Wealth: Its Not What You Earn But What You Keep

I like questions from readers, if they are general enough for a blog post.  Here’s one for tonight:

Mr. Merkel,

Following reading your blog here:

It occurs to me that attaining money in the first place is only half the battle.  A well known fellow among engineers; Nicolai Tesla was great at this.  He made many millions in his life.  He also constantly reinvested most of his income into new inventions and new ideas.  When he died, he was pretty much destitute.

Starting a gas station requires about $300,000 ($150-200k to buy the store/land, 40k to furnish the store, 40k to buy the gas) in startup capital.  In technology, and in software; you can start making money with a good idea and next to no start-up capital… assuming you don’t get crushed by a larger company in the process.

How do the super rich store their massive income?  How do they invest it?  Buying up ever more companies and taking their profits off the top?  What is a minimum threshold amount of money that you need to start to do this?  Can you recommend any good books?

There are several classes of assets that the wealthy like to preserve their wealth.  Here are some examples:

  • Real Estate
  • Municipal Bonds
  • Businesses in necessary industries that throw off a lot of cash flow.
  • Businesses in which they have significant inside knowledge, and can continue to benefit from the knowledge.
  • Occasional equity investments in private ventures that seem promising.

After a certain amount of wealth is acquired, intelligent wealthy people tend to turn to things that have predictable cash flows, rather than take a large amount of business risk.  They’ve made their fortune.  Now it is time to conserve it, and receive what some consider to be rents — passive income that comes with little volatility.

Even Goldman Sachs did this with excess profits, buying safe securities, and throwing them into the BONY box. [BONY == Bank of New York, now BNY Mellon]

In essence, the wealth is converted to ownership in what is likely to be a growing income stream.  What is not used is reinvested.  That is how wealth is preserved during the life of the wealthy.

As for books, you can look at “The Millionaire Next Door,” and its series. Also, Rich Like Them.

But remember, not all rich try to preserve their wealth.  Some lose it through over-consumption, and others through bad investments.  The investments that I list above require a degree of humility, and thus, only wise rich people will follow such a strategy.

By David Merkel, CFA of Aleph Blog