Why do the Rich get Richer…?
You hear often ‘The Rich are getting Richer….’ have you wondered why?
The main reasons:
a. The power of compounding
b. Income far, far greater than expenditure
c. Understanding the Wealth Virtuous Cycle
d. Ability to take risk
e. Deep wealth buckets ensuring no asset class is ever reduced to zero
In the real world the word Rich and wealthy are used interchangeably, so in that context I will use the word rich here to mean and include the wealthy too.
a. The power of compounding: when the real rich invest they can let each asset class compound without touching them for real long periods of time. If you watch the media or even read some blogs, you will see diktats like ‘profit booking is a must’. In this post I do not wish to argue about that, but if you had invested in the sensex in 1979 (100) it would be worth about 28,000 today – 280 times in 37 years – amazing by any standards. However if you were not really wealthy all the gyrations in the sensex would have worried/bothered / scared you. That may have sent you running to the broker to liquidate. However if you were really rich you could have invested a portion of your assets and seen a fantastic growth in that part of the portfolio.
b. When a person (family) is really wealthy the income has no connection at all with the expenditure. You just operate like 2 different machines – one wealth creating machine and one spending machine. It helps that your income is say 10x of your expense. So an increase or decrease (inflation) does not have any impact at all on your life style. Since you are saving/investing a big surplus of your income, you are able to compound faster too.
c. Understanding the wealth virtuous cycle – protecting the wealth (insurance), managing it well (when you have a net worth of say Rs. 100 crores you can afford a Family Office to look after the family wealth) , and learning to live sensibly are all part of the wealth cycle.
d. When you have a lot of money in different baskets you can take a chance with each basket. I know of a industrialist who used to use his personal money for lending to movie making. Movie funding is a 1 or all kinda game – you can get 100% p.a. return or be wiped out. You also need to fund in multiples of Rs. 10 crores – thus keeping the retail guys out. Such opportunities are not even available for the common man! Similarly I know of one person who bought 1 lakh shares of Infosys at Rs. 90 (discount at the time of issue, remember it devolved!!). He was holding till the listing of TCS and at that stage sold off. Only because he had(has) a networth in excess of 4 digit crores, he could hold on without getting excited about the prices. For a person with lesser networth there would have been a great pressure to ‘book’ profits :-).
Take the case of a boy earning Rs. 12 Lakhs at age 28 – on this salary is it possible to commit to a Rs. 35000 EMI for a house? Hardly. It is almost impossible. However when the father has a huge networth it is possible to do so. I know of a father who has told his son ‘the month you CANNOT pay the installment, I will. Thus the son has a FREE risk transfer mechanism – if he were to lose his job, his DAD is the safety net!
e. If you have say a big portion of your money in equities, technically it is possible that you panicked in 2008 and sold off EVERYTHING in 2008. This would have meant that in 2009 when the market revived YOU would have had nothing in equities – thus the fantastic growth of 90% would have been missed. You would be kicking yourself, right?
So now when you hear the Rich get Richer….you know it is not emotional, it is mathematical!
IsItPossible
So how can an average person who is NOT in the category of so called “wealthy” or “rich” could make that leap in his lifetime!!! RATHER can that average person ever make that leap at all?
subra
depends on the Attitude. Once attitude is in place, the world makes an effort to put you on a pedestal. We are a very lucky generation – some of the richest people in the world are SELF MADE, not inherited, not Royalty…as it used to be in the past. Warren Buffett, Bill Gates, Mittal, ….no shortage of examples.
Dr M.Chandrashekhar
Nice post. Many of these Super Rich guys also get insider info of the Market, Govt Economic policies etc before Aam Aadmi gets to know & they move in ffast to make a kill–first mover advantage.
subra
ha ha Dr. Chandrashekhar what you have said MAY be true. Whoever told you it is a fair world, lied to you big time.
Abhijeet
I invested in March 2008 just 12K in 11 scripts. Today it’s reached three digit growth %. Some of them giving stellar returns. I wish I should have not wasted a large chunk in buying car instead, invested that amount in those scripts. I still invest for long-term (never sold any in last 5 years), but waiting for golden opportunity again. I read in newspapers, forums, blogs that a time like that is possible (triple recession) and would like to know your thoughts about it.
nitish
great post, however most of the people who are truly wealthy are highly successful people in their own profession and not merely good investor.
Ujjwal
Most people cannot be Rich as they do not have the mentality of the rich. If their income increase they promptly increase their expenses. They do not want to take any risk and thus invest in low yield securities. Most of my friends have lost money in stock market during the 2008 crash and sold most of their investments at that time. They are entering the market now after the Sensex crossed 20K one more time. But they lost out on the low price regime of 2008-10 and thus it becomes difficult for them to see any meaningful return. Also, most people do too many trading. They book profit too soon and move to the next stock. But I have seen investing a large proportion of your income in Equity MF through SIP makes you really Rich. For most people that is the right route but few can do it and thus we see so few Middle class people moving towards Rich.
Krish
Nice post. I am not sure about mathematical play out of rich through regular savings, investing and compounding. But many seem to have become rich through bribes (tax free income) and inheretance (property, political post, business and so on).
The other day I was reading an article that NSE/BSE trading volumes in terms value have not gone for the last 5 years inspite of more listed companies, growth in GDP and good income with the people.
Looks like in the last decade, almost all of them seem to be in Real Estate. The way RE loan portfolio of the banks increasing, every one are convinced that it is the sure path for wealth creation.
I am a NRI and as I speak to my friends, relatives, neigbours, co-passengers and what not, every one enquires what I own property in terms of plots, flats and agri land and so on. No one ever questioned whether I have exposure in Equity or even debt instruments.
As I think about the ordinary Indian disenchanment with equity, this is what it comes to my mind. We have heroes in sports, business, films and so on. May be we do not have real stories of equity investment successes. These have never figured out in print and TV media. Ordinary public is not able to relate to any idol. Much of the media coverage is theory, assumptions and models.
There is a lot to be done to woo the public into equity investing.