The modus operandi of the very rich

NationalPost.com – FinancialPost.com/PersonalFinance
Thursday, Mar. 10, 2011.   William Hanley, Financial Post

Decades ago, I read a science fiction novel about a man who was marooned in space in a state of suspended animation for a few hundred years. When he returned to Earth, he discovered he actually owned all the businesses in the world, his fortune having grown exponentially to encompass, well, everything.

I can’t recall the title of the book, but I did remember the premise of the story on Wednesday when Forbes published its annual world billionaires list and associated pieces. After a bit of a stumble during the Great Recession, the billionaires are back on track, their fortunes piling up nicely once again.

The 1,210 billionaires comprising this most exclusive international club are worth a total US$4.5-trillion, up from 937 and US$3.8-trillion. A billion being a thousand million and a trillion being a thousand billion, that’s an impressive amount even in a world where “trillion” is tossed around casually when discussing government deficits.

Billionaires and their offspring do misplace their fortunes from time to time — there are no Rockefellers on the list, for instance. But the current crop of billionaires from Manhattan to Moscow to Mumbai are very good at making money, keeping it and making it make more.

As a result, this gilded 1,210 hold almost 4% of the world’s wealth, which is estimated at US$130-trillion. And the percentage will only grow and grow.

While Warren Buffett did not set out to build a personal fortune of US$50-billion that makes him the third-richest person behind Mexico’s Carlos Slim (US$74-billion) and Bill Gates (US$56-billion), his skill at investing and unwavering focus over more than five decades made it possible. Now, it is probable that Buffett’s holding company, Berkshire Hathaway Inc., will continue to build his and his shareholders’ fortunes by systematically buying up assets across a range of U.S. businesses.

It is this ability to keep buying and keep building that marks the modus operandi of most of the billionaires on this list. It is perhaps the root of how capitalism works. Put capital to work and it begets more capital. It’s a simple concept, but difficult to attain at this level because it’s almost impossible to assemble a critical mass of money that can be built up and/or leveraged up to the 10-figure level.

Much has been made in recent years about the growing disparity of incomes and wealth. In the United States, for example, the top 1% of the population holds about 34% of the country’s wealth — defined as assets minus liabilities. The top 10% has about 80%, leaving 20% to the bottom 90% of the population.

The disparity has been growing steadily over the past three decades and will continue to grow, with, for instance, the compensation of CEOs rising rapidly as workers’ incomes stagnate.

When I’ve written about income and wealth disparities in the past, some readers have accused me of being envious. Nothing could be further from the truth. People who know me know that envy is not among my many flaws.

I worry, as do many other unenvious folk, that the gulf between vast wealth and struggling middle classes is growing ever wider in North America and Europe, perhaps signalling a paradigm shift in wealth distribution.

But nowhere is the raw power of capitalism more apparent on the Forbes list than in the “Bric” countries. The number of billionaires in Brazil, Russia, India and China is surging, with Russia home to 101 billionaires and China 115. Together, the countries have 301.

The number of 10-figure people in these countries will doubtless rise and fall with the price of commodities and the vagaries of the world economy. The stars for now, however, are aligned to keep the planet producing billionaires at a record clip, with Facebook alone cranking out six in the past couple of years.

Unlike my science fiction protagonist of long ago, no one will end up owning everything. But the pool of billionaires will grow and grow over time. One task for investors will be to identify at an early stage the billionaires-to-be.

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