Thinking of your wealth as being in two buckets is a useful mental model
Source: Getty Images and RhetorIQ
When I first started in wealth management, I thought that entrepreneurs, being risk-takers, would want high-octane, risky investment portfolios. I came to realize the opposite is true – a top priority for them is to preserve the wealth they have created. While building their business, they knew they could lose everything. As they take money out, they want to be sure to keep it.
Reid Hoffman is a partner in the venture capital firm Greylock Partners and a founder of PayPal and LinkedIn. At a conference I attended years ago, he was asked whether his PayPal experience led Greylock to invest in payment companies. He replied that Greylock hadn’t made any investments in payment firms since he became a partner because he had vetoed them. Hoffman knew how hard it was to create PayPal and how lucky they had been, so he was hyper-aware of the barriers that payments companies face. Hoffman knows that everything it takes to make your first $100 million can work against you when you’re trying to keep it.
Generating Great Wealth
While there are exceptions, if you want to generate significant wealth, you must own part of a successful business. High-income earners – like doctors and lawyers – make a nice living, but people who vault into tens of millions or more are business owners with remarkably similar strategies. They:
- Concentrate their assets, usually in a single company. This increases the chances of winning big if their one big bet pays off.
- Tolerate a high level of risk: their success or failure depends on their company. If it takes off, they are rich; if it flounders or fails, they aren’t.
- Are obsessed: they invest almost all their time and talent in their business. Building the company is their singular focus and takes over much of their lives.
And luck plays a role too. Looking back, successful company owners can identify how everything seemed to come together “just so.” If a few things had happened a bit differently, their company wouldn’t have been as successful. On the flip side, bad luck kills off many otherwise promising businesses.
Preserving great wealth often means doing the opposite of what it took to create it.
Source: St. Louis Trust Company
Preserving Great Wealth
The strategies for preserving wealth are the opposite of those for generating …….