As Scott Adams of Dilbert fame puts it in his grid, when you plot rich and poor on one axis you should plot, clever and stupid on another axis. Because not all rich people are smart.

The stupid-rich exist and you can see them roaring up and down the road in their brightly painted cars flashing their bling in all the party hotspots of the world. They can also be great business people – you can be an amazing programmer, shop keeper, bus company owner, or company executive, but that does not mean you are any good with your investments. This is how the BernieMadoffs of this world perpetrate fraud. The stupid-rich often simply hand over their money to people they trust or are told to trust and let these strangers do their investing for them. This is not exactly a great formula for success. Handing your money over to anyone is fraught with risk and the returns at best are likely to be lackluster. It is often how the super-rich become less rich very quickly.

I start with this because people who are not rich often imagine wealth as being permanent. But wealth is often transitory. Wealth is fragile. The process of losing a fortune can be quick. Many a sports or Hollywood star has gone from rags to riches and back in just a few years. Certainly it is hard to be rich for a lifetime if you step off the moneymaking path. Inflation is the killer. A million dollars in the bank in 1950 was a real Hollywood fortune. Today it is a small house in Newport Beach.

If a fortune can last a lifetime, then there is the problem of the next generation. A billionaire’s “playboy” child can turn a billion dollars into dust in half a lifetime. They call it “clogs to clogs in three generations” – clogs being the wooden footwear of the poor in 19th century Britain. The first generation makes it. The second generation spends it. The third generation – you get the point.

Something else the non-rich should know: many “rich” people have massive amounts of debt. A “billionaire” might well have a billion in debt. If he we resettle all his debts, he might find himself with no money at all. So how does the billionaire keep his mansion and yacht? Well, if you can borrow a billion, a few extra tens of millions of debt is not a problem. Think about the ratio of your yearly salary and your credit card limit and then multiply those figures by 100,000. You would have a pretty interesting credit line under those circumstances.

How does someone borrow a billion dollars? Connections help. That connection might be through business or it might be through politics, but once you can borrow money to buy assets, as long as you can make the debt payments and inflation or the markets push up the value of those assets, you are looking good. If the market implodes, so does the “wealth”of these “rich” people. Every time a market crashes a new generation of rich people with lots of debt suddenly goes broke.

So how do the smart, rich, with real wealth, invest? They diversify. They spread their money over as many hard assets in as many places as they can. They collect. That does not just meanthey collect art, which they often do,but they collect assets, whether they arebonds or stocks or real estate. The solution is the same for the non-rich as it isfor the smart-rich: diversification. Spreading your risk is the key to building andpreserving your wealth. In the same waya smart investor buys stocks and diversifies his portfolio of shares, the super-richbuy a broad range of assets. Often theywill have what amounts to an in-houseinvestment bank, called a “family office”.The family office takes care of the family’scapital and will involve itself in protecting the family’s wealth not only by picking good investments but also by throughvarious tax-efficient umbrellas like corporations or trusts.

Often these family offices are tryingto look out for the next few generations.Many of the super-rich with smart money already have grandchildren and wantto ensure prosperity for their grandchildren’s children. As such they are lookingfor capital preservation. The first aim isnot to lose money. That might sound aneasy job but when you look into the pastand see the ravages of inflation, war andpolitics on the fortunes of nations andtheir people, you start to see that having$100 million, let alone $1 billion, andstill having the equivalent in 50 or perhaps 100 years, is actually a tricky task.With broad enough diversification, a potof money is protected from bad luck, badadvice, and bad decisions. Without it, atsome time one of the former will wipe outeven the biggest fortune.The Investment Secretsof the Super-rich

 

By Clem Chambers

This article does not constitute investment advice on the part of Clem Chambers or Ventures Africa. For investmentadvice please consult a certified financialplanner.