How the 0.001% invest
economist.com
economist.com
I guess when you that much money, more money means less than vanity and bragging rights.
Instead of striving for out performance, the funds just catered to the whims and idiosyncrasies of the family. Also, many of these funds were too small to make sense, AUMs from like 150MM-500MM. They would have be much better off just investing in a hedge fund, but the family's ego didn't allow them. I think the point was to show off more than anything else.
One of the exceptions was Sergey Brin's family office, which managed a shit-ton of money and had some good people who actually knew something about portfolio construction.
It's often about preservation of wealth more than gains for these people.
That said I've discussed some returns they make and it's incredible. I don't want to say what I recall, as it was a couple years back and it sounds like an exaggeration. They said this is partly because they get access to deals that don't hit the wider market and you need serious cash to get in the room to have that chat. And I guess these manager have a bunch of the right people attached to them so it makes an easy stop.
This is something I hear a lot and I just don't get. Are the people on the other side of those deals just...not greedy? After all, you are implying that the deal has better expected returns than what people are buying on margin in public markets, so why doesn't the person on the other side of the deal take a little more for themselves by selling there instead (at a slightly more favorable interest rate)?
Is it because the rich investors are needed to bring some level of expertise or connections to the investment to make it work? If that's the case, and it seems likely, I would not say they are getting "access to better deals" per se. More like they are getting a normal rate of return and they have a valuable asset that they are renting out as well (their expertise or connections), and it all gets rolled into one number. But complaining about the rich having valuable assets is different from complaining about them having access to better investment opportunities.
You'd be surprised how many deals like that are out there. Many entrepreneurs do business with a few solid partners during their lifetime.
Aside from that, there are other reasons:
1. You don't want to invest everything in the public markets, i.e. acquiring an interesting existing business and growing from there could be a good idea.
2. Some of these businesses might be less prone to losses during a recession or stock market correction, so they might serve as a buffer for cashflow and income.
3. These deals might have higher upside, because of information asymmetry or something that isn't blatantly obvious to other people. Alternatively, you might have access to different channels that could easily grow the business.
Once you’re big enough, IPOing makes sense, unless you just want to maintain control or those pesky compliance requirements will reveal some harsh secrets.
This type of deal can get you huge returns but is also very risky.
My first thought was regulation. See: accredited investor. One can sell to accredited investors, and caveat emptor, or get buried in a whole new ass-load of paperwork and butt-microscopes selling to retail.
My second thought was scaling, or selling in volume. Why do companies sell wholesale? Because they don't want to deal with nickel-and-dime buyers, there's a whole new set of infrastructure and process needed for that. Take a little less profit to sell one big block rather than doling it out to retail investors.
They’re called “bought deals”. An investment bank has a public-traded equity desk that will buy, up-front, $x billion of your stock at $Y. Then they’ll email blast/call their retail investors to buy it up over the next few weeks.
The banks take the risk of not filling the order with retail buyers, which happens occasionally.
[1] https://qz.com/67052/heres-how-warren-buffett-made-3-1-billi...
Now of course, buffet also needed timing and the ability to act fast, but lots of people had money to invest then.
One such a deal that surfaced somewhat recently was that cum-ex trading. If you put that in the public market, you would essentially be killing the goose that's laying golden eggs since there would be outcry to make it illegal. If instead you just offered it to select few (people with enough capital & no moral qualms about using it), you could keep it under the wraps for longer time and get better long term return.
I'm not sure what type of professional you are, but you may be in breach of your responsibilities by disclosing the specifics listed above.
I know this message might seem silly, but I'd hate if you got in trouble for complimenting the guy's affairs.
Edit: I've editted out the person in question's name in case you do the same.
Who knows other similar comments they've said in other threads on HN?
You may have a local equivalent, but you may not.
1. Companies don't die, so are not liable to inheritance tax.
2. (Holding) companies often don't pay capital gains taxes, so money can compound tax free. You only pay tax at the end, when you take it out of the company.
