“There is no other God than Truth” – Mahatma Gandhi
“Men at some time are masters of their fates. The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings.” ― William Shakespeare, Julius Caesar
“The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare – all this and more is written in its fiscal history, stripped of all phrases. He who knows how to listen to its message here discerns the thunder of world history more clearly than anywhere else.” – Joseph Schumpeter, The Crisis of the Tax State, 1918.
Histories of individuals, cultures, countries ascending though fierce, indefatigable determination, will, discipline, little luck to unprecedented level of wealth, power, and fame, and their often self-destructive sudden fatal fall or slow, degenerative descend to oblivion have always intrigued humanity. As recently as July 26, Bloomberg reported a fascinating saga of the 56 year old charismatic, powerful, self-made Brazilian billionaire, Eike Batista’s amassing $35 billion of personal wealth in one short lifetime, who aspired to be the richest person in the world as recently as last year, and then thanks to his concentrated portfolio and hubris losing all his billions, now left with only close to $200 million. An historic, instructive epic of entrepreneurship and wealth creation and destruction. The following short piece highlights some elements of wealth creation, leaving more important aspects of wealth preservation over multi-generations and the causes of its destruction to a follow up article.
According to Forbes magazine, the number of families worth $50 million or more grew to roughly 107,100 in 2013, with their aggregate wealth of $22.9 trillion. That is roughly 61% of entire world market capitalization of roughly $37.5 trillion at the end of 2012. In their annual survey, Forbes also reports the number of world billionaires rising to 1,426 in 2013, with their combined wealth of $5.4 trillion (roughly 14.4% of world market capitalization). We extrapolate from these numbers that the average wealth of these non-billionaire families (those estimated 105,674 families worth at least $50 million today) is roughly $166 million.
Countries that host and hospitable to billionaire families
The Table below provides demographic profile of the home countries of these billionaires. Hong Kong produces largest number of billionaires (55.01) per 10 million of population; followed by the United States (14.25). The bottom two are China and India in terms of producing billionaires per capita.
Honk Kong hosts most billionaires per capita is no accident; it is rooted in its historically practicing laissez faire capitalism, territorial, extremely low corporate and personal income tax, zero estate tax (except for a brief period of low rate territorial estate tax) and sales tax, zero tax on capital gains, interest, and dividend income, stable exchange rate, entrepreneurial culture, disciplined public spending, and good governance. Schumpeter’s 1918 observation quoted above certainly holds true for Hong Kong. In its 2010 issue, Forbesalso highlighted the exemplary tax system of Hong Kong.
Individuals and families ascend to the coveted rank of billionaire, traversing often on uncharted, treacherous terrains with unflagging, fierce will and determination, unyielding sense of wonder, imagination, and curiosity, unabated entrepreneurial zeal, bold decisions and risk-taking, insatiable, incessant quest for making a difference; and despite Shakespeare’s admonition in Julius Caesar noted above, a little luck, chance, right timing, generosity and kindness of mentors, and living in a country hospitable to wealth creation undoubtedly help immeasurably.
Mathematics of wealth growth
The Table below shows growth at year 53 of original investments ranging from $2 million to $5 million under annualized realized return scenarios ranging from 5% to 12% rates.
One can appreciate the magnitude of difference in final outcomes even at 1% difference in annualized rate of return on invested wealth. For example, at 5% annualized rate of return, $2.5 million of one-time, original investment grows to merely $33 million at year 53; but at 12% rate it grows to over $1 billion ($1.015 billion). To reiterate the important of the portfolio design, disciplined investment management, and power of compounding, I have embedded below two tables that both numerically and graphically illustrate the point.
Why are so few billionaires?
The quest of this enquiry and post is not political at all: concentration of wealth and its long-term favorable or adverse consequences on societies and whether any adverse consequences are a fault of wealth or its misuse by those few who possess it. That I leave to brilliant, progressive economists, who after looking at these numbers are already thinking of ways to legislate the limit to human aspirations. The purpose of my enquiry here is principally rooted in the science of wealth management: with close to 11 million millionaires and estimated 105,674 families (excluding the current billionaires) worth $50 million or more, why are so few billionaires – only 1,426? The tables above shows that with a modest amount set aside early on and managed with unwavering discipline by seasoned advisors, each of these high net worth families has potential to create multi billionaires.
Solely as an illustration (not any investment, tax, or legal advice), let’s just focus on these 107,100 families in the context of the U.S. income, gift and estate taxes and investment environment. Under the current law, a couple can make gifts of up to $10 million free of gift and estate tax. Suppose these families on average have two children. They place $2,462,888.77 in two irrevocable trusts (with trustees given requisite control over disposition – a separate subject), one for each offspring when the child is born. If they can achieve on an average 12% (net after tax and fees) returns on the invested portfolio, when the child reaches age 53, the underlying funds could grow to $1 billion in each trust. And $2 billion is removed from the family’s estate for estate taxes. So this family, just set aside only $4,925,777.54 out of their household wealth of at least $50 million and created two future billionaires. They are still left with $45 million of initial wealth (even much more in many cases as the average wealth of these families is close to $166 million) for other entrepreneurial pursuits and for carrying out their civic duties and philanthropic aspirations. To achieve these seemingly lofty goals, they need not take reckless risks, abuse their power by influencing politics and political leaders, indulge in rent-seeking behavior that demoralize public will and retard progress towards achieving a more meritocratic and just society and good governance for the stability of society. So I am puzzled as to why there are so few billionaires. This post does not address the issues of value judgments, grooming the next generations for managing and handling massive amounts of wealth, reminding them of their civic duties and virtue of hard work, and forsworn them to unwaveringly refrain from unethical, untruthful means of acquiring wealth, conspicuous consumption and ostentatious display of wealth and iniquitous use of wealth for political gains and rent-seeking activities: power abused is power lost.
We return to the question at hand: why there are only a few billionaires despite so many millionaires? Is it because these multi-millionaire families simply lack a billionaire mindset and requisite ambition; they are unwilling to irrevocably set aside even a small sliver of their fortune early on and let it grow undisturbed over five decades; they are “predictably irrational” (borrowing the term from the Duke Professor Dan Ariely) in their investment management decisions; they dabble into this and that latest investment fads; they become overconfident and take reckless risks or become too risk averse; their investments are too concentrated, perhaps in one stock they love and irrationally attached to; estate taxes may significantly erode their wealth due to lack of timely and adequate planning; divorces, litigations, inability or unwillingness to find competent and ethical advisors; exhaustion from the wealth creation journey that left very little time and energy to think of legacy issues, estate planning, wealth management, family values, grooming the next generations, irresolute offspring impoverished by lack of similar life experiences and treacherous terrains that shaped will of their ancestors, or punished sometimes perhaps simply by cruelty of genetics. These issues require further research and insights from multi-disciplines.