December 23, 2015

Wealth secrets of one percent by Sam Wilkin

Wealth secrets of one percent by Sam Wilkin
A modern manual to getting marvelously, obscenely rich

One must change one’s tactics every ten years if one wishes to retain one’s superiority.

Seven secrets of spectacularly rich people.

1.   Don’t be the best. Be the only.
Any good book on business strategy will tell you that profits are determined by a vast array of external and internal factors. Economists will tell you that even legislated monopoly business, facing no competition - not even the threat of competition - will tend to seek an optimal price point (not optimal for the customer). Growth isn’t the ultimate achievement of business strategy; having one’s competitors hanged is the ultimate achievement of business strategy.

Intellectual property / patent allow some software companies to be near monopoly (e.g. .Microsoft at one point enjoyed more than 90% share of world’s PC’s OS).

2. Bigger is still better

Think Vanderbilt, Rockefeller and Carnegie. Even after they started to face competition being in an economies-of-scale industry was still usually good for some decent profits, if not perhaps robber baron profits. After the US adopted a light touch approach to antitrust law, retail became another sector where scale created hard advantages, because retailers could use their size to bludgeon their suppliers.

3. The worst place to do business is really the best.

What matters in business is not having a big market, but what matters is dominance. What matters is the absence of competition. In regulated countries, oligarchs’ takes advantages of worst places (e.g. Reliance succeeding in license raj period in India).  Most business people are instinctively attracted like moths to a flame to the largest, most lucrative markets. They think that if they can get even a little bit of that huge sum of money, they will be rich. Following this line of reasoning, they conclude that going global is the ultimate achievement of business strategy, because going global increases the number of markets they are in. They are totally wrong. Yes, going for a huge market is tempting, but you will be forced to price competitively and probably won’t make much money. You might have a small share of a huge market, but it won’t be worth much. It is much better to go for a large share of a tiny market.

4. When lenders can’t lose, you win.

Scale economies are a wealth secret when access to capital is difficult.(because one needs a lot of cash to build large-scale operations). We have already seen that one reason competition was limited in Russia and the robber baron-era US was that access to capital was very constrained, largely because after their money was stolen a few times, people wised up and didn’t hand over any more. Overcoming this challenge4 - finding reliable ways to misuse people’s money and still attract more of it - is a modern wealth secret breakthrough.

5. You have got to own it, baby, own it.

Taken together, property rights are the basis for a wealth secret that appears often on the Forbes Global Rich List. Among the top fortunes in advanced economies 75% are attributable to either fund management or intellectual property rights. About 130 of the roughly 1,600 fortunes are in real estate. A further r40 or so are in oil & gas or mining. About 120 are in fashion or retail, where companies often own only valuable brands but valuable properties. Roughly 65 are in pharmaceuticals or health care, 90 or so are in technology and about 870 more are in media. In other words, on a rough estimate at least a third are property rights fortunes of some kind. And that is without trying to factor in the fortunes gained in the post Soviet collapse.

6. Spin laws into gold.

Wealth secrets are hidden in laws and regulations so complex and boring that even though they are publically accessible, it is ultimately that anyone will ever find them and even more unlikely that anyone will do anything about them. For example, the Dodd-Frank Act was supposed to put an end to too big to fail in the US, ran to 848 pages and requires regulatory agencies to produce about 400 further rules and clarifications, producing 30,000 pages of rule making in total. While ‘dictatorship by tedium’ has a great ring to it, in reality, hiding things in plain sight work just as well in democracies. The reason is that each regulation that produce wealth secrets has only time impact on most of the public. The more complicated an issue, and the less-direct impact it has on each individual voter, the more likely it is to be, in effect, invisible. For seekers of wealth secrets, these complex regulations are hugely important. They may be boring, but they are well worth studying, because they are worth lots of money to a few beneficiaries.

7. If you want to succeed in business network, network, network.

Network effects are another wealth secret. For example, computer software industry with its platform strategies (exploiting indirect network effects) and its social networks (exploring direct network effects) is the home of numerous monopolies or at least companies that dominate their sub sectors.

Author admits that there are many millionaires and billionaires whose wealth secrets he doesn’t understand. The Koch brothers & Warren Buffett's for instance. Warren Buffett's technique is ‘moat’ which he says is something that will keep competition at bay for a decade or two. From Buffet’s perspective, a business with a moat is a good business. Buffet invested in Moody’s which is protected by a government policy that essentially limits competition in the industry to three companies. Buffett writes:”With few exceptions, our regulators have promptly allowed us to earn a fair return on the ever-increasing sums of capital we must invest”. Basically the government decided how much they will earn and it is a lot.

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