Don't Try To Be A Billionaire
Most recently, I was talking to my wife about our future money goals. And with a lot of our goal-oriented discussions, it's usually me talking the whole time about big audacious goals while my wife graciously indulges me.
In this particular discussion, a really interesting question came up that got both of our attention - is it possible for us to one day become a billionaire? If we continued to remain frugal, save and invest as we were doing now, is it possible for me to one day join the ranks of billionaires like Jeff Bezos, Bill Gates, and Warren Buffet?
I couldn’t help myself, so I started running some numbers. Interestingly, I found out after crunching the numbers that I didn’t want to be a billionaire.
01 - Require Really Long-Time or Big Returns
Let’s say that you’ve been really good with your finances so far, and you were able to amass a millionaire dollars in investments by the time you are 40 years old. A feat that is truly worthy of praise and respect.
But you aren’t satisfied with just being a millionaire. You want to achieve that ultimate billionaire status. You want to see your face on the cover of Forbes right next to Elon Musk and Jeff Bezos. So you run some numbers. What returns do you need, and for how long?
Well, it turns out that if you stayed invested in a total stock market or the S&P 500 with a somewhat realistic 8% rate of return, it would take you quite a bit of time to reach that billionaire status.
You will get there eventually, but it would take you about 90 years for your investment to surpass the $1B mark ($1,018,915,089). And that is if you didn’t touch your $1M investment, the market did return 8% annually, and you lived till you are 130 years old. Given medical technology these days, this isn’t entirely out of the question. That is, if you really take care of yourself, you potentially can.
But let’s say you don’t want to wait 90 years. You want to achieve it sooner. Maybe you are willing to wait 30 years when you are 70 years old. Then what would it take? If you are to rerun the numbers, it turns out that in order to turn $1 Million Dollars into $1 Billion Dollars in 30 years, you will need to achieve a 26% return on your investment every year for the next 30 years. Something that is not possible by just investing in index funds. I mean, I love index funds and the market, but in the last 100 years, the average annualized returns of the S&P 500 hovers right around 10%.
And this also had a lot of swings up and down. At one point, falling by close to 44% (43.8%) in 1931, its worst year. Ironically having its best year in 1933 with 54% in annualized return. So what does this mean? If the market can only consistently return around 8 to 10% annually, and with that rate, it would take you 90 years to reach billionaire status, how did today’s billionaires achieve the status they did?
This leads to our second reason why you may not want to achieve billionaire status.
02 - Require Big Risks
How did today’s billionaires take big risks? They concentrated their investments and effort. And I mean really concentrate.
In order to achieve 26% returns. Or even 20%, you need to throw diversification out the window. You are “doomed” to average returns if you have a diversified portfolio. And as you saw earlier, average returns require almost 100 years in the market to turn a million dollars into a billion dollars. And that is if you had one million dollars to start out with, which most people don’t.
So when you look at the billionaires on the Forbes list, most of their wealth is derived from a single source. Most are founded or have significant ownership in a single company or a few companies that hit it big.
Elon Musk, worth $219 Billion dollars, cofounded six companies, including electric car maker Tesla, rocket producer SpaceX, and tunneling startup the Boring Company.
Jeff Bezos, worth $171 Billion dollars, founded the e-commerce giant Amazon in 1994 out of his garage in Seattle after working at Wall Street for several years.
Warren Buffett, worth $118 Billion dollars, owns just a handful of stocks in his holding company Berkshire Hathaway; Apple, Bank of America, and American Express, to name a few. And most of which he held for more than several decades.
As you can see, these billionaires achieved billion-dollar status not with average funds and average returns but with very concentrated investments, which derived them amazing returns that trumped the stock market returns. Of course, all with really big risks.
And this, as you can guess, is really hard to do.
03 - Big Returns Are Hard
For every billionaire on the Forbes list, there are thousands who didn’t even come close because only a select few have been able to achieve these kinds of returns with either their company or their investments.
When we look at the volatility of the stock market where at times the market swings up by 20 to 30%, it can feel like achieving that 26% return in the stock market is possible. Suppose we did enough homework and enough research. After all, we all know of stocks that have performed really well in recent years, such as Tesla, Amazon, or Apple. How hard can it be?
Well, let me be the one to pop your bubble. It's near impossible. And we shouldn’t feel bad about this because the overwhelming majority of professionals in the business can’t either. There are thousands of professionals whose full-time job is to study companies and predict their future performance. Yet studies have shown that even these super-smart individuals struggle to select winning stocks.