3. If they're using (some) debt to invest, using a company shields them from liability and bankruptcy (Google Einar Aas, he bankrupted himself in personal name because he traded using a personal account with leverage)
Donald Trump, if his public finances are to be believed, would have roughly the same net worth had he just invested the money his dad gave him in mutual funds. Instead he managed to create a series of failing companies and questionable ties... but managed to live the high life and stamp his name on bloody everything.
Additionally, we could say that success in active investing is (often) a function of how much you're willing to spend to find the right opportunities. For an UHNWI, this is likely enough to beat the market, especially if a high percentage of investors are passive, leaving more opportunities for corrections open.
As another commenter said, the goal is usually to avoid becoming poor first and foremost, rather than becoming richer.
Sure, but it seems like the solution to that isn't "new and innovative private investments", it's "invest more money in treasury bonds from stable first-world governments and maybe precious metals".
Is this also true at the level of the small investor ?
Say I'm willing to spend a few hours a day learning and researching about stocks. Does this mean that over time, I'll be able to significantly beat the index funds ?
Or is it, more likely, a fool's errand, because that as a small investor, I don't really have enough bandwidth and money to significantly diversify ?
You don't have a chance unless you are doing the same amount of work with more sophisticated tools, with the same trading tools.
You might win based purely on chance, but you are extremely unlikely to.
Some of the high frequency traders can rake it in. But they are using teams of highly paid analysts to look for opportunities and those opportunities don't last long before they have to move on to the next thing. And I would assume it's getting harder and harder for them as time goes on and more enter that market.
This is why people invest some money, however minute, into shorting the entire stock market.
There was a factoid going around years ago that said Donald Trump's net worth was equal to the value of his inheritance if it had been invested in an index fund.
But note that under that hypothetical, he never would have spent any of it. Do you think the historical Donald Trump ever made any splashy purchases? Where did that money come from?
Having a high net worth while living the high life involves a lot more money than having a high net worth while living an ascetic life, and implies that his returns were a lot more than the index fund experienced.
Also, while some of Trump's lavish expenses are pretty much just lavish expenses (business jets and the like), some of his superficially ridiculous personal expenses, like gold-plating half of his entire penthouse apartment in Trump Tower[1], don't necessarily hurt his net worth that much because he could always sell the tower with the tacky gold-plated penthouse to someone else who could extract some value by removing the tacky gold plating and having two valuable assets left over: (a) a penthouse apartment in a Manhattan high-rise and (b) gold.
Most of Trump's losses came from a variety of failed business ventures, which isn't necessarily a huge criticism. Some people just like doing a bunch of business ventures and they don't all have to succeed to be a net positive. It's just that if Donald Trump spent the same lavish amounts of money and invested less money in his own ventures and more money in index funds, he would be richer today.
Of course, in this hypothetical scenario, would he become a cartoonish real-life personification of American capitalism, host a reality TV show, get a lot of Twitter followers, and develop the dedicated fanbase necessary to eventually be elected President? Probably not.
[1] I'm not entirely making this up, though my only source is a foggy memory of the first season of The Apprentice, when Donald Trump invites the guests to tour his penthouse apartment.
Incorrect, it would have been worth substantially more, at about 13 billion (his current wealth is around 3-4 billion). So he still would have been able to spend billions and be further ahead than he is today.
Source: https://www.forbes.com/sites/katestalter/2016/09/01/would-do...
If he invested without margin then he would have made half of what he actually made. And that's without any spending at all.
Frankly I would have done the same, I think running a bunch of different businesses would be more stimulating than maximizing wealth through stocks. But objectively he's paid a financial price for that.
Trump is the harbinger of a return to patrimonialism. Family offices, a return to patrimonialism. You get a bunch of people who never really understood civics or finance and you try to govern them technocratically, and you’re going to struggle. But everyone in this demographic understands families. They see this dude being passed down wealth, and ‘making something’ of it, and setting his kids up. People understand that, especially the type of person who doesn’t necessarily understand how the neoliberal world works, in ways that are both in their favor and against it.
Family offices are another data point in this trend towards capital accumulation, stark income inequality, and a retreat from public exposure.
https://www.nytimes.com/interactive/2018/10/02/us/politics/d...
