According to folklore, the way to create a spectacular fortune is to build
a better mousetrap, then let the world beat a path to your door. However, if
you study the individuals who took this advice to originate many of the great
ideas in business and technology, you'll be surprised to learn how few
struck it rich.
Billionaires have another strategy —
and if you look into how history's billionaires
created their fortunes, you'll
be surprised to discover how few of
them invented anything.
For instance, Bill Gates, the wealthiest
person in the world, didn't invent
the products that made him rich.
Microsoft's first successful product,
DOS, was derived from a product created
by Gary Kildall, a pioneer in the
software industry who died at 52 in a
barroom brawl and who was well short
of the billion-dollar mark in net worth.
Microsoft Windows®, in the popular
view, was copied from Apple
Computer®, but the technology didn't
even begin at Apple. Its uniqueness,
the Graphical User Interface (GUI) was
originated at Xerox®, which never
effectively exploited it.
Gates did, however, have one exceptional
insight. He understood how to
make money from a product. It must
have been tempting for Gates to simply
sell DOS to IBM for use in its personal
computers. At the time, that would
have been a big sale for Microsoft.
Instead, Gates allowed IBM to use the
operating system for a modest sum,
recognizing that the real money would
be in licensing it to producers of application
software.
A similar story can be told about
the late Sam Walton, a previous occupant
of the top spot on the Forbes 400
list. He actively boasted that his best
ideas came from competitors. Wal-
Mart wasn't the first discount retailer,
yet it became the biggest retailer of
any kind. One big reason was that Walton tirelessly shopped the other
chains, with an eye toward copying
whatever was working for them.
Others had the idea of the discount
retailing format before Walton did.
But he was the one who developed
the most successful formula for
exploiting it. His approach had several
components, including concentrating
initially in small towns, giving
store managers a big ownership
stake in their businesses, and
betting boldly on new computer
technology.
Clearly, the super-wealthy
have followed many different
paths to achieve their billionaire
status, but there are common
themes. Determination and hard
work characterize all of their
successful quests. But many
determined, hard-working people
never achieve their clearly
defined goal of amassing great
wealth. And most will continue
to fall short because they don't pursue
the key strategy that has worked
repeatedly over the years.
There is a theme that consistently
runs through the billionaires' stories. I
call this theme "the billionaires' strategy"
which is to:
Gain control of an asset
and increase its value.
Take a look at what separates "the
world's greatest investor," Warren
Buffett, from the would-be masses
who invest in the stock market. Buffett
does not simply identify stocks that
have the potential to rise by more than
the market averages. Instead, in many
instances, he buys big enough stakes
in companies to be able to influence
their business strategies. Sometimes,
he buys the entire company, and when
management heeds his advice, the
companies tend to prosper and their
stocks tend to rise.
It's true, certain key elements of
Buffett's wealth-building techniques
can't be implemented unless you
already control a large amount of capital.
However, Buffett started small
too. He didn't try to hit it big by managing
his own portfolio. Instead, he
formed an investment management
business, raising money through
acquaintances in Omaha. Before long,
he had enough purchasing power to
gain control of a small farm implements
manufacturer. Buffett then set
about streamlining the company's
operations. That transaction became a
model for many bigger deals that followed
and the foundation of Buffett's
vast industrial empire.
Notice that the billionaires' strategy
is not the one you hear quoted far
more frequently — "Buy low, sell
high." Plenty of assets are available at
"low" prices for one simple reason:
They don't have much value. If no one
comes up with a good plan for enhancing
a supposedly cheap asset's value, it
might get even cheaper. Conversely,
buying an asset at a fair, rather than a
cheap price, is a good strategy, if the
plan for enhancing its value is sufficiently
powerful.
Gaining control of an asset and
increasing its value is a strategy with
many variations. One method is to
acquire an asset that's subject to legal
restrictions and bring about a relaxation
of the limitations. A simple
example is buying a property that's
zoned for residential use, then petitioning
to have it rezoned for commercial
use.
Extending the value of an
existing brand name is another
formula underlying many great
fortunes. If consumers know
and trust a brand, that trust may
be transferable to a new product
category or even an entirely new
technology.
Naturally, the fact that a formula
has worked before, in a
different situation, is no guarantee
that it will work in the
particular way that you
attempt to apply it. Good execution
is vital to success.
What's more, you may execute well,
only to discover that someone else
has beaten you to the punch. There's
even a danger that an unforeseen
change in the technological or regulatory
environment will put both you
and your rivals out of business
almost before you begin. Remember,
no one said it would be either easy or
risk-free to build wealth as the billionaires
do.
On the other hand, the low-risk
paths have a very limited upside. If
you're working at a job, you face an
inherent constraint, even if you're very
good at what you do and even if you're
working extremely hard. The constraint
is that there are only 24 hours
in a day and you need some of them
for sleeping. So, you continue trading
your time for money.
The critical decision that you face is
whether your goal is to make a living
or to make a killing. If it's the latter,
your best shot is to follow a strategy
that has worked many times in the
past. You'll have to apply the success
formula in new circumstances, using
some judgment and creativity in the
process. But if you gain control of an
asset and find a way to enhance its
value, you'll be on the road that has
most reliably led to a billion-dollar net
worth.
Martin Fridson is a former
Managing Director of Merrill Lynch.
Learn more about Martin Fridson and his powerful new program, Think Like a Billionaire.
