31 ms·

How the 0.001% invest

388 points by nikbackm 8y ago

lawrenceyan 8y ago
Paywalled.
- nikbackm 8y ago
  Using private browsing mode tends to work.
  - AdamJacobMuller 8y ago
    I'm not quite sure how sites do it, but, lots of sites manage to enforce the article limit across even incognito and even across browsers... i pasted an archive.is link (http://archive.is/o3LVk http://archive.is/o3LVk) which is quite reliable for me and 99% of the time someone else already archived it.
    - Semaphor 8y ago
      So that's what those are supposed to do? Everytime I click on one I get an error, currently it's "Error 1016 Origin DNS error". Never actually saw what's behind that site but it does not seem like a working domain.
      - icebraining 8y ago
        Are you using Cloudflare's DNS servers? Yeah, it doesn't work with that, for some reason.
    - gammateam 8y ago
      There was an article posted on hn like 18 months ago about how to detect users across incognito sessions, defeated by switching browsers entirely Word got out
    - gear54rus 8y ago
      Same way scummy ad networks do it (in fact they probably use ad networks' tech), google 'browser fingerprinting'.
AdamJacobMuller 8y ago
http://archive.is/o3LVk http://archive.is/o3LVk
- carlospwk 8y ago
  MVP
- mlrtime 8y ago
  For people who don't like to click on random links, this is the article.
abledon 8y ago
[removed fun fact due to it being false and still being published in modern books .. sigh]
- benj111 8y ago
  You seem to miss the most salient point! The Rothschilds are still investing, and you can join them. RIT (Rothschild Investment Trust, London listed) https://en.m.wikipedia.org/wiki/RIT_Capital_Partners https://en.m.wikipedia.org/wiki/RIT_Capital_Partners (not investment advice)
  - C1sc0cat 8y ago
    Seconded I have done very well investing in RCP though its on a premium now. Note Its a defensive IT designed to preserve wealth
- vmlinuz 8y ago
  Fun fact: This is not supported by historical evidence, and was likely simply anti-Semitic fake news which got out of hand... https://www.independent.co.uk/news/uk/home-news/the-rothschild-libel-why-has-it-taken-200-years-for-an-anti-semitic-slur-that-emerged-from-the-10216101.html https://www.independent.co.uk/news/uk/home-news/the-rothschi...
  - pgeorgi 8y ago
    "Fun" fact.
  - abledon 8y ago
    Haha! Well if its true that the parent fun fact is not true, its shocking because I read that in a book[1] authored by Dan Cryan [2]. [1] https://www.amazon.ca/Introducing-Capitalism-Graphic-Dan-Cryan/ https://www.amazon.ca/Introducing-Capitalism-Graphic-Dan-Cry... [2] https://technology.ihs.com/Biographies/400721/dan-cryan https://technology.ihs.com/Biographies/400721/dan-cryan
    - 8y ago
deleted 8y ago
[deleted]
benj111 8y ago
I'm not particularly convinced by the risks stated here. Yes Bill Gates could buy 65% of the Turkish stock market, but if he wanted power, there are surely cheaper and easier ways to do it. And regarding stability, you could make the case that these funds could increase stability. If you're in the 0.001% then surely you have the money to have a long term out look, which means they aren't going to worry about that short term blip. I think the last paragraph headline sums it up for me. They've rediscovered DIY investing.
- Moodles 8y ago
  > I'm not particularly convinced by the risks stated here. Both of your points are made in the article?
  - benj111 8y ago
    They mentioned presumably 'reasonable' risks, or else they wouldn't have mentioned them at all. I'm just not convinced they are even reasonable enough to bother mentioning. The third issue (tax) is where the potential issues are, and got virtually the same length paragraph.
    - Semaphor 8y ago
      My impression was that they mentioned the obvious risks (and by obvious what the public and pundits might fear), and then immediately went on to say why it's not an actual risk.
jerrre 8y ago
0.001% of the world is about 75k people [1], there are about 2200 dollar billionaires [2], so only(!) ~3% of these people are billionaires. Not a real point to make, but I was wondering, and it might save someone else time. [1] https://www.wolframalpha.com/input/?i=0.001%25+*+world+population https://www.wolframalpha.com/input/?i=0.001%25+*+world+popul... [2] https://en.wikipedia.org/wiki/The_World%27s_Billionaires https://en.wikipedia.org/wiki/The_World%27s_Billionaires
- lazyasciiart 8y ago
  The article is about families, so if you say the average size of these families is 3-4 people, they're all in it.
- rorykoehler 8y ago
  They mention the magic number of $100m in the article.
- emn13 8y ago
  As that wiki link points out, wealth isn't entirely public or measurable; so the list isn't complete. It explicitly excludes dictators and royalty (so, hey, saudi family!), and " excluding and ranking against those with wealth that is not able to be completely ascertained" That makes perfect sense of course; but all those excluded parties from that ranking still need to manage wealth, so getting exact or even estimated numbers here is going to be tricky. And then there's the family != person disconnect - although it seems to me that most people in this situation got lucky somehow, so it's rather unlikely there are multiple original sources of wealth in such families. If there are several individually wealthy family members it's probably more likely due to dilution. But yeah, you'd assume the median family wealth of a the top 0.001% of people is likely below 1 billion. But how much? Who knows.
  - ascar 8y ago