Where's the $3 billion number coming from?
Conversely, plenty of funds do 15-20% in the short term. 15% only takes 57 years, and 20% brings it down to 44.
So, doable, but you'd be considered a pretty amazing investor. And this all assumes the money was invested from the day he was born.
I don't know, perhaps you couldn't very easily leverage properties back then for cash (i.e. once they had been paid off), or interest rates were very high (a quick google teaches us that in 1970, the interest rate was 8.5%)?
https://www.nytimes.com/interactive/2018/10/02/us/politics/d...
It's not uncommon for aggressive growth funds to take a 20% tumble in a year. Downside is much, much more destructive than many understand especially when one must also account for fund management fees (typically .7%) which are collected whether the fund gains or loses!
But the simple fact is that a 50% loss requires a 100% gain just to get back to even, which is still a loss once inflation and operating costs are factored in.
Here's a simple question that most people fail: Q: A mutual fund loses 50% in a year. In order to break even the next year, your fund must earn ? 1) inflation 2) 50% + inflation 3) 50% + your income tax rate 4) 100% + inflation 5) 100% + inflation + operating costs + 'it depends'
The correct answer is 5. The correct answer is nearly 106%- One must make up for actual loss (100%) PLUS operating expenses for both years (usually 0.7% per year: 1.5%), plus inflation for both years (2%/annum: 4%). Of course there are tax implication for gains/losses taken outside of a qualified retirement plan (401k,403b,etc.) and sheltering losses can complicate substantially, but hopefully this illustrates a point about the impact of losses.
https://www.forbes.com/sites/katestalter/2016/09/01/would-do...
Being a Lord in the UK is more or less equivalent to being a US senator.
So "keeping up with the Jones'" is something no one outgrows then... Interesting.
Not a real point to make, but I was wondering, and it might save someone else time.
[1] https://www.wolframalpha.com/input/?i=0.001%25+*+world+popul... [2] https://en.wikipedia.org/wiki/The_World%27s_Billionaires
That makes perfect sense of course; but all those excluded parties from that ranking still need to manage wealth, so getting exact or even estimated numbers here is going to be tricky. And then there's the family != person disconnect - although it seems to me that most people in this situation got lucky somehow, so it's rather unlikely there are multiple original sources of wealth in such families. If there are several individually wealthy family members it's probably more likely due to dilution.
But yeah, you'd assume the median family wealth of a the top 0.001% of people is likely below 1 billion. But how much? Who knows.
While this is probably true in general, there are at least two famous exceptions from Germany.
There is the notable case of Adolf "Adi" Dassler, founder of Adidas, and his older brother Rudolf Dassler, founder of Puma, who separated from their joined shoe manfucaturing business and independently built two of the largest shoe (and now sports equipment) manufacturing companies in the world. Both still headquartered in the tiny 23000 people city Herzognaurach, Germany (close to Nuremberg).
And the similar story of Karl and Theo Albrecht, founders of Aldi (Albrecht Discount), which was split in Aldi Nord (north) and Aldi Süd (south), both growing their company in billion dollar businesses and each becoming billionaires. Granted though they had slightly different styles of running their business, their success was based on the same innovative business idea and a geographic non-compete agreement.
>Rich clients have taken a closer look at private banks’ high fees and murky incentives, and balked.
OK. Rich clients were not happy with the way external managers managed their funds and decided to do it themselves. I get it.
>As they grow even bigger in an era of populism, family offices are destined to face uncomfortable questions about how they concentrate power and feed inequality.
How on Earth is it related to populism?
>Family offices have created inequality.
If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. You undertake higher risk and potentially receive higher award.
What's the point of the article?
It's not a 100% rule. Lots of wealth has been lost due to wrong investment. Many rich people lose their fortunes.
