Where Are All the Billionaires?

By Dr. J. David Ashby, CPA, CFP® professional


No doubt most of you reading this are in the non-billionaire club. Nevertheless, here’s an interesting paradox laid out in the book, The Missing Billionaires by Victor Haghani and James White. Permit me to lay out the puzzle here.

The U.S. Census of 1900 recorded that America had roughly 4,000 millionaires. Several of those families had a net worth of hundreds of millions. The authors give the example of a family with $5 million back then. Assume that family invested their wealth in the U.S. stock market and peeled off a conservative rate of two percent of the investments each year to live on. And assume that same investment and spending pattern continued generation after generation. That single family from 1900 should have 16 descendant households today worth more than a billion each! If only one fourth of those 4,000 households had started with $5 million, then we should have 16,000 billionaires today in the U.S.!

But, alas, according to Forbes magazine, in 2022 there were only around 700 billionaires in the U.S. What happened? Before we address that issue, I should mention that the 2022 list does include Donald Trump but it does not include Taylor Swift. She only became a billionaire in 2023!

When Haghani related this puzzle to a colleague well-schooled in finance, the friend offered several logical explanations: war, taxes, divorce, the Crash of 1929. However, none of those were the explanations that Haghani uncovered. My own notion was extravagant lifestyles. Generations that inherit wealth often do not have an appreciation for what it took to build it. I don’t know what kind of vehicles Sam Walton’s great grandkids drive. But an old pickup truck like Sam drove is likely not their vehicle of choice. However, it turns out that lavish lifestyles were not what depleted the family fortunes either.

So what does account for the squandering of millions, really billions, of dollars in the wealthy families of over a century ago? Haghani describes it as a poor job of sizing their investment risk. Another way of saying it: too much concentration on a single investment or a few investments, i.e., a lack of diversification. Haghani reports that from the 1950s to as recently as the 1980s, the average investment portfolio of an individual held only two stocks. That’s a concentrated bet with little diversification.

So what about the average non-billionaire person on the street trying to protect their nest egg? What are we to do? The answer to extreme concentration is diversification, or ‘not putting all your eggs in a single basket’. Fortunately, there are tools to do just that. Mutual funds and their cousin, exchange traded funds (ETFs), allow investors today to avoid concentrated investments. You can be invested in hundreds of companies, even thousands, by holding only a few mutual funds. If one of those companies in your mutual fund happens to be an Enron or a Lehman Brothers that goes broke, you don’t feel the impact directly.

Despite these modern-day financial products, there are still many investors who prefer the concentrated positions. This often comes in the form of company stock. An employee may hold most of their 401k in the company’s stock. While that can pay off big, it’s a concentrated risk. It’s good to be excited about the company you work for and want to invest in it. But consider the amount of exposure you have and monitor it carefully.

Concentrated investments may be the reason we’re over 15,000 billionaires short in the U.S. There’s a lesson here for the rest of us!

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