    > If there are several individually wealthy family members it's probably more likely due to dilution. While this is probably true in general, there are at least two famous exceptions from Germany. There is the notable case of Adolf "Adi" Dassler, founder of Adidas, and his older brother Rudolf Dassler, founder of Puma, who separated from their joined shoe manfucaturing business and independently built two of the largest shoe (and now sports equipment) manufacturing companies in the world. Both still headquartered in the tiny 23000 people city Herzognaurach, Germany (close to Nuremberg). And the similar story of Karl and Theo Albrecht, founders of Aldi (Albrecht Discount), which was split in Aldi Nord (north) and Aldi Süd (south), both growing their company in billion dollar businesses and each becoming billionaires. Granted though they had slightly different styles of running their business, their success was based on the same innovative business idea and a geographic non-compete agreement.
nly 8y ago
The article only considers new investment. Jeff Bezos may be worth $150bn, but approximately $125bn of that is in Amazon stock. He's 80% invested in Amazon. Does it really matter where the worlds richest man puts the other 20% when he could afford to lose it all on moonshots and not give a damn? The risk-reward trade-offs you and me make while investing just don't apply to Jeffs personal investment decisions, and therefore aren't all that interesting.
- adventured 8y ago
  His wealth concentration is actually quite higher, around ~94.7% in AMZN stock. Bloomberg has him currently at a $132b net worth, with $125b in Amazon. The rest is Blue Origin and The Washington Post, with his cash position at 'only' an estimated $2.45b. Given the absurdly high valuation of Amazon - and as a fan of humanity pushing into space - I'd like to see him sell some larger blocks of Amazon while the stock market is so high, in order to secure funding for Blue Origin for a decade or more all at once. In terms of dilution, it's drastically better to yield ~$6b-$10b on a few sales out of a stake of $125b, than out of a position worth ~$65b (where he was at just two years ago) if the market is down for a long period of time. Especially true given he has recently indicated Blue Origin might demand even more than $1b per year.
  - charlesdm 8y ago
    It doesn't matter as he can easily borrow tens of billions against his Amazon shares.
    - adventured 8y ago
      Debt always matters when it's that large of a sum. If he borrows $10b over six years against $65b in shares, he would have been dramatically better off liquidating $10b worth of stock over ~18 months when it was worth $125b-$145b and having zero debt. He's 54, has been at the helm for 24 years and isn't going to run Amazon forever, the market isn't going to freak out if he sells a few points more of stock. Is Amazon heading toward an 18 PE ratio against $20-$25 billion in profit? $360b-$450b market cap, versus a $778b market now (already down ~$250 billion from the highs). At some point in the near future will their profit growth stagnate, Microsoft or Intel style, for most of a decade; and will their multiple compress over time with that stagnation? Historically that's the very likely outcome (or far worse). The stock market goes down with the next recession, the very high S&P 500 / market multiple gets chopped down to a more reasonable historical level. After several years pass and the smoke clears, Amazon's AWS growth has slowed considerably, its online retail growth is single digits, and the market awards it a mature slower growth 15-20 style PE ratio. There has never been an exception in the tech world, when it comes to multiple compression. The compression monster comes for everyone. Microsoft, Intel, Cisco, Apple, Facebook, Google, etc have all suffered it. There will never be an exception. Amazon isn't going to get an 80 PE ratio on $20b in profit, the market will squeeze it perpetually down. It's very likely the party top is already over (the next time we see such absurdly low market-supporting interest rates, it'll be because of a recession, and stocks will have plunged accordingly). When it comes to the cost of funding Blue Origin (which is very high), I think he will have wished he sold more stock while it was on the moon during this stock market bonanza, where even very low growth stocks like Intuit are still fetching hilarious 50 PE ratios. And these are the reasonable scenarios. The dangerous scenario, where you're nuts to borrow $10 billion against stock, is where Amazon is disrupted (AWS particularly), or the economy gets really bad and Amazon gets a 16 PE ratio against $18 billion in profit (still not actually a bad outcome even then). In that case, Bezos is now borrowing $10b against ~$45b in shares or less. Non-trivial leverage, even for that much wealth. Or you could just easily evade all the major risk scenarios, sell off 1.6% of the richly valued Amazon stock - just 10% of your holdings - and fund Blue Origin debt free for a decade or so without concern (hopefully to the point of self-sustainability). And you do it while the market is bubbly, precisely because shareholders are far less likely to care then.
LegendaryLegend 8y ago
TLDR: they use family offices, we don't know what they invest in as there's no transparency, and they didn't outperform the global stock market in 2016 and 2017.
deleted 8y ago
[deleted]
spyckie2 8y ago
https://en.wikipedia.org/wiki/The_World%27s_Billionaires https://en.wikipedia.org/wiki/The_World%27s_Billionaires Interesting to see the deltas (YoY) increase in wealth of these billionaires. The top 5 have a growth of $8-15bn a year in wealth in the past few years. This increase in wealth is mostly an increase in institutions that keep growing at a very healthy rate (Amazon, Microsoft, BH, Facebook, etc). I think it's important to remember that all of these persons (Bill Gates, Jeff Bezos, etc) are the primary owner of a large institution that creates the wealth. Building orgs to put money to use is what they did to make their money in the first place, so it makes sense that they would do that with their private wealth as well.
Blackstone4 8y ago
