Monday, August 20, 2018

Book Review #38: How to be a billionaire: Author: Martin S Fridson

Just finished reading the book 'How to be a billionaire, proven strategies from the titans of wealth', written by Martin S Fridson,

Fascinating book.

Author sums up the layout of the book in the first chapter. This is the first book that I have read that does that. So let us dive right in.

Traditional wisdom on building wealth stress on the individual. Have a new idea and single minded focus, keep hope and optimism and keep dreaming and visualizing success, so they say, and you will eventually become a billionaire. The focus is on thoughts and attitudes as a means of attaining wealth. This thought is exemplified by the book 'Think and Grow Rich', written by Napoleon Hill.

The above approach is simplistic as per Mr.Fridson. The traditional wisdom miss two important qualities of a billionaire, their ability to negotiate great deals and their  understanding of financial concepts including taxation.
The book covers short biography focused on critical incidents from the lives of who is who of Billionaires list spanning last two centuries. All of those covered, except for Sir Richard Branson, are of American Origin. All of them have appeared in Forbes Billionaires list at some point during their lifetime. The coverage include H L Hunt, John Kluge, Ross Perot (EDS and Perot Systems), Sam Walton (Walmart) John D Rockfeller (Standard Oil), Bill Gates, Wayne Huizenga (Waste Management), J Paul Getty (Various), Laurence Tisch, Warren Buffett, Kirk Kerkorian, Carl Icahn, Paul Anshutz and Sir Richard Branson (Virgin).

The billionaires execute some strategies and follow some core principles. Author identifies strategies like 'Take monumental risks', 'Do business in a new way', 'Dominate your market', 'Consolidate an industry', 'Buy low', 'Thrive on deals', 'Outmanage the competition', 'Invest in political influence' and 'Resist the unions'.

The book is divided into three parts comprising twelve chapters. The first two chapters explain the layout of the book. Next 9 chapters is dedicated to each of the strategies discussed above. The book rounds off by discussing what the reader should do to to become a billionaire.

Every billionaire discussed in the book follow one or more of the following principles
  • Pursue money in ideas
  • Rules are breakable
  • Copying pays better than innovating
  • Keep on growing
  • Hold on to your equity
  • Hard work is essential
  • User Financial leverage
  • Keep the back door open
  • Make mistakes then lean from them
  • Frugality pays
  • Enjoy the pursuit
  • Develop a thick skin
There are two 'levellers' that prevent one from becoming a billionaire. The first one is competition. There are many industries out there that are highly competitive. An entrepreneur in such industry will not have the pricing power necessary to make extraordinary wealth. 

There are four strategies to overcome the effect of competition, They are improving brand value, patent protection, dominant market share and having sustainable cost advantage (Which Buffett calls 'Wide Moat').

The second leveller is the conventions of the society. If you want to become a billionaire, you will have to make some people unhappy. You will need to take decisions that are unpopular. Society frowns upon such behaviours. Becoming a billionaire is not a popularity contest. You have to ensure that you live by standards that you have set for yourself. Remember, they called Jack Welch as 'Neutron Jack'.

Equally interesting is the path billionaires do not take. For example, no one can become a billionaire only through salary income. That is obvious. However the surprising conclusion is that 'Playing the stock market' will not make you a millionaire. Passive investing never makes on a billionaire.

Another aspect is that while billionaires may not be originators of a new idea, they know how to convert ideas to money. That one was an eye opener for me.

Billionaires come from all shades of experience. Some are exceptional gamblers and poker players. Some of them, like Warren Buffet and Bill Gates, are highly intelligent and academically brilliant. Many of them had fathers who were business men. Looked at it that way, there are no 'Rags to riches' billionaires.
A common thread is all of them enjoy the pursuit. Winning, rather than the prize itself, is a source of gratification. Many of them live a modest life.

Finally, becoming a billionaire is not an easy ride. One must have a clear focus and single minded commitment. There will be missed family engagements and potential health issues. Families will be stressed.

What are the types of industries that produces billionaires? Historically it has been seen that industries that drive the economic development of a country are the ones with the highest potential. For example, for a country like India that is in the development phase, industries like infrastructure can produce more billionaires than other industries. However, Financials is an evergreen billionaire making industry.

More billionaires are generated in rapidly growing industry than any other. However, not everyone in such industries make the cut. Only those that create dominant market share during the growth phase will become billionaires.

Equity is important. To be a billionaire, one must hold high amount of equity in rapidly growing companies. These can be identified by the high PE multiples that they trade in. As an exception, the author points out that Warren Buffet never invested in growth stocks. He invested in companies that have existed for years, that have a dominant market share, trades at a discount to intrinsic value and that has competitive advantage and pricing power. 

The book explains abstract concepts with specific examples. The author had given real life examples of billionaires to explain concepts. For example, concept of vendor handling in discount retailing is explained by how Sam Walton did it in Walmart.

As discussed above, a chapter is devoted to each of the nine strategies. In these chapters, the author identifies billionaires who demonstrate the strategy. The strategy 'Take Monumental Risks' is explained with example of H L Hunt and John Kluge (Pronounced 'Kloogy). Both of them were exceptionally good poker players who were not afraid of betting huge amount on a game of poker. Mr.Hunt, for instance, used to pay his staff salary from earnings from his poker game. They extended the risk taking behaviour to business. Hunt moved from farming to trading on Cotton Futures to end up finally in Oil business taking high risks in each instance. Like Hunt, Klooge took high risks in his Leveraged Buy Out of Metromedia that returned him 400% profit in just over two years. He also took some astute steps by funding the LBO using junk bonds. Klooge's story also brings out the role of luck in the path to become a billionaire.

