The Missing Millionaires and Billionaires

Amar Pandit , CFA , CFP

November 7, 2023 | 6 Minute Read

After reading last Tuesday’s post (What’s the Latest?), a dear reader wrote to me, “Amar, I loved this post, but I didn’t understand the last line of your post. What did you mean by the missing millionaires and billionaires?”

Let me quickly recap the concluding paragraph of that post, so you get some context.

While you are not a patient in the context of investing and while the diagnosis might not be so fatal initially (in many cases it absolutely is) when it comes to your money, getting your diagnosis right is the first and most important step. It’s critical to your financial life, your financial well-being, and your peace of mind…. Not getting this right is the number one reason why there are so many missing millionaires and billionaires on this earth…

This post then gets into the issue of these missing folks – What do I mean by missing? Who are these people? Where are they? And how do they exactly become missing?

A simple answer to this question is…There would have been far too many millionaires and billionaires on this planet if most people had done a few things right – save well + invest in ownership (public companies) + behave well by letting compounding to work for them + manage their risks (death, health, and many others).

Simply doing this would have created many more billionaires (not to mention millionaires) than we can ever imagine. But doing this alone is super difficult because:

a. We are not taught how to consume financial services…that’s why we end up seeking prescriptions even before we are thoroughly diagnosed.

b. More importantly we can’t see our blind spots, biases, behaviour, and assumptions. There is no one to come between us and our (impulses, emotions, and behaviour).

c. We get in our own way by way of market timing, product selection, overconfidence, fear, and many other things.

Therefore, we need the care and wisdom of a real financial professional. The key is then how to find this professional, but this is a topic for another day.

Coming back if you want your family to continue being millionaires and billionaires for the next several generations, then you must educate your legal heirs to keep repeating the 4 steps mentioned in the formula. They then need to pass it on to their next generation and this needs to continue to remain millionaires and billionaires. Forget doing this for multiple generations, it’s super difficult to simply do it for one generation.

One of the key things to understand is that even billionaires haven’t remained billionaires…

Cornelius Vanderbilt was the richest man on earth by 1877, less than 150 years ago (in the 19th century)…Yet, less than 50 years after his death, one of his direct descendants died penniless, and no Vanderbilt was counted among the world’s richest people. There is an insightful book “Fortune’s Children: The Fall of the House of Vanderbilt” that covers the story of all the spenders who dissipated such a vast inheritance.

Don’t we all know stories within our families where we have seen millionaires vanish? Many would have seen billionaires vanish too.

The description of an interesting book “The Missing Billionaires” by Victor Haghani and James White, reads as follows:

Over the past century, if the wealthiest families had spent a reasonable fraction of their wealth, paid taxes, invested in the stock market, and passed their wealth to the next generation, there would be tens of thousands of billionaire heirs to generation-old fortunes today. The puzzle is why you cannot find a single billionaire on any current rich list. There are several explanations but one mistake which is of profound importance to all investors: poor risk decisions, both in investing and spending. Many of these families didn’t choose bad investments- they sized them incorrectly- and allowed their spending decisions to amplify this mistake.

I will simplify this mistake with one simple sketch…

 

7nov-investor

 

A doctor once told me: This sketch reminds me of all the debates I used to have with patients who want to argue the merits of which blood pressure medicine to take, based on a friend’s experience. And I’d tell them, ‘It doesn’t matter which one you take if you don’t quit smoking.’

The single most important factor in a lifetime of successful investing is your own behaviour.

You could have the greatest portfolio ever created. But one poor behavioural mistake a decade, and you might as well have just kept your money in the bank.

In fact, I would argue that portfolio design only matters to the degree that it influences your behaviour.

So next time some hand-wavey person on the financial pornography network starts talking about how you should buy, sell, or do anything at all, just remind yourself: none of that matters if you don’t behave.

 

7Nov-2

 

When done correctly, investing is a place where you get rewarded for being lazy.

That may seem counterintuitive, because we’ve been trained to think that when we do more, we get more. That activity = results.

But investing is a do-less proposition because of the power of compounding.

The next time you’re tempted to do something, don’t. If it compounds, let it.

My missing millionaires and billionaires list includes all those living today who could have been ones. Here are some numbers to give you some context rather this is a quick test.

Let’s say you start investing Rs.50,000 per month for the next 30 years. This means every year you have invested Rs. 6 Lakh, so over a period of 30 years, you would have invested Rs. 1.8 Crore. Assume you earn 12% p.a. compounded on your investments. Now for the next 25 years, you go on to do a SWP (Systematic Withdrawal Plan) and receive Rs. 6 Lakh per month. This means you are now receiving Rs.72 Lakh per year, so for 25 years, this is Rs.18 Crore. What do you think is the outstanding balance in your investment account after 25 years?

I have asked this question to many people and the common response was: Will there be any left, because I am only investing Rs.1.8 Crore and I have already received Rs.18 Crore? How can there be anything left? A few adventurous people said “Rs. 5 Crore.”

What’s your answer?

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.

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The correct answer is Rs.233 Crore…

Did you guess this? I didn’t get it right either (but I was close). Such is the power of compounding. A simple Rs.50,000 investment done consistently would have made you a rupee billionaire. Even if you did Rs.25,000 in the above scenario, you would still be left with Rs.116.5 Crore (a rupee billionaire). Even if someone just does Rs. 5,000, the person might end up with Rs.23.3 Crore (a dollar millionaire not to mention the income of 7.2 Lakh he would have received every year for 25 years).

The above example is simply yet another illustration of the power of compounding.

Every person has the potential to become a millionaire, and rupee billionaires (many can go on to become dollar billionaires over a generation if not in their lifetimes) even with a very limited amount of savings (as we have seen above).

But we get in our own way with things such as – which is the best product to invest (product selection), is this the right time to invest (forecasting and market timing), interrupting compounding all the time instead of simply saving, investing, and letting compounding to work for us.

We must get out of our own way to become a billionaire and then remain one (Also read The 500 Year Plan Post). We must get out of our own way to avoid getting into the missing list. We must get out of our own way to have enough and to live HappyRich (aligning the use of our capital with what’s really important to us.

The question then is -Are you a missing millionaire or billionaire?

On that note, I wish you and your family a very Healthy and Happy Diwali. May God Bless you with loads of great health, happiness and success.