The majority of the world's richest people have their wealth tied up in companies they either founded or inherited.... if they are investing their capital they have limitations most of us do not have to face. If I go from having to invest $1m to $100m to $100bn, my investment universe shrinks each time. For example, a small investor can invest in companies with market cap of ~$50m+....not possible for Warren Buffet. He can only invest in maybe less than a few hundred companies...with market caps in the region of a few $100bn.... there are of course treasuries/bonds but no seriously wealthy person has all of their money in bonds. In part because the returns are so low and income taxes are meaningfully higher than cap gains.
- PakG1 8y ago
  The way Bill Gates is doing it makes sense to me, and I imagine many of the super rich probably find a similar model. https://en.wikipedia.org/wiki/Cascade_Investment https://en.wikipedia.org/wiki/Cascade_Investment It financially does not make sense to have all eggs in one basket, the risk is inordinate. This has been mathematically proven over and over again. When you're smaller and aiming for big returns, go for it. When you're bigger, your universe is a bit different.
- mruts 8y ago
  On the other hand, if you don't have a lot of money, many investment strategies become infeasible. The move from 1mm to 100mm would definitely increase your investment universe, not decrease it. With 100mm you can do private equity, VC, debt, illiquid and obscure stuff, EM bonds, etc etc. Most of that you can't do with 1mm. But you are right that going from 100mm to 100bn definitely shrinks your universe.
  - Blackstone4 8y ago
    Most PE funds have a minimum of $5m-$10m (less for VC)... so even $100m isn't enough to go directly to a PE firm....typically at this size, you might go through a fund of funds... Even at a small size, it's possible to invest in alternatives through public markets. I have my pension in listed private equity. You can also invest in private debt BDCs and closed-end funds that do infrastructure and a bunch of other things.
FatDrunknStupid 8y ago
There's a lot more fragmentation than this suggests. I've worked at a hedge fund that had exactly one investor for example.
ThrustVectoring 8y ago
Back when I was fantasizing about what I'd do if I won the lottery, I looked into family offices a bit and concluded that there's basically no point as far as the investing advice goes. It's still likely a good idea for some of the ultra-wealthy for estate, tax, and philanthropic purposes, but on the investment side? The standard passive indexing approach used by middle class individuals scales in a cost-effective manner to the billions of dollars of assets. And as a bonus, you don't need to stake your fortune on a trust-based relationship. Instead, you get to base things off of institutions and audits - Vanguard isn't going to take the money you shoved into VTSAX and embezzle it through investing in their distant cousin's "company", even if it is a billion dollars.
- ljcn 8y ago
  Not refuting your assertion, but the concentration of power in tracking funds is a looming problem. The FT did a bit on it last week. Here's something similar from the motley fool: https://www.fool.com/investing/2018/12/01/vanguards-founder-warns-that-index-funds-could-bec.aspx https://www.fool.com/investing/2018/12/01/vanguards-founder-...
  - yourapostasy 8y ago
    Only a looming governance problem, but not in any way a financial performance problem. Only the latter will trigger any real reaction from the markets, and Bogle thinks that won't likely happen until 70% of market under passive indexing at a minimum. Governance concerns are not structural and addressable when it reaches a critical mass. I wouldn't be overly concerned, just put in a word when someone starts to lobby for regulation requiring delegating voting power back to index investors, and fund managers having to vote the preponderance of pro-rata voted shares.
- C1sc0cat 8y ago
  Err no it doesn't for large amounts not losing money is as important - see the previous comment about RCP. You can also get into special sits and arbritrage ala Elliot and partners
- whatok 8y ago
blazespin 8y ago
After some small amount (5 million?) you are less interested in capital growth and more interested in protecting your capital. That’s what drives this the 0.001%
- comboy 8y ago
  On the other hand, when you have $5M, you may want to protect it because if it goes down to $1M it makes a difference. For those ultra-wealthy though, if their wealth goes down 100x, it does not impact their comfort of living in any way. They just have less power. I'm sure it still does not feel good psychologically so I'm not completely disagreeing with you.
  - dx034 8y ago
    The problem is that most very rich people have very concentrated positions. The family office might only manage 10% of the wealth with 90% being in one company. The investment then has to be structured so that the 10% survive even if the 90% vanish overnight (unlikely but not impossible). The performance on those 10% isn't that important, ownership in the company drives most of the fluctuation in wealth anyway.
potatofarmer45 8y ago
I've worked for a family office in Hong Kong. What was really telling for me was how the rate of return KPI was measured. We were not benchmarked against the S&P 500, or any index. We were measured directly against the fund of another frenemy family. So long as the fund outperformed the other family, all was good. It's crazy because you could be underperforming treasury bonds, and still be good because the other office was worse. I guess when you that much money, more money means less than vanity and bragging rights.
- deleted 8y ago
  [deleted]
- mruts 8y ago
  I've seen the portfolio's of dozens of family offices (I worked at a portfolio analytics company so I had free reign to snoop around), and none of the offices seemed competent. The returns were terrible and the portfolio construction laughable. Instead of striving for out performance, the funds just catered to the whims and idiosyncrasies of the family. Also, many of these funds were too small to make sense, AUMs from like 150MM-500MM. They would have be much better off just investing in a hedge fund, but the family's ego didn't allow them. I think the point was to show off more than anything else. One of the exceptions was Sergey Brin's family office, which managed a shit-ton of money and had some good people who actually knew something about portfolio construction.
