Rolling in it ... Evidence from BRW’s Rich lists suggests that extreme wealth is built by putting all your eggs in the one basket.
Members of BRW’s Rich lists come from a wide variety of backgrounds and industries but for all their differences, they often follow similar investment strategies.
Although there are exceptions to every rule, there are commonalities in the way Rich listers typically invest. For those who want to be rich, learning from those who have already achieved it makes sense. Here are some of the common wealth-building rules the rich tend to follow.
1. Don’t diversify
Investment advisers love to preach the importance of diversification. For an investor who wants a safe and stable portfolio it makes perfect sense. But for those who want to become rich it doesn’t.
Evidence from the Rich lists suggests that extreme wealth is built by putting all your eggs in the one basket. The rich typically pile all profits back into the one business.
2. Sacrifice short-term gains for long-term windfalls
In 2005, Mark Rowsthorn ($515 million) paid for the derelict former Savoy Tavern on the corner of Bourke and Swanston streets in Melbourne. Since then the prominent site has remained undeveloped; it was described by Lord Mayor Robert Doyle as a “scab on the city”.
Land banking is a common technique applied by the rich. Rowsthorn bought the Savoy Tavern site from the struggling Republic of Nauru and, given its location, future appreciations in value are almost assured.
Many Rich listers, such as Mary Fairfax ($430 million), land bank by buying agricultural land on the outskirts of a big city and wait until urban sprawl makes it prized by residential developers.
Apart from the requirement for lots of patience, the biggest problem with this strategy is that you have to be rich to do it.
3. Illiquid assets make you rich, not cash
People with lots of cash typically aren’t rich. Most of Gina Rinehart’s immense wealth ($29.2 billion) doesn’t sit in the bank but is buried deep underground. The rich often will only get a large amount of cash when they sell their main investment due to retirement or death.
Re-investing dividends back into a good business increases its value but leaves the owner with little cash relative to their overall wealth. Many list members, particularly the Young Rich, claim they don’t feel rich.
Converting fixed assets to cash is problematic for time-poor entrepreneurs with big plans.
But a lack of cash can cause big problems, even for a rich lister as Refund Home Loans founder Wayne Ormond ($38 million) found out. Despite the inherent value of his business, cash flow problems resulted in it going into administration shortly after he made last year’s Young Rich list.
4. Use networks
Last year’s Rich 200 issue made reference to the many inter-related dealings between members of the BRW Rich 200.
By way of example, it noted that Richard Smith ($770 million) owns racehorses with Bruce Mathieson ($1.14 billion), who shares an interest in Molopo Energy with Max Beck ($375 million), who jointly owns Essendon Fields project with Lindsay Fox ($2 billion), who once tried to buy Ansett with Solomon Lew ($1.2 billion), who owns an office tower with the Besen family ($2.2 billion). Enough said.
5. Service growth industries, don’t operate in them
The mining boom has transformed the economy but capital constraints have led to a relatively small number of miners joining the Rich lists. More common has been the emergence of mining services entrepreneurs.
Ashley Fraser ($117 million) debuted on last year’s Young Rich by building a company that leases earthmoving equipment to miners. This allowed him to tap into the fast growth in the mining sector without having to compete with the big companies that do the actual mining.
6. Be your own boss
You don’t get rich by appointing someone else to manage your affairs for you. You have to do it yourself.
Successive Rich lists demonstrate that investors make fortunes, not dutiful employees, no matter how skilled they may be.
The best exception to this rule is Australian-born Douglas Daft ($240 million in 2002).
He was awarded large amounts of stock as The Coca-Cola Company chief executive between 2000 and 2004.
Glencore’s chief executive, Ivan Glasenberg ($7.4 billion), and chief financial officer, Steven Kalmin ($485 million), made this year’s Rich 200 but both became rich by their private firm going public and not from salary packages.
7. Bad markets are good markets
One of the big advantages of being rich is that you don’t have to rely on banks for finance.
In bad markets, banks are less likely to lend and over-extended sellers are forced to sell at reduced prices.
This suits the rich down to the ground. Many Rich listers are counter-cyclical investors. They buy when others are forced to sell and sell when others are keen to buy.
Serial entrepreneur and Young Rich member David Gold ($28 million) told BRW last year that it is crucial to be hands-on in bad markets.
“When times were good, investments don’t need as much attention,” he said.
8. Dominate first, expand later
Very few of the rich are “born global” and geographic expansion is invariably done from a position of strength.
This rule even applies to the technology-savvy members of the Rich 200. Founders of online recruitment company Seek, Andrew and Paul Bassat, didn’t begin buying overseas jobs boards in earnest until their local business had proven itself and become the best and biggest of its type in Australia.
9. Make mistakes
No one is perfect – not even a Rich lister. Most of them have had big setbacks and several have lost fortunes only to get them back though hard work and learning from their mistakes.
Joseph Gutnick lost his business empire when his nickel venture Centaur Mining & Exploration collapsed in 2001.
He returned to the Rich 200 in 2010 with a series of resources investments worth $300 million and increased his wealth this year to $335 million. Even Alan Bond remade the Rich 200 in 2008 with $265 million before falling off the list again the following year.
Becoming rich is a lot more difficult if you are not willing to take risks.
10. Never stop working
When Anthony Pratt ($5.5 billion) celebrated his 53rd birthday at his family’s sprawling Melbourne residence earlier this year, he invited Opposition leader Tony Abbott, Finance Minister Penny Wong and a host of suppliers, customers and fellow Rich listers to the party.
The rich allow for little delineation between their professional and personal lives. All social gatherings are an opportunity to win more work.
Fortunes are not built by sticking to standard business hours.