Sunday, June 19, 2016

What to think about when thinking about Billionaires.

In Singapore, the fastest and most convenient way to one-up a millionaire when you are not even one is to cite a billionaire.

A common thing to hear about these days is Jack Ma telling his son that he does not need to be a top student to succeed in life. What Jack Ma meant was that if your dad is Jack Ma, you probably will not need to top your classes.

The problem is that most of us are not fortunate enough to be Jack Ma's son.

The bigger problem is that that ordinary people do not study billionaires as a discipline.

( You may also want to read about a previous blog article I wrote about advice from Richard Li. )

So up till today, my job is half done. While I managed to establish the ridiculousness of spouting the pithy wisdom of billionaires, I was unable to come up with a better alternative that would allow us ordinary mortals to think about billionaires in an intelligent way. Fortunately, Sam Wilkins wrote a book called Wealth Secrets : How the Rich got Rich which contained a lot of historical snippets on how Billionaires made their money.

Here are some pointers on how to think about Billionaires :

a) Instead of spouting what a billionaire says, focus on what he did.

Billionaires obviously need society to accept him as he is. In such a case, it is only natural to highlight their struggles and how poor they started out. The magic is to dig into what was actually done by the business to get this far.

The problem is that this step is not enough. A lot of Singaporeans like to remind others that Bill Gates and Mark Zuckerberg dropped out of Ivy League universities. If that were a secret that a lot more drop-outs woulds be billionaires.

b) Focus on government-business interfaces.

Once you get into the rabbit hole trying to figure out how billions are being made by some very special people, having accounting expertise is not enough. Typically, billionaires will be able to sustain huge profit margins and ROIC of 30% or more for over a decade to get where they are today. This is virtually impossible in Singapore because our government will slap you with competition law provisions before you can get too far.

The first place to scrutinise is the billionaire's relationship with the governments of the day. The Ambani dynasty of Reliance in India thrived because they knew how to deal with the License raj and was able to hold onto licenses which permitted them to manufacture polyester decades ago.

c) Think about economics : Natural monopolies, economies of scale and network effects. 

Billionaires became that way because they found ways of establishing natural monopolies. This was how robber barons like Rockefeller got rich. He bought rival oil companies and to gain economies of scale and then colluded with railroads to eliminate the competition. Warren Buffet was special because he did not exploit these economic ideas directly but invested in companies that did.

Economics focuses on these powerful ways of making money and it normally focuses on putting yourself in a position to have no competition.

d) Think about the law of property or intellectual property.

Another aspect of becoming wealthy is by manipulating the legal landscape of your respective country. Riches are normally made due to some lack of clarity in property or intellectual property law.

It is a mistake to think that Bill Gates was a technological visionary who dropped out of Harvard University to code software - I hope engineers can think about this and not make mistakes like this any further.

Microsoft sustained huge profit margins because MS-DOS was written at a time when the US courts was still unsure of whether software can be copyrighted and Bill Gates had a lawyer dad who was able to help his son shape the contracts which license his software out to users. A large bulk of MSFT's success was learning how to enforce their IP rights.

( Yes ! It blew my mind when I read about this. )

There are certainly more way to think about making money in the billions but most of us are still stuck at the level of thinking about leverage, motivation, using other people's money and dropping out of school. While my current framework is not perfect, it is definitely better than what folks currently have.

Before I end, I'd just like to share what Sam Wilkins said anecdotally based on his research on billionaires :

a) Billionaires are almost exclusively numbers people with an odd fascination for mathematics, which led me wondering whether Singapore's policy educational policy on mathematics is the reason why the concentration of millionaires is so high here.

b) Billionaires seldom see money as a means to get something to be enjoyed, they see wealth accumulation as a game for its own ends.

c) Billionaires are brutal and always had a history of getting rid of their business partners once the business begins to prosper.

Maybe before someone would start throwing off micro-aggressions in the name of Jack Ma or Richard Li, you might to ask yourself whether you have these traits before you spout your mouth off.

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