  - whitepoplar 8y ago
    My guess is that most UHNWIs would do better to simply park their money in Vanguard index funds and call it a day.
    - pbrb 8y ago
      Was thinking the same thing, but I'm sure they still want to have a portion of their portfolio in high risk high reward investments. I also wonder if they can get better deals (Warren Buffet style) by taking large positions direct vs. buying indexes through a broker.
lordnacho 8y ago
The family offices I've worked with do pretty much everything. Part of the reason to do everything is that you have the freedom to do so. I literally called a friend on behalf of another friend to get him a bridge loan for a house once. A free mandate makes for more interesting work, plus as the manager you can stick things in illiquids that have no mark-to-market. That's the uncharitable view, of course. The charitable view is that you are better at evaluating opportunities and are able to do things other institutions are not. Main thing about FOs is they are just the article says, totally idiosyncratic. One FO I know is basically just a wily old guy who does all his business by phone, meets people to look them in the eye, that type of thing. Made a lot on crypto. Another FO is basically a hedge fund. Bunch of different desks doing various things, a lot of focus on regulatory approval (that's still a thing, not sure why the article makes it look like there's no hurdles).
- peteretep 8y ago
  The SEC remedy against bad hedge fund owners in the show Billions is the threat of turning them into family offices
  - lordnacho 8y ago
    Yeah I saw some of that show. The thing is if you're a MFO you're handling other people's money.
  - thomas93 8y ago
    This actually happened in real life to Steve Cohen (the person Axelrod's character is loosely based on). After being banned from managing outside capital, SAC Capital Advisors transitioned to being a family office called Point72. Only recently has it begun to to manage outside capital again.
- lighttower 8y ago
  How do these guys find deals to invest into? How do the deals find them?
  - 8y ago
known 8y ago
"If you invested in a very low cost index fund — where you don’t put the money in at one time, but average in over 10 years — you’ll do better than 90% of people who start investing at the same time" --Buffett
- hippich 8y ago
  I guess depends on which 10 years you pick and whom you compare yourself with - https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1998&firstMonth=1&endYear=2008&lastMonth=12&calendarAligned=true&endDate=12%2F16%2F2018&initialAmount=1000&annualOperation=1&annualAdjustment=1000&inflationAdjusted=false&annualPercentage=0.0&frequency=4&rebalanceType=0&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&symbol1=SPY&allocation1_1=100&symbol2=SHY&allocation2_2=100 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
mark_l_watson 8y ago
It seems like the very rich feel comfortable having a large percentage of their wealth in a few investments. At the opposite end of the wealth spectrum, I like extreme diversification- caring to preserve some spending power in the face of an unknown future rather than maximizing investment gains. I believe that all people need to be happy is a comfortable place to live, good food and fellowship with friends and family. Because of this belief, a conservative highly diresified approach makes sense to me.
- Klover 8y ago
  The article clarified that family offices tend to invest in a quite economically healthy way: diverse, and more attracted to startups. Which is why the consolidation of money this time around does not pose the same threat as 1998. Unless I remembered wrong. I read it on Thursday.
dgudkov 8y ago
I struggle to understand the point of the article. >Rich clients have taken a closer look at private banks’ high fees and murky incentives, and balked. OK. Rich clients were not happy with the way external managers managed their funds and decided to do it themselves. I get it. >As they grow even bigger in an era of populism, family offices are destined to face uncomfortable questions about how they concentrate power and feed inequality. How on Earth is it related to populism? >Family offices have created inequality. If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. You undertake higher risk and potentially receive higher award. What's the point of the article?
- golergka 8y ago
  Rich people bad.
  - cporios 8y ago
    This is neither what the article is saying or implying, nor the general view or bias of this newspaper.
- pbhjpbhj 8y ago
  >If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. // If you can afford to invest, and do so successfully, you therefore make money from others labour. As poor people can't do that, any successful investment is contributing to wealth inequality. In general, if you win on investments someone else is losing. This means that if having large capital base means you have accessv to better investments - eg avoiding large fees - then you'll drive more inequality. To recapitulate: There's only a certain amount of wealth generated, if you receive "higher reward" without doing more wealth generation then those generating the wealth are getting a smaller proportion.
- vharuck 8y ago
  The author floats and addresses possible worries, especially because populism focuses on comparing the "haves" and "have nots." The say "family offices create inequality" could be a worry, but that it has no merit. From the article: >The most obvious of these is the least convincing—that family offices have created inequality. They are a consequence, not its cause.

