“Imitation is the sincerest form of flattery…”
–Oscar Wilde
Hello everyone,
Should you be investing in companies headed by the world’s wealthiest people? If you take that approach, what are the pitfalls and advantages?
Or is there a better path to take? And if there is, what is it? We will explore some of those questions in this post.
THE RANKS OF THE WEALTHY HAVE GROWN
The trends are hard to ignore—the successful control the world’s wealth–the top ten percent control 85 percent. And the trend appears to be growing.
For instance, I recently read that only a dozen people in the top tier control TWO TRILLION dollars in assets. That is unprecedented.
Given the trends, you must at least consider investing in the companies these individuals have founded. But if you are thinking about that, what other concerns do you have to look at? In this post, we will look at some of those issues and some basic issues of morality and fairness, not just the investing potential.
THE TREND TOWARD CONCENTRATION
Several factors appear to contribute to the concentration of wealth. Here are a few:
Skills in demand attract disproportionate income. Warren Buffett says, “There’s a “mismatch” between the requirements of attractive jobs and the skills of the early American labor force, which is “simply a consequence of an economic engine that constantly requires more high-order talents while reducing the need for commodity-like tasks.””
Time and compounding magnify and concentrate wealth. If you look at many individuals on the top of the list, they have been in the wealth-building game for decades. Time alone is a significant component of wealth creation. To see how that works, you can read here and here.
Monopolies can be formed. In some industries, one company dominates, while competitors are small or nonexistent. Effectively, this makes them monopolies, which is, in turn, a guarantee that the firm will make money. Of course, things can change and do. For instance, see here.
Scale can be an obstacle to competition. When a company wins in its industry, it often takes enormous money, time, and resources for a new rival to compete. Without competition, a firm’s income is assured.
IF YOU CAN’T BEAT THEM, SHOULD YOU JOIN THEM AS AN INVESTOR?
Whether you join hyper-successful people through investing in their companies is up to you. I am writing from the point of view of a long-term investor.
Here are a few factors to consider:
- Your attitudes—you are betting on the powerful, not the underdogs if you invest in these very large companies. In other words, you may feel that certain companies have an enduring advantage and that investing in underdogs may not be worthwhile or pay off in the long run. In defense of an anti-underdogs approach, not all underdogs are worthwhile.
- Valuation and Diversification. There is no question that safety in the form of overconcentration is coming at a price. Only seven or eight stocks represent about a third of the value in the S&P 500. Some pundits believe those companies are overvalued based on very high valuations. People who invest in the top dozen stocks must be comfortable with undiversified holdings and what that means for risk.
- Off-limits Industries. I don’t like some industries. For instance, I do not invest in liquor, tobacco, or gaming stocks. And I am a bit leery of the fossil fuel industry too—even though I am convinced that at least one of them will eventually find much of the antidote to climate change; so, theirs is an industry that bears watching as technology advances. They are a small part of a company I invest in.
So, crossing some of the companies off my buy list because of what they do takes care of one concern.
If you don’t like a specific industry, you can choose not to invest.
- The company’s founder—you can have any number of reasons for disliking the behavior of a company founder.
For instance, lack of philanthropy is a concern for me. Charity is a form of sacrifice on behalf of others, and I like to see that in a company founder.
For instance, in an introduction to an article by Robert Frank of CNBC, he noted that philanthropy had an outsized impact on net worth. For instance, if Warren Buffett had never donated much of his wealth to charity, he would be worth nearly $400 billion today. If Bill Gates had never donated his money to charity and donated it to his foundation, he would have been the world’s first trillionaire long ago.
I am an investor in both companies these gentlemen founded.
ONE LAST INVESTING TEST
Charlie Munger once said, “Don’t be too attached to your own ideas and be blindsided.” That is good advice.
While I won’t invest in some people or companies, being objective about what I like is essential. My preferences are not always advantageous or good. Similarly, thinking about the virtues of companies and people you dislike is essential. That will give you a balanced perspective.
The rest is up to you.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Image: Remy Geiling
License: Unsplash