
How the Rich Got Rich - technology
http://www.inc.com/jeff-haden/how-the-rich-got-rich.html
======
rayiner
The huge amount that comes from capital gains got me thinking... why is the
return on capital, versus say the return on labor, so high? Our society is
awash with capital. We apparently have more of it than we know what to do with
(see, e.g., the real estate bubble, the tech bubble). If the capital markets
were efficient, shouldn't supply and demand equilibrate things to drive down
the price of capital?

I think the structure of the capital markets, VC's and funds and the like, are
still holding back efficiency by limiting the market of sellers. Things like
Kickstarter that "democratize" the capital markets may also play a huge role
in making them more efficient.

~~~
ef4
"to drive down the price of capital?"

But that's exactly what we do see. Interest rates are absurdly low. Interest
rates _are_ the price of capital.

The fact that you can select a sample of outliers who won big on risky
investments doesn't change the overall statistical situation. Most capital is
still getting low returns.

~~~
ccarpenterg
_Interest rates are the price of capital_

I think that's inaccurate. The price of the capital is its cost of
opportunity. Interest rates are the price of debt.

~~~
chimeracoder
No, interest rates are both. All costs are opportunity costs, so it's just two
ways of looking at the same coin.

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FrancescoRizzi
when we see these reports/analysis it seems the answer is always the same:
Capital Gain. However, I think this whole line of inquiry is mis-titled: these
reports always tell us how the rich people are making _now_ their income.
Which, I feel, is not a good hint as to how you can _become_ rich.

For the greater public, the question of "how the rich people went from 0 to
$1B" might more interesting than "how the rich people maintain their $1B+".
Definitely I find the latter more interesting than the former (probably
because I don't have $1B+)

~~~
DanielBMarkham
I had the same exact reaction, but looking at the article again, it clearly
says _A total of over 3,800 taxpayers have made the top 400 since 1992, but
only 27% appear more than once, and only 2% appear 10 or more times._

That means these are not people who are necessarily rich and are raking in the
money. These are most likely people who have a company, have stock options,
and are cashing out. Most of them never come back to the list. The point here
is that grabbing on to a company could be like catching a rocket -- your
ticket to the stars. Whereas working an hourly wage is likely never going to
do much more than make you upper-middle-class.

I realize you could interpret these numbers differently, but that's what it
looked like to me. You can't have big capital gains income without some kind
of underlying company that's doing tremendously well.

~~~
leot
There are ~400 Americans with > $1 billion in wealth, and 200 with >$2
billion. $77 million in return on $1 billion is 7.7%. On $2 billion it's a
mere 3.85%.

Combined with the fact that only 27% appear more than once in the IRS's list,
and the fact that people tend to stay billionaires for a long time, this
suggests that once people get to this level of wealth they turn down the
aggressiveness of their investing and become risk averse.

For if every billionaire earned a healthy return on their capital, the top 400
earners would stay roughly the same from year to year, and correspond closely
to America's top wealthiest.

Furthermore, America would be generating a lot more wealth than it currently
does.

~~~
DanielBMarkham
You're mixing wealth and income.

~~~
jaxn
No, he is saying that $1B in wealth (about 400 people) generates $77m
(threshold to make list of highest earners) in income assuming a 7.7% rate of
return (which seems unrealistically high to me).

~~~
leot
Actually, I'm saying that if the 200+ Americans with >$2 billion in wealth
consistently generated more than 4% return on capital, then at least 50% of
the top 400 earners should stay relatively the same year after year (since
those with >$2 billion usually stay billionaires). The fact that only 27% have
appeared more than once suggests that those with more than $2 billion in net
worth are reporting returns less than 4%.

~~~
jaxn
Appreciating assets don't count as income. They very well may be minimizing
income while still maintaining growth. When they sell those assets, they make
the list.

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dmix
The Rockefeller quote is interesting

    
    
      "If your only goal is to become rich, you'll never achieve it."
    

But I've always felt Citizen Kane's was more accurate:

    
    
      "It's easy to make a lot of money, if that's all you want to do 
      is make a lot of money."

~~~
tluyben2
I think if your goal / all you want to do is make a lot of money you have a
pretty sad life. However it's not very hard. I don't know in what context the
Citizen Kane quote was used. A lot of money varies a lot from where you are
and what kind of insane thoughts you picked up from the internet.

A lot of money can be $1 million in a lot of countries, $10 million in most
countries, $100 million in all countries, $1 billion in silicon valley.

Your first million is the hardest they sometimes say but if you have that, you
SHOULD not ever have to work ever again if you are smart. That smart part
messes most of those cases up.

If you have $10 million you are done unless you are a complete idiot. Again,
this idiot part messes most of those cases up.

So currently most blahblah about getting rich is focused on $100 million or
above. I read with much amusement how people in Monaco who have 'only $10
million' feel poor and unhappy. What a sad moron you are. Even in Monaco you
can easily live a super nice life, the rest of your life, with $10 million,
but apparently people IN Monaco are so insane they consider this poor.

Anyway; I believe Citizen Kane was right if he means 'a lot of money' in the
sense of being rich/never having to work again in your life. If he means $100
million or over, he is wrong IMHO. Nor did I ever met anyone who had as only
goal to make money while I know a lot of rich people (who are rich in the
sense they never have to work); even 2 with the magical 'over $100 million and
they didn't even ever think about money much, they did what they did best and
it shot to the top. That's the best way IMHO, but then again, I don't live in
SV.

~~~
eli_gottlieb
So if it's so easy, how do you make your first million?