388 points by nikbackm 8y ago

lawrenceyan 8y ago

Paywalled.

nikbackm 8y ago
Using private browsing mode tends to work.
- AdamJacobMuller 8y ago
  I'm not quite sure how sites do it, but, lots of sites manage to enforce the article limit across even incognito and even across browsers... i pasted an archive.is link (http://archive.is/o3LVk http://archive.is/o3LVk) which is quite reliable for me and 99% of the time someone else already archived it.
  - Semaphor 8y ago
    So that's what those are supposed to do? Everytime I click on one I get an error, currently it's "Error 1016 Origin DNS error". Never actually saw what's behind that site but it does not seem like a working domain.
    - icebraining 8y ago
      Are you using Cloudflare's DNS servers? Yeah, it doesn't work with that, for some reason.
  - gammateam 8y ago
    There was an article posted on hn like 18 months ago about how to detect users across incognito sessions, defeated by switching browsers entirely Word got out
  - gear54rus 8y ago
    Same way scummy ad networks do it (in fact they probably use ad networks' tech), google 'browser fingerprinting'.

AdamJacobMuller 8y ago

http://archive.is/o3LVk http://archive.is/o3LVk

carlospwk 8y ago
MVP
mlrtime 8y ago
For people who don't like to click on random links, this is the article.

abledon 8y ago

[removed fun fact due to it being false and still being published in modern books .. sigh]

benj111 8y ago
You seem to miss the most salient point! The Rothschilds are still investing, and you can join them. RIT (Rothschild Investment Trust, London listed) https://en.m.wikipedia.org/wiki/RIT_Capital_Partners https://en.m.wikipedia.org/wiki/RIT_Capital_Partners (not investment advice)
- C1sc0cat 8y ago
  Seconded I have done very well investing in RCP though its on a premium now. Note Its a defensive IT designed to preserve wealth
vmlinuz 8y ago
Fun fact: This is not supported by historical evidence, and was likely simply anti-Semitic fake news which got out of hand... https://www.independent.co.uk/news/uk/home-news/the-rothschild-libel-why-has-it-taken-200-years-for-an-anti-semitic-slur-that-emerged-from-the-10216101.html https://www.independent.co.uk/news/uk/home-news/the-rothschi...
- pgeorgi 8y ago
  "Fun" fact.
- abledon 8y ago
  Haha! Well if its true that the parent fun fact is not true, its shocking because I read that in a book[1] authored by Dan Cryan [2]. [1] https://www.amazon.ca/Introducing-Capitalism-Graphic-Dan-Cryan/ https://www.amazon.ca/Introducing-Capitalism-Graphic-Dan-Cry... [2] https://technology.ihs.com/Biographies/400721/dan-cryan https://technology.ihs.com/Biographies/400721/dan-cryan
  - 8y ago

deleted 8y ago

[deleted]

benj111 8y ago

I'm not particularly convinced by the risks stated here. Yes Bill Gates could buy 65% of the Turkish stock market, but if he wanted power, there are surely cheaper and easier ways to do it. And regarding stability, you could make the case that these funds could increase stability. If you're in the 0.001% then surely you have the money to have a long term out look, which means they aren't going to worry about that short term blip. I think the last paragraph headline sums it up for me. They've rediscovered DIY investing.

Moodles 8y ago
> I'm not particularly convinced by the risks stated here. Both of your points are made in the article?
- benj111 8y ago
  They mentioned presumably 'reasonable' risks, or else they wouldn't have mentioned them at all. I'm just not convinced they are even reasonable enough to bother mentioning. The third issue (tax) is where the potential issues are, and got virtually the same length paragraph.
  - Semaphor 8y ago
    My impression was that they mentioned the obvious risks (and by obvious what the public and pundits might fear), and then immediately went on to say why it's not an actual risk.

jerrre 8y ago

0.001% of the world is about 75k people [1], there are about 2200 dollar billionaires [2], so only(!) ~3% of these people are billionaires. Not a real point to make, but I was wondering, and it might save someone else time. [1] https://www.wolframalpha.com/input/?i=0.001%25+*+world+population https://www.wolframalpha.com/input/?i=0.001%25+*+world+popul... [2] https://en.wikipedia.org/wiki/The_World%27s_Billionaires https://en.wikipedia.org/wiki/The_World%27s_Billionaires

