Friday, April 29, 2005

What's the Likelihood of "Making It" as a "Pure" Investor?

Anyone seeking to make a fortune should spend a few minutes scanning the Forbes 2004 list of the world's wealthiest people--for in the treasure hunt for riches, it helps to know where others are finding gold before starting to dig on one's own.

As well-publicized, the top 10 wealthiest people in the world are:

Name: Net Worth, Country (Residence), Source of Wealth

1. William Gates III: $46.5 bil., U.S.A., Software (Microsoft)
2. Warren Buffett: $44.0 bil., U.S.A., Diversified (Berkshire Hathaway)
3. Lakshmi Mittal: $25.0 bil., India (U.K.), Steel (Mittal)
4. Carlos Slim Helu: $23.8 bil., Mexico, Communications (America Movil)
5. Prince Alwaleed Bin Talal Alsaud: $23.7 bil., Saudia Arabia, Investments (incl. Citigroup)
6. Ingvar Kamprad: $23.0 bil., Sweden, Retailing (Ikea)
7. Paul Allen: $21.0 bil., U.S.A., Software/Investments (Microsoft)
8. Karl Albrecht: $18.5 bil., Germany, Supermarkets (Aldi)
9. Lawrence Ellison: $18.4 bil., U.S.A., Software (Oracle)
10. S. Robson Walton: $18.3 bil., U.S.A., Retailing (Wal-Mart)

(Source: The World's Billionaires, Forbes, March 10, 2005)

To understand where the world's most well-heeled people have obtained their riches, we can examine the breakdown of sources of wealth across industries. Extending a bit further down the Forbes list to include the top 50 wealthiest people, I find:

Industry: Percentage of Top 50 on Forbes List of the World's Billionaires

Providers of Products and Services (86%):
Retailing (discounters, supermarkets, apparel, home furnishings, mail order): 26%
Manufacturing (candy, cosmetics, autos, shoes, eyewear, packaging, aircraft): 22%
Technology (software, communications): 16%
Media (publishing, entertainment): 12%
Commodities/Materials (oil, steel): 4%
Financial (mutual funds): 2%
Construction: 2%
Casinos: 2%

Profit from Holding or Trading Assets (14%):
Investments (businesses, stocks, LBOs): 8%
Real Estate: 6%

I have separated out the most investor-oriented categories in order to gauge the likelihood of "making it" by being a "pure" investor who buys, holds and sells assets, as opposed to an operator of a business providing products and services.

Question: Is using one's acumen to make the right buy-sell decisions (as a value-hunting investor, arbitrageur or trader) a common road to riches with a decent chance of becoming successful, or is following a path in the manufacturing and service sector more likely to bear fruit?

As the above breakdown shows, the vast majority (86%) of the top 50 billionaires made their money primarily through traditional manufacturing and service businesses that depend on customers at the retail or wholesale level. A much smaller minority (just 14%) made their fortunes as investors in one of two categories:

1. Investments: Although only four (8%) of the top 50 billionaires made the bulk of their money directly from investments, two of these multi-billionaires appear among the top five, viz., Warren Buffett (#2) and Prince Alwaleed (#5). The other two individuals in the investments category are Kirk Kerkorian (#41) and Carl Icahn (#50), who made their money through various investments including casinos and LBOs;

2. Real Estate: The three (6% of the top 50) individuals in the real estate category are all Hong Kong citizens (by chance?, or are the rules of the real estate game somehow different in Hong Kong?)--Li Ka-shing (#22) with Hutchinson Whampoa; Raymond, Thomas and Walter Kwok (#31) with Sun Hung Kai Properties; and Lee Shau Kee (#38) with the Henderson group. Among these three, Li Ka-shing is the most diversified beyond real estate, now running a conglomerate including cell phone, retail and electricity businesses.

(Prior to tabulating this breakdown, I had expected to find more of the world's top billionaires with riches sourced from real estate, especially with the very substantial run-up in both commercial and residential real estate prices worldwide during the past five years. I plan to take a closer look at real estate wealth in another post.)

Here's my take from this quick survey of sources of wealth:

1. As American-style capitalism continues to thrive, consumer-oriented businesses (retail, manufacturing, technology) are likely to remain promising areas. There appears to be plenty of opportunity still for the next Wal-Mart or Ikea, more winning products like Mars bars and Nike shoes, or another Microsoft or Dell;

2. It is also possible--though "statistically" less likely--to make a fortune as a "pure" investor. However, for anyone with the resolve to try, an encouraging note is that "pure" investors are actually overrepresented (with Buffett and Prince Alwaleed occupying two of the top five slots--that's a hefty 40%!) among the ranks of the super-wealthy with net worth exceeding $20 billion.

Conclusion: Based on the list of the world's wealthiest people, the chance of "making it" as a "pure" investor may appear low, but spectacular success (as exemplified by the likes of Buffett and Prince Alwaleed) is certainly possible for those with the inclination and wherewithal to try.

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