You hear often ‘The Rich are getting Richer….’ have you wondered why?
The main reasons:
a. The power of compounding
b. Income far, far greater than expenditure
c. Understanding the Wealth Virtuous Cycle
d. Ability to take risk
e. Deep wealth buckets ensuring no asset class is ever reduced to zero
In the real world the word Rich and wealthy are used interchangeably, so in that context I will use the word rich here to mean and include the wealthy too.
a. The power of compounding: when the real rich invest they can let each asset class compound without touching them for real long periods of time. If you watch the media or even read some blogs, you will see diktats like ‘profit booking is a must’. In this post I do not wish to argue about that, but if you had invested in the sensex in 1979 (100) it would be worth about 28,000 today – 280 times in 37 years – amazing by any standards. However if you were not really wealthy all the gyrations in the sensex would have worried/bothered / scared you. That may have sent you running to the broker to liquidate. However if you were really rich you could have invested a portion of your assets and seen a fantastic growth in that part of the portfolio.
b. When a person (family) is really wealthy the income has no connection at all with the expenditure. You just operate like 2 different machines – one wealth creating machine and one spending machine. It helps that your income is say 10x of your expense. So an increase or decrease (inflation) does not have any impact at all on your life style. Since you are saving/investing a big surplus of your income, you are able to compound faster too.
c. Understanding the wealth virtuous cycle – protecting the wealth (insurance), managing it well (when you have a net worth of say Rs. 100 crores you can afford a Family Office to look after the family wealth) , and learning to live sensibly are all part of the wealth cycle.
d. When you have a lot of money in different baskets you can take a chance with each basket. I know of a industrialist who used to use his personal money for lending to movie making. Movie funding is a 1 or all kinda game – you can get 100% p.a. return or be wiped out. You also need to fund in multiples of Rs. 10 crores – thus keeping the retail guys out. Such opportunities are not even available for the common man! Similarly I know of one person who bought 1 lakh shares of Infosys at Rs. 90 (discount at the time of issue, remember it devolved!!). He was holding till the listing of TCS and at that stage sold off. Only because he had(has) a networth in excess of 4 digit crores, he could hold on without getting excited about the prices. For a person with lesser networth there would have been a great pressure to ‘book’ profits :-).
Take the case of a boy earning Rs. 12 Lakhs at age 28 – on this salary is it possible to commit to a Rs. 35000 EMI for a house? Hardly. It is almost impossible. However when the father has a huge networth it is possible to do so. I know of a father who has told his son ‘the month you CANNOT pay the installment, I will. Thus the son has a FREE risk transfer mechanism – if he were to lose his job, his DAD is the safety net!
e. If you have say a big portion of your money in equities, technically it is possible that you panicked in 2008 and sold off EVERYTHING in 2008. This would have meant that in 2009 when the market revived YOU would have had nothing in equities – thus the fantastic growth of 90% would have been missed. You would be kicking yourself, right?
So now when you hear the Rich get Richer….you know it is not emotional, it is mathematical!
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