lazyasciiart 8y ago
The article is about families, so if you say the average size of these families is 3-4 people, they're all in it.
rorykoehler 8y ago
They mention the magic number of $100m in the article.
emn13 8y ago
As that wiki link points out, wealth isn't entirely public or measurable; so the list isn't complete. It explicitly excludes dictators and royalty (so, hey, saudi family!), and " excluding and ranking against those with wealth that is not able to be completely ascertained" That makes perfect sense of course; but all those excluded parties from that ranking still need to manage wealth, so getting exact or even estimated numbers here is going to be tricky. And then there's the family != person disconnect - although it seems to me that most people in this situation got lucky somehow, so it's rather unlikely there are multiple original sources of wealth in such families. If there are several individually wealthy family members it's probably more likely due to dilution. But yeah, you'd assume the median family wealth of a the top 0.001% of people is likely below 1 billion. But how much? Who knows.
- ascar 8y ago
  > If there are several individually wealthy family members it's probably more likely due to dilution. While this is probably true in general, there are at least two famous exceptions from Germany. There is the notable case of Adolf "Adi" Dassler, founder of Adidas, and his older brother Rudolf Dassler, founder of Puma, who separated from their joined shoe manfucaturing business and independently built two of the largest shoe (and now sports equipment) manufacturing companies in the world. Both still headquartered in the tiny 23000 people city Herzognaurach, Germany (close to Nuremberg). And the similar story of Karl and Theo Albrecht, founders of Aldi (Albrecht Discount), which was split in Aldi Nord (north) and Aldi Süd (south), both growing their company in billion dollar businesses and each becoming billionaires. Granted though they had slightly different styles of running their business, their success was based on the same innovative business idea and a geographic non-compete agreement.

nly 8y ago

The article only considers new investment. Jeff Bezos may be worth $150bn, but approximately $125bn of that is in Amazon stock. He's 80% invested in Amazon. Does it really matter where the worlds richest man puts the other 20% when he could afford to lose it all on moonshots and not give a damn? The risk-reward trade-offs you and me make while investing just don't apply to Jeffs personal investment decisions, and therefore aren't all that interesting.

adventured 8y ago
His wealth concentration is actually quite higher, around ~94.7% in AMZN stock. Bloomberg has him currently at a $132b net worth, with $125b in Amazon. The rest is Blue Origin and The Washington Post, with his cash position at 'only' an estimated $2.45b. Given the absurdly high valuation of Amazon - and as a fan of humanity pushing into space - I'd like to see him sell some larger blocks of Amazon while the stock market is so high, in order to secure funding for Blue Origin for a decade or more all at once. In terms of dilution, it's drastically better to yield ~$6b-$10b on a few sales out of a stake of $125b, than out of a position worth ~$65b (where he was at just two years ago) if the market is down for a long period of time. Especially true given he has recently indicated Blue Origin might demand even more than $1b per year.
- charlesdm 8y ago
  It doesn't matter as he can easily borrow tens of billions against his Amazon shares.
  - adventured 8y ago
    Debt always matters when it's that large of a sum. If he borrows $10b over six years against $65b in shares, he would have been dramatically better off liquidating $10b worth of stock over ~18 months when it was worth $125b-$145b and having zero debt. He's 54, has been at the helm for 24 years and isn't going to run Amazon forever, the market isn't going to freak out if he sells a few points more of stock. Is Amazon heading toward an 18 PE ratio against $20-$25 billion in profit? $360b-$450b market cap, versus a $778b market now (already down ~$250 billion from the highs). At some point in the near future will their profit growth stagnate, Microsoft or Intel style, for most of a decade; and will their multiple compress over time with that stagnation? Historically that's the very likely outcome (or far worse). The stock market goes down with the next recession, the very high S&P 500 / market multiple gets chopped down to a more reasonable historical level. After several years pass and the smoke clears, Amazon's AWS growth has slowed considerably, its online retail growth is single digits, and the market awards it a mature slower growth 15-20 style PE ratio. There has never been an exception in the tech world, when it comes to multiple compression. The compression monster comes for everyone. Microsoft, Intel, Cisco, Apple, Facebook, Google, etc have all suffered it. There will never be an exception. Amazon isn't going to get an 80 PE ratio on $20b in profit, the market will squeeze it perpetually down. It's very likely the party top is already over (the next time we see such absurdly low market-supporting interest rates, it'll be because of a recession, and stocks will have plunged accordingly). When it comes to the cost of funding Blue Origin (which is very high), I think he will have wished he sold more stock while it was on the moon during this stock market bonanza, where even very low growth stocks like Intuit are still fetching hilarious 50 PE ratios. And these are the reasonable scenarios. The dangerous scenario, where you're nuts to borrow $10 billion against stock, is where Amazon is disrupted (AWS particularly), or the economy gets really bad and Amazon gets a 16 PE ratio against $18 billion in profit (still not actually a bad outcome even then). In that case, Bezos is now borrowing $10b against ~$45b in shares or less. Non-trivial leverage, even for that much wealth. Or you could just easily evade all the major risk scenarios, sell off 1.6% of the richly valued Amazon stock - just 10% of your holdings - and fund Blue Origin debt free for a decade or so without concern (hopefully to the point of self-sustainability). And you do it while the market is bubbly, precisely because shareholders are far less likely to care then.

LegendaryLegend 8y ago

TLDR: they use family offices, we don't know what they invest in as there's no transparency, and they didn't outperform the global stock market in 2016 and 2017.

deleted 8y ago

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spyckie2 8y ago

https://en.wikipedia.org/wiki/The_World%27s_Billionaires https://en.wikipedia.org/wiki/The_World%27s_Billionaires Interesting to see the deltas (YoY) increase in wealth of these billionaires. The top 5 have a growth of $8-15bn a year in wealth in the past few years. This increase in wealth is mostly an increase in institutions that keep growing at a very healthy rate (Amazon, Microsoft, BH, Facebook, etc). I think it's important to remember that all of these persons (Bill Gates, Jeff Bezos, etc) are the primary owner of a large institution that creates the wealth. Building orgs to put money to use is what they did to make their money in the first place, so it makes sense that they would do that with their private wealth as well.

