Friday, June 29, 2012

How the rich got rich

A recent research on how the top 400 rich people in US made their money makes interesting reading. The data spanning a period of 1992-2007 showed that the richest 400 in the US made their money though:

  • Wages and salaries: 8.6%
  • Interest: 6.6%
  • Dividends: 13%
  • Partnerships and corporations: 19.9%
  • Capital gains: 45.8%

So what does it mean – I believe it means that:

  1. Working for a salary won’t make you rich –this is true as much in India as it is in the US –Most of us look at salary to become rich and that is the first wrong assumption. We all need to create multiple passive incomes.
  2. Making “Safe” investments in debt based instruments won’t make you rich either –inflation and taxes eat up whatever you may make out of debt instruments like fixed deposits. So interest income will not make you rich -but one should have a part of their portfolio in these instruments just so that there is some safe capital.
  3. Investing only in large companies also won’t make you rich – we in India mostly invest in large companies through the equity route. In the US, the investors search for the next multi-bagger – a small company today that will grow into a large company in the future.
  4. In the US owning a business or businesses (fully on in part) seems to help people get rich as 2/3rd of their money came from this route. Remember that US is full of small businesses.

In India, I believe, for getting into the top 400 richest - one has to follow a similar path with one small additional option

  • invest in yourself,
  • grow your knowledge and experience,
  • take risks in equity ( large and mid cap) and in real estate (this is the additional option in India); and
  • build a financial windfall through investing in companies that would be future stars (the venture capital route).

If you do not want to be in the top 400 richest in India – but still want to be reasonably rich, then you can

1.       invest in yourself,

2.       grow your knowledge and experience and

3.       take risks in equity and in real estate.