When you're poor, you are taxed:
- High interest loans
- Remittances with high fees e.g. with Western Union
- Using Cash (on average, you pay a tax on items which have the credit card fee priced in)
- Access to banking (low interest savings/checking accounts)
- Credit cards with high fees, low kickbacks
As you get wealthier:
- Credit cards with kickbacks (e.g. travel, cash back)
- Access to bank accounts with higher interest
- Access to international banking
- Access to international stock markets
As you get wealthier:
- Ownership of businesses which allow you to store your wealth without getting taxed
- Ownership of international businesses which allow you to find the best tax situation internationally
As you get wealthier:
- Access to private markets
- Ownership of businesses where you can directly partner with other businesses
- Running a financial institution
- Running a business so large that you can influence governments
- ...
Up to a point. The ultra-rich have so much money now that it would take a monumental disaster for them to become poor again. IIRC only one person in history has ever stopped being a billionaire: J. K. Rowling, and that was due to enormous philanthropic giving.
Mere millionaires come and go, but once you're talking hundreds of millions the positive feedback loop of capital makes it difficult to lose everything.
Maybe the reason we never see hundred millionaires lose everything is because they have the necessary skill to manage the money well.
I don't think it would be correct to attribute causation based on the information we have available.
Some of it may be the forced diversification you get with this much money. It's hard or impossible to dump $100M into a single stock unless you are an Elon Musk type and own the company. So if you make a bad bet and lose a million bucks, well, that's just 1% of your portfolio and the rest will make up for it. Of course you're a regular millionaire and lose a million bucks on a bad investment you are going to the poorhouse.
You could dump $100M into GE without triggering anti hostile takeover actions, but they're also not likely to go bankrupt anytime soon.
Maybe some hundred millionaires could have had their portfolio completely tied up in Lehman Brothers a few years ago, but even then you probably would have gotten a fair bit of money back.
But this goes back to my point that as long as you aren't pants on head with your investments you are beyond the point where it's possible to ever be poor again.
The articles says 'But the aim is usually to diversify risk, not concentrate power, by taking capital from the original family business and putting it into a widely spread portfolio.'
It uses the word 'usually' and it's also a blanket that's trying to generalize all these parties, while in a reality that may not be true.
Here are 3 constructed but plausible goals one may have: 1) Make 100% sure that you remain wealthy (make almost nothing but never lose anything) 2) 9-in-10 chance to do worse than SP500 index, but 1-in-10 chance to get 'literally take over the world' rich 3) Investing in causes that seem good for the world a la green energy, tesla motors, etc
As a counter example, I present cases of lottery winners who go broke. There are multiple documented cases of 10+ million and 100+ million winners who lose the majority of their wealth.
> How on Earth is it related to populism?
A populist would generally be opposed to the concentration of wealth and power in a small subset of the population. Populism is on the rise today, as is the trend of family investment offices which are a result of concentrated wealth and power. Thus family offices are destined to face uncomfortable questions by populists.
> they didn't create inequality. Yes, you're agreeing with the author. The surrounding sentances from the sentence you quoted:
"[...] the objections to them [family offices] will rise exponentially. The most obvious of these is the least convincing — that family offices have created inequality. They are a consequence, not its cause."
The article does not say that family offices have created inequality, it actually says that they have not.
Regarding the "point of the article":
This is an Economist "Leader", which is a one-page summary of the three-page full article published in the print version of the newspaper. It says the following:
1) Explains what "family offices" are: rich individual's DIY private investment firms.
2) Explains why the populist argument "family offices create inequality" is wrong.
3) Presents three arguments for "family offices are bad" with which the author does not agree, and their rebuttals:
a) "family offices destabilize the financial system" - but data shows that actually they are doing the opposite.
b) "family offices magnify the power of the wealthy" - but this is against the interests of their owners who want to diversify.
c) "family offices might beat regular investors because they have privileged access to information" - they don't outperform the markets right now, but privileged access to information and insider trading could be a problem with family offices.
The author arrives at the conclusion that family offices are a force for good, but more regulation and transparency might be required to address (3c).
You (or the author of the full piece) seem to be describing Socialism. Populism is sometimes but not necessarily opposed to a wealthy elite, and the type of populism on the rise in the US and Europe seems generally to be a vague conception of a cultural elite, instead. Seems odd to bring into this discussion.