~~~
tluyben2
'So easy'? Well, you don't want to hear this, but HN is not a reflection of
reality. Most millionaires get to their first million over 55 years of age.
Not the 25 y/o millionaires/billionaires you see passing the homepage here.
The Citizen Kane quote was done in the context of someone who spends all his
money rather than saves it. That's the clue here; if you live frugal and save
all you can of your wage, you'll be a millionaire around 60 without effort.
Remember; all you want to do is make a lot of money so you don't want to spend
money on fun stuff, kids, family, vacations etc. In the area from the
Netherlands I came from (and this goes for other parts on earth too i'm sure)
all old farmers are millionaires. They NEVER spent $0.01 they didn't
absolutely had to spend.

So, again (and this is the reason why most people are not automatic
millionaires after a certain age) IF getting a lot of money is ALL you want to
do, you will sacrifice things; you will move to a cheap place, you will eat
and live cheap. So yes, it's easy, but maybe not what you wanted to hear.

I don't want to wait that long so I have the next easiest thing; software
services. Works great, no competition. It's much harder than the above, but
it's also much quicker.

~~~
eli_gottlieb
Sarcasm, bro. My remark was intended to point out that most people simply
never will make a "first million", and doing so is quite difficult.

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toddh
Here's the IRS pub that's the basis for the article: The 400 Individual Income
Tax Returns Reporting the Largest Adjusted Gross Incomes Each Year, 1992-2009
<http://www.irs.gov/pub/irs-soi/09intop400.pdf>

The Tax Foundations take (<http://taxfoundation.org/article/fortunate-400>) is
a little different. Interesting that in the 18 years that the report covers
none of the taxpayers were on the top 400 list for all years. & only 4 (1%)
were on the list for 17 years. 73% were on the list for just 1 year.... Their
take was that most folks were on the list due to one time event...sale of
assets, etc

Also wages were flat for all 17 years (as a % of total income). Partnership &
S Corp income was up ~400%, which could be because of the growth in publicly
traded partnerships.

~~~
technology
Good point.

There is a similar report by Harrison Group which surveyed 3,000
pentamillionaires ($5 million net worth) and found that almost all
pentamillionaires made their fortunes in a big lump sum after a period of
years.

<http://finance.yahoo.com/news/pf_article_103017.html>

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roguecoder
Given that the tax structure massively prefers capital gains to other forms of
income, it is unreliable to look at the reported tax percentages as a measure
of where the money is actually coming from. For example, many of the uber-rich
structure payments for their labor such that they are taxed as capital gains.

~~~
brown9-2
Exactly, the article is ignoring any sort of cause and effect for why the
numbers are the way they are. If the US changed tax policy to favor other
types of income, how the rich divide their income would change to fit.

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flibble
No no no. If capital gains tax is less than income tax, then of course the IRS
stats show most income comes via capital gains.

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eli_gottlieb
In this article, Inc Magazine confirms what any follower of Marx or George
could have told you long ago: the rich get rich from owning things, preferably
productive assets like businesses, rather than from working.

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antidaily
Their parents mostly.

~~~
fromdoon
Hmm .. it would be really interesting to check out, how many of today's
billionaires inherited most or part of their wealth and how many made it big
starting from modest backgrounds.

Any pointers folks?

~~~
SatvikBeri
For millionaires (defined as people with >$1MM of capital goods that can be
easily reinvested), Capgemini claims that "only 16% of high net-worth
individuals inherited their stash"[1]. I'm not sure what the precise
definitions are since it's not defined in the article.

 _The Millionaire Next Door_ claims that 80% of millionaires in the USA are
the first generation in their family to be rich.[2]

I also did my own research looking at (non-Forbes) biographies of the top 10
richest people in the world according to Forbes in 2009. 3 out of 10 came from
millionaire or richer families (Eike Batista, Bernard Arnault, Stefan
Persson).

If you trust Forbes, you can simply go through their website[3], it classifies
each billionaire's wealth as self-made, inherited, or inherited + grown.

[1]: <http://www.economist.com/node/17929057>

[2]: [http://www.investopedia.com/financial-
edge/0810/7-Millionair...](http://www.investopedia.com/financial-
edge/0810/7-Millionaire-Myths.aspx#axzz1zwr9WPZw)

[3]:
[http://www.forbes.com/lists/2010/10/billionaires-2010_Carlos...](http://www.forbes.com/lists/2010/10/billionaires-2010_Carlos-
Slim-Helu-family_WYDJ.html)

~~~
_delirium
Bill Gates also came from a millionaire-or-richer family, so that'd make 4, if
that's the cutoff you're using. (He inherited several million from his
grandfather, in a generation-skipping trust fund, although I don't believe he
yet had access to that money at the time of founding Microsoft.)

~~~
SatvikBeri
Yeah, my logic was that he didn't have/use those resources while building
Microsoft. I was trying to divide billionaires into those who built up their
wealth without relying much on other resources, vs. those who took existing
wealth and grew it.

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wallflower
I remember reading some article about how a private banker had a ultra-high
net worth family who wanted to name their latest blind trust, 1066 - as in
1066 - the year in which their family acquired most of their wealth.

~~~
lifeisstillgood
The impressive thing there is keeping and growing the wealth for a thousand
years. Quite literally the family of William the conqueror did not do that so
this family really pulled a trick

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gareth_at_work
Anybody who has a 401k or IRA in the US is benefiting from capital gains, and
as we all know from 4 years ago, it can be very risky.

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cagenut
great example of why arguing over the income tax rate is a distraction from
the real issue: the capital gains rate

~~~
DanielBMarkham
You'll need to explain yourself a little more. Why is the real issue capital
gains? No matter what the rate is, it wouldn't amount to much of anything
compared to the money brought in from income taxes.

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countessa
I like that "do a lot of small things right"....kind of sounds like "the more
I practice, the luckier I get"