Blackstone4 8y ago

The majority of the world's richest people have their wealth tied up in companies they either founded or inherited.... if they are investing their capital they have limitations most of us do not have to face. If I go from having to invest $1m to $100m to $100bn, my investment universe shrinks each time. For example, a small investor can invest in companies with market cap of ~$50m+....not possible for Warren Buffet. He can only invest in maybe less than a few hundred companies...with market caps in the region of a few $100bn.... there are of course treasuries/bonds but no seriously wealthy person has all of their money in bonds. In part because the returns are so low and income taxes are meaningfully higher than cap gains.

PakG1 8y ago
The way Bill Gates is doing it makes sense to me, and I imagine many of the super rich probably find a similar model. https://en.wikipedia.org/wiki/Cascade_Investment https://en.wikipedia.org/wiki/Cascade_Investment It financially does not make sense to have all eggs in one basket, the risk is inordinate. This has been mathematically proven over and over again. When you're smaller and aiming for big returns, go for it. When you're bigger, your universe is a bit different.
mruts 8y ago
On the other hand, if you don't have a lot of money, many investment strategies become infeasible. The move from 1mm to 100mm would definitely increase your investment universe, not decrease it. With 100mm you can do private equity, VC, debt, illiquid and obscure stuff, EM bonds, etc etc. Most of that you can't do with 1mm. But you are right that going from 100mm to 100bn definitely shrinks your universe.
- Blackstone4 8y ago
  Most PE funds have a minimum of $5m-$10m (less for VC)... so even $100m isn't enough to go directly to a PE firm....typically at this size, you might go through a fund of funds... Even at a small size, it's possible to invest in alternatives through public markets. I have my pension in listed private equity. You can also invest in private debt BDCs and closed-end funds that do infrastructure and a bunch of other things.

FatDrunknStupid 8y ago

There's a lot more fragmentation than this suggests. I've worked at a hedge fund that had exactly one investor for example.

ThrustVectoring 8y ago

Back when I was fantasizing about what I'd do if I won the lottery, I looked into family offices a bit and concluded that there's basically no point as far as the investing advice goes. It's still likely a good idea for some of the ultra-wealthy for estate, tax, and philanthropic purposes, but on the investment side? The standard passive indexing approach used by middle class individuals scales in a cost-effective manner to the billions of dollars of assets. And as a bonus, you don't need to stake your fortune on a trust-based relationship. Instead, you get to base things off of institutions and audits - Vanguard isn't going to take the money you shoved into VTSAX and embezzle it through investing in their distant cousin's "company", even if it is a billion dollars.

ljcn 8y ago
Not refuting your assertion, but the concentration of power in tracking funds is a looming problem. The FT did a bit on it last week. Here's something similar from the motley fool: https://www.fool.com/investing/2018/12/01/vanguards-founder-warns-that-index-funds-could-bec.aspx https://www.fool.com/investing/2018/12/01/vanguards-founder-...
- yourapostasy 8y ago
  Only a looming governance problem, but not in any way a financial performance problem. Only the latter will trigger any real reaction from the markets, and Bogle thinks that won't likely happen until 70% of market under passive indexing at a minimum. Governance concerns are not structural and addressable when it reaches a critical mass. I wouldn't be overly concerned, just put in a word when someone starts to lobby for regulation requiring delegating voting power back to index investors, and fund managers having to vote the preponderance of pro-rata voted shares.
C1sc0cat 8y ago
Err no it doesn't for large amounts not losing money is as important - see the previous comment about RCP. You can also get into special sits and arbritrage ala Elliot and partners
whatok 8y ago

blazespin 8y ago

After some small amount (5 million?) you are less interested in capital growth and more interested in protecting your capital. That’s what drives this the 0.001%

comboy 8y ago
On the other hand, when you have $5M, you may want to protect it because if it goes down to $1M it makes a difference. For those ultra-wealthy though, if their wealth goes down 100x, it does not impact their comfort of living in any way. They just have less power. I'm sure it still does not feel good psychologically so I'm not completely disagreeing with you.
- dx034 8y ago
  The problem is that most very rich people have very concentrated positions. The family office might only manage 10% of the wealth with 90% being in one company. The investment then has to be structured so that the 10% survive even if the 90% vanish overnight (unlikely but not impossible). The performance on those 10% isn't that important, ownership in the company drives most of the fluctuation in wealth anyway.

potatofarmer45 8y ago

I've worked for a family office in Hong Kong. What was really telling for me was how the rate of return KPI was measured. We were not benchmarked against the S&P 500, or any index. We were measured directly against the fund of another frenemy family. So long as the fund outperformed the other family, all was good. It's crazy because you could be underperforming treasury bonds, and still be good because the other office was worse. I guess when you that much money, more money means less than vanity and bragging rights.