The say "family offices create inequality" could be a worry, but that it has no merit. From the article:
>The most obvious of these is the least convincing—that family offices have created inequality. They are a consequence, not its cause.
Inequality is a mathematical statement about the distribution of wealth. It has nothing to do with risk or fairness or "rewards". If you accumulate wealth in one place, then you very directly create inequality. That's exactly what inequality is. By definition.
In this case I suspect the author is talking about a popular interpretation of populism where a politician in question intends to make sweeping changes to constitutions and rights where those are seen to be working against the popular interest.
In this case the answer might be to curb the rights of specific types of family investors somehow, for instance in European property markets (to take an example from the author) where this is seen as distorting the markets and causing pain to people - for instance not being able to afford housing, or ending up in negative equity because such funds pull out of the market and cause a bubble to collapse.
If you can afford to invest, and do so successfully, you therefore make money from others labour. As poor people can't do that, any successful investment is contributing to wealth inequality.
In general, if you win on investments someone else is losing.
This means that if having large capital base means you have accessv to better investments - eg avoiding large fees - then you'll drive more inequality.
To recapitulate: There's only a certain amount of wealth generated, if you receive "higher reward" without doing more wealth generation then those generating the wealth are getting a smaller proportion.
1,000,000,000*.0005 = $500,000
For that level of expense, you could instead have a one-man office or other service provider that can buy the individual stocks comprising (or closely approximating) the index, and not have to pay any expenses other than his salary and trading costs. Meanwhile he can provide tax planning/philanthropic services as well.
It would be hard to find someone at this salary level who can match the tracking performance of Vanguard. If they achieve a tracking error that's 1% higher than that of Vanguard's, that would mean an annual loss of approximately $800k compared to Vanguard (1,000,000,000 * 8% * 1%).
[0] https://institutional.vanguard.com/VGApp/iip/site/institutio...
In the given scenario, you aren't just hiring a guy to buy stocks for the Vanguard expense ratio. You're also buying all their financial and information security processes. You're buying risk mitigations like regular audits and SOX compliance and SP800-53 controls. To safeguard a billion dollars, that overhead is totally worth it.
Most tracking indexes, especially the ones Vanguard uses, do not do that and thus do not allow the markets to front-run them. If you adopt the strategy of "do what Vanguard does" and you do it immediately after Vanguard says they did something, you are already too late to get the prices that Vanguard got and can kiss at least .05% goodbye just based on that. I would expect to under-perform by at least .25%, if not more.
Even at 5 bps on a billion, I think you'd be extremely hard pressed to do everything Vanguard does for you for $500K/yr.
I'm at least a factor of 500 away from having to consider this question, but if you told me it would cost me $500K to have one fewer critically important person on my staff to deal with, that would be a good tradeoff in itself.
"Because Vanguard charges too much" isn't one of them, IMO.
If so, not worth dealing with for a billionaire, but definitely an opportunity for a middle-class robo-advisor.
The likelihood of a single person delivering index tracking performance better than these giants is pretty slim. Better to drop the tranche designated for broad market passive indexing into one of these giants' funds as an institutional holder, then have the one-man office project-manage leading education of younger generations, help the family leader clarify the ongoing family mission the office supports, the accountants' filing tax compliance at the individual and trust/foundation levels (likely in many different jurisdictions), grooming a successor, updating processes and procedures to improve auditability/accountability/anti-fraud detection, assisting with legal compliance, helping out with financing approved moonshots, etc.
[1] https://riabiz.com/a/2018/12/13/vanguards-asset-machine-wobb...
But then you have to trust that guy not to fuck it up, while Vanguard has a stellar reputation and a whole office of people making sure things go as expected.
Honestly a much stronger argument is tax efficiency. If you're buying the individual stocks, then even when the index is flat you'll have some capital gains and losses. You can use both these to improve your tax efficiency - the losses can be harvested to offset realized gains elsewhere, while any appreciated shares can be donated to charity and repurchased with new money, effectively increasing your tax basis.
