Building and having wealth is more than buying nice cars – it can allow you to do a lot of incredible things.
It’s no secret that having wealth gives us the financial freedom to decide how we spend our time. For me, financial freedom means being able to work on exciting and constructive projects with amazing people while investing in and building various assets that appreciate in value or generate cash flow.
That said, even though we all want to be wealthy, what’s the best way to get there?
There are endless options to grow your wealth – with stocks, bonds, ETFs, index funds, real estate, crypto, collectibles, precious metals, and more, what’s the most effective way to generate wealth?
Business ownership.
The Wealthy Own Businesses
Of course, as the author of Buy Then Build, I may be a little biased, but I am for good reason.
In my book, I highlighted that nearly 100% of ultra-high-net-worth individuals own their own businesses. This research was done by John Bowen in The State of the Affluent report, which showed that 80% of high-net-worth individuals and 91% of very high-net-worth individuals own their own companies.
This suggests the wealthier someone is, the more likely they are to own a business.
In fact, the report says, “An important part of the wealth of the affluent can be attributed to business ownership.”
If you read The Millionaire Next Door, it claims that “self-employed people are four times more likely to be millionaires than those who work for others.” The SBA also agrees.
Of all the investment vehicles available to us, private businesses are a powerful engine of wealth for those at the very top. The 1% own 57% of private companies, according to the Federal Reserve.
That said, it’s important to note that buying a business doesn’t guarantee a high net worth, and buying a business strictly to achieve that isn’t a good idea, either.
However, this does support the fact that owning a successful business can be a great investment vehicle, and those who make the most of it can do incredibly well.
What Makes Billionaires Different From Millionaires?
I recently read an article by Michael Kitces, a financial planner who advises other financial planners. In his article, Kitces compared the profile of the “millionaire next door” to that of billionaires to highlight what made one person rich and another extremely wealthy.
The “millionaire next door” profile is typically someone who has a high paying job, lives below his or her means, saves 10-20% of their income over time, and owns a diverse portfolio, benefiting from the compounded growth you can find in the stock market.
Billionaires, on the other hand, invest in themselves. They invest heavily in their own companies, and from a diversification standpoint, actually overweight their investments into businesses they own and have control over. This is how they grow until they become billionaires.
Kitces makes this comparison by using two different trees as analogies: a redwood tree and a bush.
When it comes to investing, most people save and accumulate for retirement in a way that resembles the growth of a bush – savings are allocated into a diversified portfolio, similar to a bush. The bush grows in all directions, but it doesn’t grow very tall. Much like the limitations of a bush, this approach only takes us so far in terms of retirement savings.
On the other hand, billionaires take a different approach, akin to the towering redwood. They concentrate in a single direction for a very long time and never deviate from that to diversify. For many of them, their primary source of wealth is still their company stock.
For example, Bill Gates could have diversified his portfolio after Microsoft went public, which would be considered the conventionally wise approach; however, he continued to invest in Microsoft. Although considered risky, this strategy led to substantial returns.
Similarly, when you think of Jeff Bezos and Amazon, Mark Zuckerberg and Facebook (Meta), and Larry Page and Sergey Brin with Google, none of these billionaires got to where they did by saving into a diversified portfolio.
Key Investment Principles
That said, whether or not you aspire to be a billionaire or simply comfortably wealthy and financially free, we can still learn from these principles. Two key points stand out from these findings:
- Billionaires become billionaires by concentrating on their businesses
- The “millionaire next door” rarely exceeds $4 million in net worth (it’s possible, just rare)
Kitces suggests that those aiming to surpass $5 million in net worth should invest in something they control and can grow, rather than relying solely on the stock market or other assets that are out of your hands.
Now, whether that business gets you to be a billionaire or not is up to you, but the point is, when you look at what makes a good investment, you have to unpack the return on investment. You should look at the margin of safety and upside potential. Businesses have all of these things. In my book, I discuss why buying businesses offer these advantages.
Wealth Allocation of Ultra-High-Net-Worth Individuals
I was recently made aware that TIGER 21 publishes the asset allocation of their members. If you’re not familiar with TIGER 21, it’s a group of ultra-high-net-worth individuals (with at least $20 million in liquid assets) who help each other build additional wealth and support each other.
So here’s the TIGER 21 allocation report from 2022 (from comparing this to other time periods, the numbers vary slightly, but not by much):
Source: TIGER 21 Asset Allocation Report 2022 (1st Quarter)
So we can take a look at the different asset classes that these ultra wealthy individuals are investing in. As you can see, their funds are divided into public equities (27%), private equity (24%), real estate (25%), and a mix of cash, currencies, commodities, and fixed income (24%).
The first thing you’ll notice is that 27% of their reallocation is in public equities – this is the stock market and securities that are available to all of us. Then you have a quarter of the chart in private equity and another quarter in real estate. Private equity isn’t just referring to private equity firms, but it’s the private market of small businesses, startups, late stage acquisitions, rollups, and other business ventures like this. It also includes businesses you own. Those are considered private equity because they’re private semi illiquid assets you’re growing.
Now, this is my main takeaway:
The right side of this allocation chart is accessible to everyone – stocks, bonds, commodities, Bitcoin, cash, gold, etc. These are things that the millionaire next door primarily invests in.
However, the quadrants that make the biggest difference are on the left side of this graph: the private capital markets of business and real estate. What we can assume is that the wealthiest individuals understand that taking risks most people are not willing to take is actually how fortunes are created. This is what separates the ultra-wealthy from the rest.
You might say, “But Walker, I’ve heard 90% of millionaires are made by real estate.”
I haven’t actually seen studies that prove that to be true, and from my experience in meeting entrepreneurs over the last 15 to 20 years that I’ve been doing this, I’ve come to a conclusion.
I know a few who have made it really big in real estate, but by and large, I find that it’s easier to have major success in business than it is in real estate at the beginning. Real estate is a great way to accelerate wealth generation, but not necessarily create wealth generation from zero.
The Fastest Path to Real Wealth
After decades of buying and selling businesses, I still believe buying existing companies is the single fastest way for most people to build real wealth.
Startups, while exciting, are great when they work, but the odds of success are terrible. 96% of startups never exceed a million in revenue.
You can go into real estate, but like I shared, I think it’s more difficult to create wealth from the beginning through real estate and you have to be incredibly scrappy to do so. I’ve met a great number of people who have gotten extremely wealthy from real estate, but in many cases, they owned a business that gave them the capital to invest into real estate.
If you’ve ever read Rich Dad, Poor Dad by Robert Kiyosaki, you eventually find out at the end of his third book that he was able to start really buying real estate because he sold a company. That was how he acquired the capital he needed to start accelerating his wealth.
Buying an existing company has the margin of safety and upside potential we talked about before. It offers the benefits of product-market fit, existing customers, infrastructure, employees, and systems. Most importantly, it has existing earnings.
By investing in and growing a business, you can break through the W-2 ceiling and achieve your financial freedom and wealth goals.
Ready to acquire a business in the next 12 months? The Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.