deleted 8y ago
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mruts 8y ago
I've seen the portfolio's of dozens of family offices (I worked at a portfolio analytics company so I had free reign to snoop around), and none of the offices seemed competent. The returns were terrible and the portfolio construction laughable. Instead of striving for out performance, the funds just catered to the whims and idiosyncrasies of the family. Also, many of these funds were too small to make sense, AUMs from like 150MM-500MM. They would have be much better off just investing in a hedge fund, but the family's ego didn't allow them. I think the point was to show off more than anything else. One of the exceptions was Sergey Brin's family office, which managed a shit-ton of money and had some good people who actually knew something about portfolio construction.
- whitepoplar 8y ago
  My guess is that most UHNWIs would do better to simply park their money in Vanguard index funds and call it a day.
  - pbrb 8y ago
    Was thinking the same thing, but I'm sure they still want to have a portion of their portfolio in high risk high reward investments. I also wonder if they can get better deals (Warren Buffet style) by taking large positions direct vs. buying indexes through a broker.

lordnacho 8y ago

The family offices I've worked with do pretty much everything. Part of the reason to do everything is that you have the freedom to do so. I literally called a friend on behalf of another friend to get him a bridge loan for a house once. A free mandate makes for more interesting work, plus as the manager you can stick things in illiquids that have no mark-to-market. That's the uncharitable view, of course. The charitable view is that you are better at evaluating opportunities and are able to do things other institutions are not. Main thing about FOs is they are just the article says, totally idiosyncratic. One FO I know is basically just a wily old guy who does all his business by phone, meets people to look them in the eye, that type of thing. Made a lot on crypto. Another FO is basically a hedge fund. Bunch of different desks doing various things, a lot of focus on regulatory approval (that's still a thing, not sure why the article makes it look like there's no hurdles).

peteretep 8y ago
The SEC remedy against bad hedge fund owners in the show Billions is the threat of turning them into family offices
- lordnacho 8y ago
  Yeah I saw some of that show. The thing is if you're a MFO you're handling other people's money.
- thomas93 8y ago
  This actually happened in real life to Steve Cohen (the person Axelrod's character is loosely based on). After being banned from managing outside capital, SAC Capital Advisors transitioned to being a family office called Point72. Only recently has it begun to to manage outside capital again.
lighttower 8y ago
How do these guys find deals to invest into? How do the deals find them?
- 8y ago

known 8y ago

"If you invested in a very low cost index fund — where you don’t put the money in at one time, but average in over 10 years — you’ll do better than 90% of people who start investing at the same time" --Buffett

hippich 8y ago
I guess depends on which 10 years you pick and whom you compare yourself with - https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1998&firstMonth=1&endYear=2008&lastMonth=12&calendarAligned=true&endDate=12%2F16%2F2018&initialAmount=1000&annualOperation=1&annualAdjustment=1000&inflationAdjusted=false&annualPercentage=0.0&frequency=4&rebalanceType=0&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&symbol1=SPY&allocation1_1=100&symbol2=SHY&allocation2_2=100 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...

mark_l_watson 8y ago

It seems like the very rich feel comfortable having a large percentage of their wealth in a few investments. At the opposite end of the wealth spectrum, I like extreme diversification- caring to preserve some spending power in the face of an unknown future rather than maximizing investment gains. I believe that all people need to be happy is a comfortable place to live, good food and fellowship with friends and family. Because of this belief, a conservative highly diresified approach makes sense to me.

Klover 8y ago
The article clarified that family offices tend to invest in a quite economically healthy way: diverse, and more attracted to startups. Which is why the consolidation of money this time around does not pose the same threat as 1998. Unless I remembered wrong. I read it on Thursday.

dgudkov 8y ago

I struggle to understand the point of the article. >Rich clients have taken a closer look at private banks’ high fees and murky incentives, and balked. OK. Rich clients were not happy with the way external managers managed their funds and decided to do it themselves. I get it. >As they grow even bigger in an era of populism, family offices are destined to face uncomfortable questions about how they concentrate power and feed inequality. How on Earth is it related to populism? >Family offices have created inequality. If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. You undertake higher risk and potentially receive higher award. What's the point of the article?

golergka 8y ago
Rich people bad.
- cporios 8y ago
  This is neither what the article is saying or implying, nor the general view or bias of this newspaper.
pbhjpbhj 8y ago
>If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. // If you can afford to invest, and do so successfully, you therefore make money from others labour. As poor people can't do that, any successful investment is contributing to wealth inequality. In general, if you win on investments someone else is losing. This means that if having large capital base means you have accessv to better investments - eg avoiding large fees - then you'll drive more inequality. To recapitulate: There's only a certain amount of wealth generated, if you receive "higher reward" without doing more wealth generation then those generating the wealth are getting a smaller proportion.
vharuck 8y ago
The author floats and addresses possible worries, especially because populism focuses on comparing the "haves" and "have nots." The say "family offices create inequality" could be a worry, but that it has no merit. From the article: >The most obvious of these is the least convincing—that family offices have created inequality. They are a consequence, not its cause.