The best way to get rich?

I have been giving a bit of thought to this as an investor, although I realise my approach of getting rich slowly is probably not the best way to get rich and certainly not quickly. For that you would probably have to win the lottery or be a media person who has overnight success in their chosen field. However, with all the stories of angst from former lottery winners and the proclivity for media stars to be go off the rails and kill themselves I'm not sure that getting rich quickly is such as good idea any way. The other way of course is to be born into or inherit wealth or just marry into it, but of course that also come with issues as well as privileges. As Jim Carrey the actor said "I wish everyone could get rich and famous and get everything they ever dreamed of so they can see that’s not the answer."

Any way it strikes me aside form those the best way is probably to own an asset of some type and apply gearing (debt), although that does obviously raise the risk, but as ever it is always about risk and reward in any investment. The easiest way for most individuals to do this is buying your own house. This offers you long term exposure to a real asset which tends to appreciate over the long term in line with the growth in earnings. In recent decades they have probably appreciated ahead of this rate because people seem to be prepared to devote a greater proportion of their income to buying a house and also interest rates have come down dramatically. Thus the ability to gear up 90% or more has therefore allowed people to accumulate significant wealth from their houses which also have the benefit of saving them rent and often it is cheaper to buy then rent - if you can get a mortgage and come up with the deposit. However, you do need to factor in the costs of ownership like maintenance and insurance etc, Some have also applied this model and been very successful building buy to let portfolios. Now I don't want to get into a debate about whether now is a good time to buy or not. Despite the market still seeming a bit expensive there seems reason to believe that supply and demand and government bribes will continue to support house prices going forward (see the market oracle for some forecasts). I'm just saying that for the average person this has been the a good way to accumulate a sizeable tax free sum of capital without too much effort if they can afford it and get their timing right. 

Aside from that a wise colleague of mine once observed that we were in the wrong business, when he saw some Venture Capitalist (VC's) bringing their latest offering to market and cashing in their carried interests. They also charge handsomely for running their funds too. This is another example of owning an asset and applying gearing. Indeed I have seen attribution data which suggests that if you adjust for gearing VC returns are about in line with equities. Individuals can do this themselves and indeed if you have a mortgage and choose to invest rather than paying it down you could view that as gearing and it is usually the cheapest form you can get. In fact I have often wondered at the fact that I could borrow at finer rates than some businesses - no wonder we have such an unbalanced economy driven by debt fuelled consumers!

The other variation on the VC theme is Hedge Funds who not only employe leverage, they owned a business and charged even higher fees / take big payouts. These have been great wealth generators for the managers, but I'm not convinced the customers have ever benefited to the same extent. I remember reading a great article on fund management fees from Terry Smith about how badly investors would have done if Warren Buffet had set up as a Hedge Fund. In fact if they had invested $1000 in 1965 with Buffet on Hedge fund terms 2% and 20%, Buffet would have ended up with $4m and the investor just $300,000. Not a great advert for Hedge funds but a good one for being a Hedge Fund Manager.

Which brings me onto Warren Buffet and his friend Bill Gates, two of the richest men in the world in recent years. So what can we learn from them. Well Warren apart from being an investor has become an owner of many businesses and also applied cheap leverage from his "free float" in his insurance companies and also no doubt within the businesses themselves. He has also by and large compounded his returns to benefit from compound interest which as the old saying says: "those who understand compound interest earn it; those who don’t, pay it". Bill Gates owes his wealth to Microsoft which is a business he got into after dropping out of college. Of course it helped that he managed to effectively create a monopoly in desk top software operating systems for a while. So I think for those who have an idea and the courage and conviction to back it via a business, this is probably the best and most satisfying way to get rich in monetary terms.

Something else that has led me to this conclusion is thinking back to when I started out investing my princely £6,000 in what was my PEP (see my previous How I Construct a Compound Income Portfolio post) and my experience on getting rich slowly. Regrets, I've had a few especially when I recall that Charles Dunstone founded Carphone Warehouse in 1989 with £6,000 of savings as detailed in this article about him. Now I'm sure last time I checked he is considerably richer than me and I am even a customer of one of his businesses these days too!  I saw another more recent and topical article which is an example of this about an on line company that is looking to float. So I guess I regret probably having been too cautious over the years but then again I don't think I have ever had that eureka moment, although I often thought of starting my own investment management company - I never got around to it.

So having identified what I think is the best way to get rich I shall return to this subject soon and get all philosophical. 

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