2. Patent protection. 3. Dominant market share. 4. Sustainable cost advantage. The Obstacle of Social Conventions Sam Walton's reputation for hard bargaining with vendors highlights a second leveler that aspiring billionaires must defeat. Society runs not only according to laws, but also according to certain conventions of behavior. Individuals who unfailingly abide by these informal rules are unlikely to amass billion-dollar fortunes. In Walton's case, the key to obtaining lower costs was a willingness to violate the retailing industry norm of cordial relations with vendors. Wal-Mart deviated even further from convention when it tried to go around manufacturers' representatives to deal directly with manufacturers. Carl Icahn has reached the billionaires' ranks through hostile takeovers, a highly controversial activity. On the one hand, corporate raiders are popular among the shareholders who ride their coattails. Also in the raiders' cheering section are a number of laissez-faire economists who argue that by dislodging inefficient managers, the takeover artists benefit the general economy. At the same time, takeover artists arouse the ire of corporate managers who face ouster as control of their companies changes hands. One of Icahn's target companies filed litigation alleging that he was engaged in a "sophisticated scheme of corporate piracy." Another denounced him as "one of the greediest men on earth." Many editorial writers and screenwriters likewise portray corporate raiders in a highly unfavorable light. Imperviousness to such criticism has been a key to Icahn's success. Although by some accounts he wants to be well-liked, making pals is hardly the central focus of his business activity. "If you want a friend on Wall Street," he advises, "get a dog." Icahn revels in his role as a brutally tough negotiator, saying: At times I guess I would plead guilty to being a bully if you call a bully a guy who says, "Look, I have your stock and I'm going to do this, and I'm coming in, so why don't you sell me the company?" In a classic confrontation over Icahn's hostile bid for Phillips Petroleum, Morgan Stanley investment banker Joe Fogg declared the proposal preposterous. "What the hell do you know about the oil business?" he demanded to know. "You don't understand, Joe," Icahn calmly replied. "I'm not here for an interview." As an aspiring billionaire, you must reconcile yourself to the fact that winning a popularity contest and climbing to the upper echelons of the Forbes 400 are radically different undertakings. If Warren Buffett had set out to make some new friends, he would not have acquired the week-day- only Buffalo Evening News and launched a Sunday edition. That action broke up a comfortable modus vivendi with the News's rival paper, the Buffalo Courier-Express. For many years, the Courier-Express had survived on the strength of its Sunday monopoly, while the News dominated the circulation battle during the balance of the week. The gentlemen's agreement shielded both papers from ruinous competition and prevented Buffalo from devolving into a one-newspaper town. On the other hand, the informal arrangement afforded Buffett the opportunity to enhance the value of his investment by converting the News into a seven-day-a-week paper. When the Courier-Express ceased publishing, leaving the News in a monopoly position, Buffett could have endeared himself to the paper's reporters and editors by including them in the News's profit-sharing plan. Instead, he rebuffed their bid by saying that nothing anyone did in the newsroom could affect profits. Notwithstanding his reputation for geniality, Buffett has stood resolute in the face of personal criticism when money was at stake. Another surefire way to influence people without winning friends is to achieve a dominant market share. From 1902 to 1905, John D. Rockefeller Sr. had to endure a lengthy series of articles in McClure's magazine exposing and condemning every significant action undertaken by the Standard Oil Company since its founding. The author, Ida Tarbell, ventured that over the preceding 30 years, Rockefeller had never run a fair race with a competitor. His pious, churchgoing image, she charged, was nothing but a predatory businessman's hypocritical facade. The index of Ron Chernow's 1998 Rockefeller biography, Titan, contains seven entries under the heading, "Rockefeller, John D., Sr.: death threats against." Nine decades later, resentment of Microsoft's dominant market position has spawned web sites devoted exclusively to vilifying Bill Gates. One way or another, if you succeed in amassing a billion-dollar fortune, you will also succeed in making some folks unhappy. If nothing else, you will upset the sort of people who cannot abide another person's success. You will certainly offend individuals who regard outstanding performance in the area of making money as inherently inferior to other accomplishments, such as taking first place in an athletic contest or getting elected to public office. In a strictly logical sense, that view seems difficult to support. Business, sports, and politics are all intensely competitive fields. Making a billion dollars is not intrinsically less of an achievement than, say, a victory in a major tennis tournament or winning a race for the Senate. Nevertheless, there will always be people who flatter themselves by looking down on "mere" fortune builders. Provided you have lived up to your own ethical standards, there is little to do but bear the critics' barbs with as much grace as possible. Do not waste energy on the leveling tones of latter-day socialists who consider it a crime to get rich. Ignore, as well, the envious