Still, you're likely better off just hiring people to do the tax planning, estate planning, and philanthropic services. It's essentially setting up a single family office with no control over your investments.
And once you talk about foreign stocks, you have different amounts of withholdings to account for, dividends that are not dividends (return of capital).
Family offices are more like endowments and follow similar strategies that will have a portfolio that includes a mix of public equities, bonds, private equity, hedge funds, and real estate. Many of these investments are illiquid and have long holding periods, so aren't available to normal investors but can provide much better returns than index funds.
In addition, when you have >$100m in wealth, consistent, predictable returns become very important and index funds don't give you that. It took 8 years for the S&P 500 to recover from the dotcom crash and 6 years for the 2008 crash.
They can also provide worse returns. You don't know which. You can guess that they'll provide average returns, because the average investment gets average returns. After all, not everyone can be above average.
Passive indexing guarantees average returns. Before costs, that is. So not only is the indexing approach cheaper, but it's also safer.
>In addition, when you have >$100m in wealth, consistent, predictable returns become very important and index funds don't give you that.
Quite the opposite, IMO. If you do something straightforward like dump 100% of that into the S&P 500 and spend the dividends, you're looking at something like $1.8 million this year. Less in a downturn, of course, but that's still pretty difficult to spend.
And if you have known large expenses, fixed income is really efficient at guaranteeing you the money needed to meet those expenses.
You do. That's the whole point. If you invest in a basket of top tier VC and PE funds, they will destroy indexes over the next 10 years. Yale is a great example of this; over the last 20 years their average returns are 12% which is 50% more than what an index did (7-8%):
https://www.institutionalinvestor.com/article/b17qpx3nyyqywd...
I'd happily do a total-return swap of the S&P 500 against any basket of VC and PE funds you'd care to name that are currently accepting new investments. Assuming, of course, that there's some reasonable way of collateralizing and settling things at the scale I'm willing to risk ($10k notional), which I honestly doubt.
If beating the market was that easy, then everyone would do it. So either the top tier funds become closed to new investment after becoming top tier, or they stop over-performing for idiosyncratic reasons, or something. I'm using outside view logic here, I really don't care at all for the stories they tell. It's honestly downright dangerous to pay too much attention to the marketing material of investment funds - after all, Bernie Madoff consistently showed 11% annual gains. At the end of the day, the average investment must achieve average returns.
It's not easy. You need $100m+ of capital and a long time horizon to implement it. Very, very few people have that. It's less than 0.0004% of the population.
I don't think active management makes sense for the majority of folks, but billionaires are exactly the kind of people that it does make sense for. With a billion or two you can probably get yourself into some pretty good closed-end funds (if you're savvy about it) that will probably deliver better risk adjusted returns than vanilla passive.
Personally, if I had the money, I would go with 2 Sigma or AQR. Both of their past returns streams are stellar and uncorrelated with the markets.
That's also a likely reason why family office holdings often look very odd as they often only provide a hedge in case the main source of income dries up. And therefore, they cannot have any connection with it. Pure performance on a standalone basis is often only second priority.
Why? A couple of billions should still be a tiny drop if compared to the market cap of S&P 500. What do those active portfolio managers provide to you?
I think the S&P500 is an entirely different beast to what it was 20 or even 10 years ago as a result of this.
If you were a family office your goal would be to get exposure to pre-IPO growth stage stuff as well as the public market.
With a couple billion you can get yourself some nice deals in a bunch of different asset classes. Also with that kind of money you can put a chunk of your money in illiquid investments that potentially could provide some great returns.
Also, when you get into aging family members and generational wealth issues, you want to have controls to reduce your immediate control. Decades of accumulated returns can be wiped out by a bad decision.
If I had billions to worry about, I’d want to make sure I had assets that were more diversified than what Vanguard offers.
You can also get into special sits and arbritrage ala Elliot and partners
https://www.fool.com/investing/2018/12/01/vanguards-founder-...
Governance concerns are not structural and addressable when it reaches a critical mass. I wouldn't be overly concerned, just put in a word when someone starts to lobby for regulation requiring delegating voting power back to index investors, and fund managers having to vote the preponderance of pro-rata voted shares.