Ross Perot and Sam Walton feature in the chapter on 'Doing business in a new way'. Both took an existing business idea, Computer Services in case of Perot and Discount Retailing in case of Walton and made it into hugely profitable businesses. By holding on to significant equity, 80% in case of Perot and 70% in case of Walton in their respective companies (EDS and Perot Systems of the former and Walmart of the later) they ensured that their wealth grew significantly as their companies earned more and more profits. Perot managed the successful IPOs of two companies getting crazy valuations for them. Walton on his part was famous for copying ideas from his competitors. Ideas like Self Service format, replacing wooden shelfs with metal ones, the name 'Walmart' was copied from a rival chain of 'Fed-mart', the 'Beat Yesterday' accounting system, Group calisthenics and daily cheer leading - all were copied from competitors. Walton also illustrates the importance of fast decision making. Both Perot and Walton knew how to convert ideas to money.

John Rockfeller and Bill Gates 'Dominated their markets' on their billionaire journey. The key principle in this strategy is to develop a thick skin. Rockfeller dominated the US Oil Industry. At one point his wealth was equal to 1% of US GDP. He used his monopoly to get great deals from his vendors including railroads. He also identified the competition early and his cost advantages helped to snuff them out before they could become problem. Gates is considered to be the world's first 'Centibillionaire', one whose net worth is more than 100 Billion USD. Gates dominated the computer software market of his generation and also looked to monopolize the industry by using his huge market advantage. Sooner or later society revolted and both Rockfeller and Gates were subject to US Anti Trust proceedings. The case study on the anti trust proceedings against Microsoft makes fascinating reading.

Having done more than 1000 acquisitions in his life time and consolidated more than 12 different industries and converted three of them into Billion dollar businesses, Wayne Huizenga selects himself as an example of using the strategy 'Consolidating an Industry' to become a billionaire. One should love the process of deal making to succeed in this strategy. In addition, financial savviness is a key requirement in this strategy. One needs to know the options for financing and structuring the deal. Accounting standards keep evolving in this area and an investor should keep abreast of the rapid changes in standards if one were to adopt this strategy.

'Buy Low' as a strategy to becoming a billionaire comes with certain caveats. One must realize that the assets are low priced for a reason. Identifying a low priced asset is very easy, however, just buying low and sitting idle, hoping for the market forces to identify the true value is not a billionaire strategy. To become a billionaire, one has to understand why an asset is priced low and then take steps to quickly add value to the asset so that it can be sold at a much higher price. The billionaires who perfected this strategy, J Paul Getty, Laurence Tisch and Warren Buffett learned knew how to identify value opportunity as well as how to add value to the asset to make it attractive for investors. For example, Tisch followed the approach of taking control of the business and then forcing the management to cut costs to increase the valuations. While the book do not discuss this, one of the best investments of Buffett was in the shares of American Express when it was selling at throw away prices. Buffett took 'monumental risks' and invested 40% of his portfolio on this stock that the market was avoiding. This example of Buffett and American Express also teaches another lesson. It is not only important to identify high value as expressed by low buying price, but once you identify such opportunity, you have to back up your discovery by making substantial investments in that opportunity.

The craziest story in this chapter is of J Paul Getty buying a lease on a land for 693 dollars. Over the next 17 years, the property produced profits totalling $6,387,946.65 !

By its nature, deal makers who 'Thrive on Deals' focus on entry and a reasonably quick exit as soon as value is available. There are four stages to make money in this strategy. Buying low and selling high is the most obvious one. In addition one can make money by structuring a profitable financing, putting the asset in service while deal negotiations are in progress and finally money can be made from the compensation available (dividends etc) while the asset is in service. The deal makers profiled in this chapter, Kirk Kerkorian, Carl Icahn and Paul Anshutz demonstrated the tenacity, stamina and the negotiation skills required in using this strategy to move into the billionaires list. They had an eye for deals, ability to take quick decisions, access to cheap financing and great negotiation skills that are prerequisites of deal makers.

'Out manage the competition' as a strategy consists of three components, Out Organize, Out Recruit and Out Motivate. The billionaires create very efficient and agile business organizations. Some leaders like Mr.Sam Walton focused on creating organizations that quickly collected updated market intelligence and took quick decisions. Rockfeller on the other hand created various committees that debated and took the best decision applicable to a vast and distributed organization. The organizations are flat and adaptable.

By recruiting top notch talents and giving them wide freedom to act, the billionaires out managed the competitors who put in systems and processes that hampered the talented from expressing their full potential. It is not only important to recruit talents, also equally important to motivate them. One way the billionaires motivate their team is by taking care of them and their families. Ross Perot gave EDS shares to the spouses of his managers. Perot also famously created a team to rescue two of their colleagues illegally jailed in Teheran. Billionaires like Huizenga, Sam Walton, Perot and Bill Gates gave stock options to their top employees who became millionaires in course of time as the share prices of their companies skyrocketed. Richard Branson created systems to capture employee feedback and create businesses out of those suggestions. Branson also created a young and sporting Organization that celebrated differences.

While 'Investing in Political Influence' and 'Resisting of unions' may by themselves create billionaires, these are strategies that will accelerate one's billionaire journey. Governments can create laws that will facilitate one industry over another and also it is a huge purchaser. Unions create another stakeholder and will lower the control over decision making.

How can you benefit from this book? As it says in the beginning, the purpose of the book is for each reader to identify the behaviours, habits and attitudes followed by the billionaires and accentuate those that they possess and work on the gaps. One has to have a clear goal of becoming a billionaire. That is sine qua non. One should also have the ability to identify and partner with great people who can add value. Finally, one need to put sustained Deep Work.

That is the simple path to becoming a billionaire...

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