How to Become Rich: The Value Investing Version

How to Become Rich: The Value Investing Version

My main goal this evening is to discredit those who tell you that you can get rich quick by investing in the secondary markets. That won’t work.  It sort of worked for Warren Buffett, but a lot of his success came from creating a holding company, and buying entire businesses, not just fractions of companies that he would not control.

Even the top entertainers and sports stars rarely become super-rich unless they have an iron discipline, and hand over their excess assets to an honest and talented advisor, who shepherds them and grows them, and gives the client personal advice as needed.  That’s what I do, though I have no famous clients.

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As with so many things, it comes down to self-control.  Can you defer self-gratification?  Will you seek talented advisors who are honest?  They aren’t easy to find.

Those that become super-rich form their own firms, and use them to further their wealth.  They hire talented people to grow their wealth.  It can be a purely industrial firm.  It can be part industrial and investing, like Loews, Berkshire Hathaway, Leucadia, Carl Icahn, etc.  It can be a private firm, whether private equity, a hedge fund, or an industrial firm.

The main idea here is that great wealth typically comes through running a large firm that is very profitable, which concentrates the efforts of others.  Significant wealth never comes through your own labors or secondary-market investing.  It comes through creating a very profitable firm.

Now, I want to add one more tangential observation here.  It’s easier to make a lot of money by offering investment advice, than by investing your own money yourself.  Why?  In offering advice, your margins are virtually unlimited.  Every new subscriber is gravy.  Your own capital is limited, so your returns are limited.

But the record of newsletters is poor; that’s why I have never considered a newsletter.  I buy no newsletters because they have no value.  I sell no newsletters because my best insights should go to my clients.  I have never seen a newsletter in my life that genuinely offered value.

Far better that you build your own firm with your valuable differential insights, than that you try to make money in the public markets.  Those who are very rich managed large firms that became dominant.

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Now, few of us can do that.  That’s the way the world works.  And most who try it will fail. Far better to aim lower and achieve a happy outcome, than strain after riches that never come.

By David Merkel, CFA of Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.