Monday, July 14, 2014

Review of How to be a Billionaire: Proven Strategies from the Titans of Wealth by Martin Fridson

Selection bias! Just like The Outsiders, How to be a Billionaire: Proven Strategies from the Titans of Wealth has a collection of traits and strategies that may be necessary - but are not sufficient - to achieve the goal of becoming a billionaire.

There are some useful observations. It tends to help to be in a cutting edge industry: "mature industries do not represent the path of least resistance" to becoming a billionaire. However, in mature industries that have boom-bust cycles, there can be great opportunities in the wreckage of the busts.

The fundamental strategies that he describes are:

  • take monumental risks (HL Hunt)
  • do business in a new way (Walton)
  • dominate your market (Gates, Rockefeller)
  • consolidate an industry (Huizenga) (roll up) - Mellon did this with coal
  • buy low (Getty, Buffett)
  • thrive on deals (Kerkorian, Icahn)
  • outmanage the competition
"Take monumental risks" just means put it all on your lucky number at roulette. We've talked about the oil wildcatters before: selection bias. The real estate billionaires are pure selection bias. Shoehorn your way into owning property with a tiny sliver of equity: leverage to the moon. If your timing of the cycle was right you get an order of magnitude return on equity. If you can string a couple of those back to back, you have the 10^3 return on $1mm nut that makes you a billionaire.

"Do business in a new way" is what tech people are calling "disruption," although I'm not sure that disrupting laundry will be as profitable as Wal Mart. He says that Sam Walton devoured books on retailing.

He shows that politics is a great way to waste money, but we already knew that from reading about the Big Rich in Texas and what the Coors family managed to accomplish with their spending.

Another concept is overcoming the "levelers;" the competition that will erode profit margins. As he says, "perfect competition is depressingly close to reality in most industries." Even arbitrage has its levelers [see 1, 2], and they have wrought leveling on option arbitrage, merger arbitrage, statistical arbitrage, etc.

Rockefeller used limit entry pricing, and there are other ways to cope with competition. One can go against social conventions. Bargain harder with vendors and refuse to do anything with them except meet in a drab conference room - no socializing or kickbacks at Wal Mart. Hostile takeovers. Holding out from distressed debt exchanges.

He is right about love of the game: "success is more likely to accrue to people who find intrinsic satisfaction in the accumulation of wealth". As we know, success is not likely to accrue to people whose satisfaction is coming from cocaine at Christmas dinner.

Selection bias, but not as pseudo-scientific as The Outsiders.


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