Does it really matter where the worlds richest man puts the other 20% when he could afford to lose it all on moonshots and not give a damn? The risk-reward trade-offs you and me make while investing just don't apply to Jeffs personal investment decisions, and therefore aren't all that interesting.
The rest is Blue Origin and The Washington Post, with his cash position at 'only' an estimated $2.45b.
Given the absurdly high valuation of Amazon - and as a fan of humanity pushing into space - I'd like to see him sell some larger blocks of Amazon while the stock market is so high, in order to secure funding for Blue Origin for a decade or more all at once. In terms of dilution, it's drastically better to yield ~$6b-$10b on a few sales out of a stake of $125b, than out of a position worth ~$65b (where he was at just two years ago) if the market is down for a long period of time. Especially true given he has recently indicated Blue Origin might demand even more than $1b per year.
It's how Elon Musk finances his business. Musk has leverage ratio around 40% of his TSLA holdings.
> Given the absurdly high valuation of Amazon
In this case, taking out a loan against the stock is a terrible idea.
True, and a scary thought for any heavy investors. That's why a company that size needs to have a publicly known succession plan given current valuation. There are people at Amazon who could take over but no one whom the market would trust with taking the reigns, right off the bat.
Is Amazon heading toward an 18 PE ratio against $20-$25 billion in profit? $360b-$450b market cap, versus a $778b market now (already down ~$250 billion from the highs). At some point in the near future will their profit growth stagnate, Microsoft or Intel style, for most of a decade; and will their multiple compress over time with that stagnation? Historically that's the very likely outcome (or far worse).
The stock market goes down with the next recession, the very high S&P 500 / market multiple gets chopped down to a more reasonable historical level. After several years pass and the smoke clears, Amazon's AWS growth has slowed considerably, its online retail growth is single digits, and the market awards it a mature slower growth 15-20 style PE ratio.
There has never been an exception in the tech world, when it comes to multiple compression. The compression monster comes for everyone. Microsoft, Intel, Cisco, Apple, Facebook, Google, etc have all suffered it. There will never be an exception. Amazon isn't going to get an 80 PE ratio on $20b in profit, the market will squeeze it perpetually down. It's very likely the party top is already over (the next time we see such absurdly low market-supporting interest rates, it'll be because of a recession, and stocks will have plunged accordingly).
When it comes to the cost of funding Blue Origin (which is very high), I think he will have wished he sold more stock while it was on the moon during this stock market bonanza, where even very low growth stocks like Intuit are still fetching hilarious 50 PE ratios.
And these are the reasonable scenarios. The dangerous scenario, where you're nuts to borrow $10 billion against stock, is where Amazon is disrupted (AWS particularly), or the economy gets really bad and Amazon gets a 16 PE ratio against $18 billion in profit (still not actually a bad outcome even then). In that case, Bezos is now borrowing $10b against ~$45b in shares or less. Non-trivial leverage, even for that much wealth. Or you could just easily evade all the major risk scenarios, sell off 1.6% of the richly valued Amazon stock - just 10% of your holdings - and fund Blue Origin debt free for a decade or so without concern (hopefully to the point of self-sustainability). And you do it while the market is bubbly, precisely because shareholders are far less likely to care then.
In other words - let's stop speculating here and simply say "I hope he continues to focus a large portion of his wealth towards X initiative that I like"
At this point maximizing ROI is probably not a major concern for him.
Do you think these companies wouldn't exist or be as capable without Bezos? Why do you think that?
The government and major corporations are slow and inertial, invested in iterative improvements on existing paradigms, as low risk small improvements are baked into the foundation of the incentive structure for their entire org. If you're CEO of a major company and make the company a tiny bit more efficient your life is great, but if you bet a billion dollars on pivoting the company towards a potential major improvement and the numbers come up wrong, your business is potentially structurally compromised and your life is relatively screwed. It's just not really worth it to gamble with your main game.
These extremely speculative, niche, very capital intensive, long time horizon bets on paradigm changes couldn't exist without large amounts of funding from contrarian and extremely risk tolerant backers.