Every year, S&P Dow Jones Index does a study on active versus passive management. Their studies show that in a 10-year period, 85% of large-cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent underperformed the index.
And the reason why is obvious if you have ever worked in a major corporation. From the surface, a company’s forecasting process may seem like a rational, mathematical exercise. How much revenue does the company expect to make in the upcoming quarter? What is its expected net profit? The forecasting team needs to simply add up all the numbers to produce a detailed forecast, right?
Well, what we are all forgetting is that people are actually providing numbers, and as we all know, we, the people, are not very logical beings. Salespeople have the incentive to provide revenue projections that will make them look good. Operations departments have the incentives to show how they plan on finding efficiencies by the next quarter. And the company CEO has the incentive to instill confidence in Wall Street investors.
The bottom line is that the forecasts that many analysts use to make their buy and sell decisions are actually further from reality than most people would like to believe. And now, if professional analysts whose full-time job is identifying winning stocks are struggling, what makes us think we can beat them? And beat the market at that? Reading a few investing books and Reddit forums, unfortunately, will not give us the edge to pick winning stocks.
And we aren’t even talking about starting your own business like most Billionaires—just stock picking. The truth is that big returns, returns that beat the market are extremely hard, and we should be very careful about trying to achieve them.
04 - Billionaire Is Overrated
Though I have a youtube channel that talks about money, our life’s goal shouldn’t be about money. Money is only a tool to enable us to design a life that we can really enjoy. Just think about trying to establish an authentic relationship as a billionaire. I wonder if Bill Gates, Jeff Bezos, or Elon Musk think to themselves this question whenever they meet new people.
Would they still be nice to me if I wasn’t a billionaire? Would they even talk to me if I didn’t have all this money?
I’m pretty sure Billionaires have a hard time trusting people because they are not sure if the person likes them for who they are or for their money. It is hard to have authentic relationships when you are always worried about people’s motives. That’s why I’m a big fan of maintaining a low profile despite your wealth.
Strong relationships are the foundation of happiness. In 1938, Harvard set out what came to be known as one the most extended studies ever completed by following 268 Harvard students for the next 80 years. Harvard wanted to know - what are the key components of a healthy and happy life. And they found a clear winner:
Close relationships, more than money or fame, are what keep people happy throughout their lives.
When you are a billionaire, you will naturally attract a lot of attention. And most often, pay attention to your money, not to your character. Authentic relationships don't require a lot of money. Use money as a tool to enable your ideal lifestyle, but focus on what truly matters in life.
05 - Millionaire Is Enough
If we strive to become millionaires, we should have no trouble living a comfortable, perhaps even lavish, lifestyle. Many people pursue wealth because they think more money will make their lives better. They could live in a bigger home. They can buy more things. And thus, all these things will make them happier.
If you are living paycheck to paycheck and struggling to make ends meet, more money can alleviate some of your stress. However, studies have shown that once your income grows to $75,000 a year, any further increases won’t result in increased happiness.
Mihaly Csikszentmihalyi - The Father of “Flow.”
A famous Hungarian-American psychologist Mihaly Csikszentmihalyi made famous this concept of “flow,” which he believes is closer to achieving a state of happiness than anything. A flow is “a state in which people are so involved in an activity that nothing else seems to matter; the experience is so enjoyable that people will continue to do it even at great cost, for the sheer sake of doing it.” It’s essentially a period in our lives when we are so immersed in something that we lose track of time. We are essentially so absorbed in an activity that we have a loss of self-consciousness.
For me these times would include when I’m reading a really great book. When I’m coaching my son’s soccer game. Or when I’m enjoying a Sunday brunch with my wife. I get so immersed in the moment that I forget time passing by. And it is during these moments of flow when I personally feel happiness. And the funny thing is it doesn’t cost much to enter this state of flow.
A really good book might only cost $15 from amazon. My son’s soccer game is free to watch. And a great Sunday brunch might cost $50 at the most if we were really living it up.
But when we have the mindset of wanting to get rich all the time, we let these moments pass by. We are so obsessed with making money that we in a way, forget to stop and smell the roses. Thus striving to become a billionaire really shouldn’t be the goal in life.
If you take the simple, “boring” approach to saving and investing and avoid the most common investment mistakes, you’ll end up with a lot of money. Maybe not a billion dollars, but probably more than you’ll need for a comfortable retirement.
