Let’s entertain the idea of becoming a billionaire through investing. How much risk will you need to take? How much capital should you have initially?
I will explore two radically different approaches:
- Compound interest, i.e. above average return year after year Warren Buffet style.
- Multiple 10x returns without blowing up.
Einstein called compound interest the eighth wonder of the world. Even if you achieve a modest 10% annual return over a lifetime you will end up rich.
Say you save up some $50,000 and begin your investing career. Here’s what your worth will look like after decades:
It takes a 25% annual return over 50 years to become a billionaire! This is a near impossible feast. For reference Warren Buffet has achieved something like 20%.
A much larger initial investment is necessary. Here’s how one million compounds:
One million does indeed give you a shot at becoming a billionaire. If you are a Buffet class investor it should take you near 40 years. At 15%, still a very impressive return, it will take you half a decade. A passive index investment, assuming the market continues its historic 10% annual return, will “only” bring you around 100 millions.
The Initial Million
The good news is that saving up a million is within reach. Begin at age twenty. Put $7500 aside. By age forty this initial seed has grown to $50,000 assuming you get the 10% market average. The next year save up ten percent more, and so you go on saving ten percent more each year.
Once you reach forty, two decades of saving have made you a millionaire.
When the ultra rich talk about hard work, this is the period of life they refer to. Of course, some are born with a silver spoon in their mouth, others won the lottery or mined Bitcoins early on. But the recipe of working hard combined with sacrifice and frugality is open to anyone.
Don’t forget that work location is key. If you are a skilled programmer, move to Silicon Valley. Rent a room in the least overpriced shared flat available. If you are unskilled, consider North Sea oil jobs or mining in the Australian outback.
Separate Investing from Consumption
Treat your savings/investments as a separate entity from your life expenses. This is easier said than done but what it takes if your life goal is to become a billionaire.
Any moron can make 20, 30 or even 50% a year repeatedly over a long bull market. But a single negative year is devastating for long term growth.
Again, mathematics. If you make 10% two years in row, your return is 21%. That extra one percent is due to the compound effect. If you lose 10% one year, you need to make 35% the next year! That’s five percent extra due to the geometric progression of returns.
If you lose 20% you need to make 52% the next year to stay on track.
Lose 50% and 142% is necessary to catch up!
Consistency is key, and there’s no surprise that old conservative investors are the ones who end up on top.
If you do manage an impressive 15% a year, but the taxman takes 1/3 every year, your end result after fifty years is barely 100 million rather than the one billion you otherwise would have had. That’s 90% tax over a lifetime!
Why not move to a tax free jurisdiction? Several Caribbean islands, Monaco, Cyprus, Malta, Switzerland, UAE, Malaysia, Singapore and Hong Kong are places you may be exempt from taxes on investment gains. A residency permit is quite easy to get. You don’t need a new passport. Your home country will stop taxing you after you move. The exception is the United States. Americans are taxed worldwide until they renounce their citizenship.
Even if you opt for staying in your old country, there are legal ways to reduce taxes. Depending on where you live, you may be able to structure trading through a company or foundation at no or low tax. Pension account is another option. Taxation may be delayed for decades this way.
Even if you cannot eliminate taxes, you should be able to offset gains with losses. You can at the very least delay taxes somewhat this way.
The Buffet Consistency
I don’t think Buffet holds all the answers. He follows the Benjamin Graham school of value investing; buy stocks that are unjustifiably cheap based on their intrinsic value.
My problem with this is not the logic in itself. It’s just that it’s too popular. When thousands of investors out there think in the same way, guess what happens to the pricing of Buffett’ish stocks.
Rather there is something much more general – and rare – Buffett has to offer. Follow these three tips and you may just have a shot of becoming the next Buffett:
- Find investments you intent to hold on forever. Most investors, even if they do buy the new Amazon, will sell way too early. It’s tempting to take a profit. It’s only if you live under a heuristic of never selling (or waiting a pre-determined number of years) you really have a shot of riding an investment to the moon.
- Hold relatively few investments and put a large portion of your wealth in each. This holds true for two reasons. If you are indeed a genius investor, save your ammo for those few great opportunities. These are years in between. If reality is that you are just an average investor (it takes decades and a couple bull-bear cycles to know), at least by making relatively few investments you still have a shot at becoming billionaire by luck.
- Avoid group think. A set of stubborn, strict rules is the antidote of jumping on the next big thing. Yes, you would have lost out on the dot com bubble and crypto boom, but this may be what it takes to avoid any devastating losses on your multi-decade stock market journey.
The bottom line is; if you do not follow these points, your chance of reaching billionairehood is zero. If you do follow them, you at the very least have a tiny shot at it.
The 10x Per Decade Approach
This strategy requires the mind of a madman and the patience of a monk. Plus a ton of foresight if you want a realistic chance of success.
Simply put, go all in on one investment. Sell once it reaches 10x return or 7 years have passed, whichever comes first.
If you start with one million, it takes three successes to reach a billion. If you start with 100k, it takes four.
Since you only have one bullet you should wait years for the perfect moment to pull the trigger.
In hindsight this strategy seems simple. Let’s make an experiment where we go back to the 90s, 2000s and 2010s, select one investment in each decade and check whether we would have made it a triple 10x return.
- The first trading day of January 1996 we buy Microsoft. We all are users of Windows 95. amazed by the product, realize Microsoft has a monopoly, and predict everyone will need a PC with this OS. The purchase price is $3.55 (adjusted Yahoo price). It reaches 10x return in December 2019, so we sell it. We’re extremely lucky. Already the next month the price drops. The next time the stock is back in the 10x territory is 2014.
- For a few years we stay in cash until the Iraq War is imminent. We buy Boeing as a military contractor in the beginning of March 2003. After seven years, March 2010, we sell with a meager 173% profit. Although a failure, the annualized return is quite okay at 15.4%.
- In the early 2010s we foresee that electric cars are the future. Tesla has grown an enthusiastic fan base, and we buy their stock in the beginning of 2013. Already in June 2017 we realize a handsome 10x profit. Awesome, yet somewhat bitter considering holding onto to Tesla to this day would have yielded an 88x return.
From these three trades our fantasy million would have first grown to 10 million from Microsoft, then 27.3 million after seven years of holding Boing shares, and finally 273 million with Tesla.
Maybe I should make one more prediction: Limiting yourself to one investment per decade will put you on the Eccentric Investor’s Wall of Fame…
A more realistic approach could be to invest 10% of your wealth once a year (still with the 10x, max 7 year rule). It averages out risk but strongly reduces the chance of billionaire by luck.
Make Yourself a Following
What I have not taken into account is a beautiful little bonus. Somewhere on your successful journey people will take notice (unless you’re secretive). This could lead to self-fulfilling prophesies.
You buy. The sheep follow. 10x return. Repeat.
People may also start throwing money at you as your track record gets more and more impressive. If you go down this route, management fees can make you a billionaire much faster.
Both strategies are long shots. There’s no sure way of becoming billionaire. It takes heck a lot of effort to save up that first million. And then you need another 30-50 years of highly disciplined investing with a large portion of luck. If you’re ahead of the curve you will reach your goal by age 70. Though your ninetieth birthday is more realistic.
P.S. I left inflation out the equation. Decades from now, who knows, a billion dollars may buy you little more than a new pair of sneakers. So much for being a billionaire.