Very wealthy people being willing to play with millions to billions of dollars in a way that is very likely to crash and burn enables risky exploration of paradigm changes like "can I get a rocket to land upright and use it again?", or "can I take a major publication and profitably revert its online funding model to subscriptions to retain integrity of its journalism in the era of the attention economy?"
That kind of exploration is important and interesting.
Also, the parent comment did say that the projects are important, not Jeff Bezos. I was just talking about the interaction of wealthy investors and their side projects, which is what this thread is about.
Someone is a person, not multiple projects.
And no, his specific investment on any individual project isn't that particularly interesting.
Investments is clearly and completely unambiguously the subject of "interested in" that sentence.
https://www.fool.com/investing/2017/06/23/the-washington-pos...
A free mandate makes for more interesting work, plus as the manager you can stick things in illiquids that have no mark-to-market. That's the uncharitable view, of course. The charitable view is that you are better at evaluating opportunities and are able to do things other institutions are not.
Main thing about FOs is they are just the article says, totally idiosyncratic. One FO I know is basically just a wily old guy who does all his business by phone, meets people to look them in the eye, that type of thing. Made a lot on crypto.
Another FO is basically a hedge fund. Bunch of different desks doing various things, a lot of focus on regulatory approval (that's still a thing, not sure why the article makes it look like there's no hurdles).
After being banned from managing outside capital, SAC Capital Advisors transitioned to being a family office called Point72. Only recently has it begun to to manage outside capital again.
For example, a small investor can invest in companies with market cap of ~$50m+....not possible for Warren Buffet. He can only invest in maybe less than a few hundred companies...with market caps in the region of a few $100bn.... there are of course treasuries/bonds but no seriously wealthy person has all of their money in bonds. In part because the returns are so low and income taxes are meaningfully higher than cap gains.
Even at a small size, it's possible to invest in alternatives through public markets. I have my pension in listed private equity. You can also invest in private debt BDCs and closed-end funds that do infrastructure and a bunch of other things.
Interesting to see the deltas (YoY) increase in wealth of these billionaires.
The top 5 have a growth of $8-15bn a year in wealth in the past few years. This increase in wealth is mostly an increase in institutions that keep growing at a very healthy rate (Amazon, Microsoft, BH, Facebook, etc).
I think it's important to remember that all of these persons (Bill Gates, Jeff Bezos, etc) are the primary owner of a large institution that creates the wealth. Building orgs to put money to use is what they did to make their money in the first place, so it makes sense that they would do that with their private wealth as well.
Yes Bill Gates could buy 65% of the Turkish stock market, but if he wanted power, there are surely cheaper and easier ways to do it.
And regarding stability, you could make the case that these funds could increase stability. If you're in the 0.001% then surely you have the money to have a long term out look, which means they aren't going to worry about that short term blip.
I think the last paragraph headline sums it up for me. They've rediscovered DIY investing.
Both of your points are made in the article?
The third issue (tax) is where the potential issues are, and got virtually the same length paragraph.
I'm sure it still does not feel good psychologically so I'm not completely disagreeing with you.
Unless I remembered wrong. I read it on Thursday.
[1] https://www.amazon.ca/Introducing-Capitalism-Graphic-Dan-Cry... [2] https://technology.ihs.com/Biographies/400721/dan-cryan
The Rothschilds are still investing, and you can join them. RIT (Rothschild Investment Trust, London listed) https://en.m.wikipedia.org/wiki/RIT_Capital_Partners
(not investment advice)
Note Its a defensive IT designed to preserve wealth
There seems to be some reluctance here to even referring to it, but I don’t subscribe to that so here you go:
https://en.wikipedia.org/wiki/Nathan_Mayer_Rothschild#Waterl...
Meanwhile, that reply calling the original post anti-semitic propaganda remains gray. It’s somewhat telling that the community seems to consider a myth of jewish war profiteering more worthy than an abservant user calling it out.
But, to quote OP: anti-semitism, “no longer fun. lol”
History, it rhymes.
Word got out