It’s a seductive pitch: “Invest like the ultra-rich!” Advertisements and financial gurus often dangle the allure of exclusive investment strategies favored by billionaires – private equity, hedge funds, and leveraged real estate – as the key to unlocking extraordinary wealth. They paint a picture of a secret club, a privileged circle where money works differently. But let’s peel back the curtain and expose the reality behind this seductive illusion.
The Illusion of Exclusivity
The allure of “investing like a billionaire” is often a sales tactic. The promise of exclusive access and superior returns masks the reality of high fees and potential underperformance.
The investment industry is constantly coming up with new ways to create ‘exclusive clubs’ that require large minimum investments. Lately, brokers are selling investments in notable private companies such as SpaceX or OpenAI at an outrageous premium to their actual valuation. The broker’s goal is to overestimate the demand and belittle the investor into making them feel as if they will miss out by not investing. Every available ‘opportunity’ has a limited quantity and time-table to make an investment. After-all, as car salesmen have said for decades, ‘the sale ends tomorrow’.
In reality, the broker is selling hopes and dreams with a commission. They do not have a fiduciary standard that requires them to act in the best interest of their clients.
The Billionaire Mindset: Preservation, Not Aggressive Growth
Billionaires have already won the financial game. Their primary concern is safeguarding their vast fortunes. This shift in focus drastically alters their investment approach. We all fear losses, a psychological phenomenon known as “Prospect Theory.” However, billionaires can afford to take calculated, and even speculative, risks that would devastate the average investor, but not them.
Diversification: A Matter of Scale
While diversification is crucial for everyone, the scale at which billionaires diversify is vastly different. They can invest in commercial real estate, hedge funds, and private equity with minimal impact on their overall portfolio. For the average investor, such ventures often represent a disproportionate share of their assets, leading to increased risk.
- Commercial Real Estate: A multi-million dollar apartment complex might be a mere sliver of a billionaire’s portfolio, but it could be the entire financial world for a typical investor, exposing them to significant risk if things go south.
- Hedge Funds and Private Investments: These exclusive clubs often come with high fees and minimum investment requirements. Hedge funds and private equity firms are businesses, and their fees are a significant drag on performance. While they may offer some protection, their performance doesn’t always justify the cost. Remember Warren Buffett’s famous bet against hedge funds? He proved that a simple S&P 500 index fund could outperform them over the long term.
The chart below from an NYU study in 2021 highlighted the lacking performance of the average hedge fund.
The Thrill of High Returns
Another significant difference between billionaire investing and the average investor’s approach lies in their capacity for speculative ventures. Billionaires can afford to allocate a portion of their wealth to high-risk, high-reward opportunities like angel investing in startups. These investments, while potentially yielding substantial returns, also carry a high probability of failure. For a billionaire, a failed startup investment is a mere blip on their financial radar, a “money to waste” scenario that won’t jeopardize their overall security. They can absorb the loss without significant impact. This luxury is simply not available to the average investor, whose financial stability could be severely compromised by a single failed speculative investment. This ability to absorb risk allows billionaires to participate in ventures with potentially transformative payoffs, while the everyday investor should prioritize more stable, proven investment strategies.
We’re particularly drawn to Henrik Bessembinder’s groundbreaking study, ‘Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks’ (link below). His research reveals a startling truth: from 1990 to 2020, virtually all the net gains in the global and U.S. stock markets were generated by a mere 1 to 2 percent of listed companies—the familiar names in Big Tech and high-growth sectors. The remaining 98 to 99 percent of stocks, in aggregate, essentially broke even.
The Truth
The truth is, most individuals build significant wealth through remarkably traditional means, not by mimicking the complex strategies of those who’ve already “made it.” They do it through:
- Consistent Investment in Publicly Traded Stocks: The bedrock of wealth creation for many.
- Entrepreneurship and Successful Business Exits: Building something from the ground up.
- Stock Options and Compensation: Leveraging company equity and performance incentives.
- Strategic Real Estate Investment: Building a portfolio of rental properties over time.
- Inheritance (though not a strategy, it’s a reality): And hopefully, preserving it.
These paths require hard work, patience, persistence, and a dash of luck. Once that level of wealth is achieved, the focus shifts from aggressive growth to preservation. Billionaires simply don’t value the next dollar of growth in the same way as someone still building their financial foundation.
Focus on the Fundamentals
Instead of chasing the illusory strategies of the ultra-rich, focus on the fundamentals of sound investing:
- Develop Your Income: Your earning power is your most powerful wealth-building tool. Invest in your skills and career.
- Invest Consistently: Build a diversified portfolio of stocks, bonds, and real estate, tailored to your risk tolerance and time horizon.
- Manage Debt Wisely: Use debt strategically to leverage your investments, but avoid excessive risk.
- Prioritize Long-Term Growth: Focus on building wealth over time, rather than chasing quick wins.
You’re Not a Billionaire, Don’t Act Like One.
The key takeaway is this: you are not a billionaire. Your financial circumstances, goals, and risk tolerance are vastly different. Don’t fall for the marketing hype that promises shortcuts to wealth. Instead, focus on building a solid financial foundation through disciplined saving, consistent investing, and a long-term perspective.
Sources:
- http://aei.org/carpe-diem/the-sp-500-index-out-performed-hedge-funds-over-the-last-10-years-and-it-wasnt-even-close/
- “Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks” (Bessembinder, Chen, Choi, Wei, 2023): https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251