We can learn a thing or two from any rich list. But first you must understand these productions are substantially fictional. Most researchers, most of the time, have little real sense of how much someone is ‘worth’.
If the subject runs a private business with no sharemarket presence then there is no chance of getting an accurate estimate. If there is a fortune based on the holdings of a sharemarket company there is some chance of getting a vague estimate, but without detailed knowledge of tax and -- crucially -- the subject’s debt levels, it’s still a guessing game.
Having digested that unpalatable fact, the next regrettable reality of rich lists is that they will always be underpinned by those who have inherited great wealth as a starting point -- more often than not the main game with this generation is not to blow it!
Estimated earnings for artists and sports stars must also be treated with great caution as these rich listers often receive only a fraction of the figures bandied about in newspaper headlines.
Most rich listers make their money from a single operating business and that business is the single source of their fortune. Investment as we know it, the diverse application of funds to property and sharemarkets is often a secondary activity.
What’s more, investments can go very wrong and the wider fortunes of ‘rich listers’ will not be greatly affected. Gerry Harvey of Harvey Norman for example spends an inordinate amount on bloodstock with a relatively ordinary record but it hardly matters when he and his wife Katie Page control retailer Harvey Norman. ‘Pokies King’ Bruce Mathieson lost a substantial amount of money in miner Western Desert Resources, which went into administration a few months ago, but it barely disturbs his wider fortune from the ALH group.
Investors who make it onto rich lists from pure investing activities are very rare indeed but there are honourable exceptions. On the global stage the standout is Warren Buffett. Others classified as investors are closer to traders … George Soros, John Paulson or Carl Icahn. In Australia, Kerr Neilson of Platinum Asset Management certainly qualifies as does debutant Hamish Douglass of Magellan Financial Group.
In previous incarnations I’ve worked as a researcher on several ‘rich lists’ in different countries and found -- like my crestfallen colleagues at the time -- that what you learn from rich lists is generic and limited to a few universal truths. Here’s a summary:
● To get seriously wealthy you must live a long time. The average age on rich lists is invariably 60 and more like 70 at the upper levels. It’s the magic of compound interest -- the sheer passage of time will expand a fortune as long as it is managed correctly.
● The rich will pay for very good advice. Two examples will suffice here: Anthony Pratt has Alan Moss (ex CEO of Macquarie Bank) as the chairman of the Pratt family advisory board, James Packer has constantly used top talent such as Ashok Jacob (now running Ellerston Capital) to advise on investing.
● Rich families have excellent succession plans which stop lawyers, freeloaders and less-favourite in-laws from hijacking the family fortune. Some families have gone as far as selling this expertise to a wider public if they are willing to pay -- the latest to enter the game is the former brewing and transport kingpin Patrick Scanlon.
● The rich continue to take risks all their lives. This does not mean the wealthiest in the land speculate, but they do not depend on index funds or cash holdings to build their fortunes.
● Once the core fortune is made from a cash-rich business money is progressively ploughed into property. Examples are numerous but the best recent model would have to be Paul Little, who made his fortune at Toll Holdings and now runs the property development company Little Group.
● Rich families stay together and don’t fight in public. The extended and very public rowing of the Rinehart family in the courts is most unusual. The latest round of the Rinehart row may have gone to daughter Bianca, but it’s hardly over yet. We don’t see the Lowy, Pratt, Oatley or Grollo families in court and it’s probably the reason they remain on the lists not for years but for generations.
If you really want to read about the rich that matter -- everyday investors who changed their lives through expert investing -- I’d forget rich lists and read about the art of investing. You might start with ‘The Millionaire Next Door’, a masterpiece of investment literature by Thomas Stanley and William Danko. It’s sold millions since it was published in 1996 and it will still matter long after the names on today’s rich lists have changed.
This article was originally published in The Australian Business Review.