Bigger is better, property is still nine-tenths of the law and why the network effect creates billionaires: The seven secrets of spectacularly rich people

In 1991 there were about 270 billionaires in the world. Today there are more than 1,800, and 290 were added to the rolls in the past year alone. In other words, more people became billionaires in the past year than the entire number of billionaires in 1991. A negative person might say that's further evidence the rich are getting richer. A positive, go-getting person would say, "well, it's easier to become a billionaire than ever before!" And it is. I've made a comprehensive study of self-made billionaires, and here's a list of some of their (economic) secrets.

A lot of experts on personal financial success will exhort you to be the best. They will advise you on routes to self- improvement and personal growth. Business books will tell you how to make your business “great” or “excellent.” These are all pretty much dead ends. 

 

The difference between the technology and finance sectors highlight why: companies in many sectors are innovative. But companies in the financial sector cannot patent their innovations, so they must look for profits in other ways. 

 

Technology companies are profitable because they have patents; and patents give them miniature monopolies. If any competitor attempts to imitate a technology company in a way that is protected by patent, the government will rough them up a bit.

 

Growth isn’t the ultimate achievement of business strategy; having one’s competitors hanged is the ultimate achievement of business strategy.

A few visionaries understand that bigger really is better, because it is still a wealth secret; you just have to find a way to make scale advantages apply. 

 

In the India of Dhirubhai Ambani, India’s richest man and founder of the Reliance empire, scale was the secret to winning in the licensing regime. Scale efficiencies could be used to convince bureaucrats to grant licenses for production capacities so large that it became very difficult for any competitor to enter. 

 

Indeed, scale is still a wealth secret in most emerging economies — including modern- day India — in part because in most of these countries, domestic capital markets are not yet developed to the point where they could fund a truly huge, unprofitable enterprise for the years or even decades that are necessary for it to grow.

Most businesspeople are instinctively attracted to the largest, most lucrative markets. 

 

They see a number with a lot of zeros at the end and it overwhelms their common sense. They think that if they can get even a little bit of that huge sum of money, they will be rich. Following this line of reasoning, they conclude that going global is the ultimate achievement of business strategy, because going global increases the number of markets they are in.

 

They are totally wrong. Yes, going for a huge market is tempting, but then you will be forced to price competitively and probably won’t make much money. You might have a small share of a huge market, but it won’t be worth much. It is much better to go for a large share of a tiny market. There, you can turn the screws.

Finding reliable ways to misuse people’s money and still attract more of it is a modern wealth secret breakthrough. 

 

The secret was exploited by those Wall Street banks that became too big to fail. One might expect that in the wake of the global financial crisis, banks would have fallen on hard times. If anyone was under the illusion risk management systems in banks were working, they probably don’t harbour that illusion any more. 

 

But then, that was never the point. The point was that the banks were invincible. While you might expect the global financial crisis to have drained money from banks by publicly demonstrating they were taking extraordinary risks, in fact the crisis and its aftermath had the opposite effect. The crisis proved unequivocally that some banks were too big to fail. So people (and other banks) became even more eager to entrust their money to those banks.

Taken together, property rights are the basis for a wealth secret that appears often on the Forbes Global Rich List.  Among the top fortunes in advanced economies, 75 percent are attributable to either hedge funds or intellectual property rights. 

 

On the broader Forbes list, of over 1,600 billionaires, including emerging markets fortunes, there is more diversity. But fortunes attributable to property rights in general nonetheless appear frequently. For instance, about 130 of the roughly 1,600 fortunes are in real estate. A further 40 or so are in oil and gas or mining. About 120 are in fashion or retail, where companies often own not only valuable brands but valuable properties. Roughly 65 are in pharmaceuticals or health care, 90 or so are in technology, and about 70 more are in media. 

 

In other words, on a rough estimate, at least a third are property rights fortunes of some kind. And that is without trying to factor in the fortunes gained in the post- Soviet collapse. Own it baby, own it.

Understanding the intricacies of legal regulations can be boring, but it can also be profitable. It is what the American humorist P. J. O’Rourke called “dictatorship by tedium.” 

 

As he put it, government officials can do “anything they want, because anytime regular people try to figure out what gives, the regular people get hopelessly bored and confused, as though they’d fallen a month behind in their high school algebra class.”

What Cornelius Vanderbilt discovered when he effectively assumed control of all of New York’s railways in the 1860s  was that the value in railways could come from controlling network connections, not just the traditional focus of point-to-point routes. In effect, he was able to control New York’s connection to the nation’s rail network. It was a wealth secrets breakthrough. By 1870, Vanderbilt’s merged railroad was paying the largest dividend of any company in US. history. Following a market crash in 1873, most railroads were no longer making profits, but Vanderbilt’s line kept up the dividends.

 

Even today, network effects can be a little scary. The industries most likely to develop into natural monopolies on a local or even global scale tend to be network businesses of one kind or another. 

 

Network businesses continue to do well. There are a lot of telecoms-related fortunes on the Forbes global billionaire list , especially in emerging markets.