types who call you greedy. As the saying goes, "It doesn't matter what people call you unless they call you pigeon pie and eat you up." Having mentally armed yourself against the levelers, you must now take care to avoid certain blind alleys of wealth accumulation. The experiences of past and present self-made billionaires not only reveal the most remunerative activities, but also, if studied properly, the activities that almost certainly will not produce billion-dollar fortunes. From a quick examination of the Forbes 400 list of America's richest people, you can learn how individuals made the list and how they did not. Forbes lists the primary source of wealth of its elite group, all of whom possess fortunes of $500 million or more. "Inheritance" appears frequently, along with a wide array of companies and industries. "Salary" does not appear at all. This is a not very subtle clue that owning a business is a more likely route to billions than being an employee. Also conspicuous by its absence from the list is "Playing the stock market." Speculating in securities is a fascinating pastime, much like betting on horses or handicapping the Academy Awards. Passive investing has not landed a single individual on the current list of billionaires, however. If you entertain hopes of making the Forbes 400 list by shrewdly managing your personal portfolio, the record strongly suggests that you should abandon the notion and get onto a more productive track. Even if you match the record of the most successful money managers, beating the market averages by a few percentage points annually, you are not likely to parlay a modest stake into a billion dollars during your lifetime. By way of illustration, the mean annual rate of return on the Standard & Poor's 500 Index over the period 1926-1998 was 13.2 percent. You will qualify for the portfolio managers' hall of fame if you succeed in beating the market over an extended period by three percentage points a year, net of commissions and taxes. At that rate of return (16.2 percent), if you begin with an investment of $100,000, you will have accumulated only $182 million after 50 years of patient labor. On the other hand, suppose that, like the vast majority of money managers, you do no better than match the market's performance over the long run. In that case, your accumulation after half a century will be a much more modest $49 million. On the positive side, these figures demonstrate the phenomenal power of patiently compounding your returns over a lengthy period. Keeping in mind the principle that the first billion is the hardest, investing your fortune for the long run can enable you to pass on more money to your heirs or favorite philanthropies. The accumulation over five decades also shows, however, that if you hope to be a billionaire before you retire, speculating on stocks is the wrong vehicle. At this point, you may be asking, "Can it really be true that nobody has made a billion dollars purely by playing the stock market?" After all, Forbes lists "Investments" as the primary source of wealth of seven of the wealthiest Americans in the billion-dollars-and-up category. A look at the profiles that Forbes also provides, however, makes it clear that these individuals did not make their fortunes primarily by spotting attractive stocks to put into their personal portfolios. Among the other activities that the "investment" specialists have engaged in over the years are: In short, Forbes's definition of an investment, for purposes of compiling its wealthiest-Americans list, is not buying a stock and waiting for it to go up. Rather, the term means taking a substantial stake in a company and actively influencing its direction. Active influence may even include owning the business outright and running it. Indeed, John Kluge, one member of the billionaires' club whom Forbes characterizes as having made his fortune primarily in investments, told the magazine: "I'm an operator, not an investor." Even the man commonly (and with considerable justice) described as the world's greatest investor, Warren Buffett, ranks among the billionaires largely because of his corporate activism, rather than his passive investing. Forbes appropriately lists Buffett's primary source of wealth not as investments, but as the company he heads, Berkshire Hathaway. Contrary to a common misperception, Berkshire Hathaway is not for all intents and purposes a closed-end mutual fund managed by Buffett. While the Sage of Omaha takes no direct role in the management of Berkshire Hathaway's operating companies, he sets broad strategies and closely monitors each unit's managers. Other billionaires who are identified with securities investing likewise made their money by means other than finding cheap stocks and waiting for the world to recognize their value. For example, Carl Icahn has not become fabulously wealthy by passively investing in companies he considers undervalued. His technique is far better described as "attempting to control the destinies of the companies in question." That phrase appeared in a memorandum that Icahn and his associate, Alfred Kingsley, distributed in 1975 in connection with their first investment partnership. The specific tactics they envisioned represented a blueprint for their later coups: No one can realistically hope to replicate Icahn's phenomenal success by imitating only the first half of his method, namely, correctly identifying the companies that are trading below their potential value. Similarly, picking good stocks alone has not been the road to fabulous wealthRead an Excerpt
DO YOU SINCERELY
WANT TO BE SUPERRICH?
The Paths Not Taken by Billionaires
(Carl Icahn—1975)