Derek Sivers

How to be a Billionaire - by Martin Fridson

How to be a Billionaire - by Martin Fridson

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Biographical look at billionaires from the last 200 years, and lessons learned from how they did it. Some lessons aren't really applicable to the rest of us, like changing government laws to protect your monopoly. But some are.

my notes

The less-informed parties who wind up on the short end are not the ones who subsequently write autobiographies recounting their ascent to billionaire status.

The one objective that ties them all together: Overcome the levelers. You must vanquish the mighty economic and social forces that conspire against your rise to massive wealth.

The levelers against which you must struggle are the Menace of Competition and the Obstacle of Social Conventions. If you succumb to them, you will never rise above a comparatively modest level of wealth.

Entrepreneurs trapped in this system may prosper through general growth in the economy, but they will not become fabulously wealthy. To pull out of the pack, they must earn much higher profits than the economy as a whole is generating. In short, if you hope to become a billionaire, you must overcome the scourge of competition, one way or another.

Lawful Sources of Pricing Power
1. Brand identity
2. Patent protection
3. Dominant market share
4. Sustainable cost advantage

In Walton's case, the key to obtaining lower costs was a willingness to violate the retailing industry norm of cordial relations with vendors. Wal-Mart deviated even further from convention when it tried to go around manufacturers' representatives to deal directly with manufacturers.

Do not waste energy on the leveling tones of latter-day socialists who consider it a crime to get rich. Ignore, as well, the envious types who call you greedy.

New ideas have given birth to many immense fortunes, but the original thinkers have not generally been the ones who made the fortunes. A more dependable strategy is to learn how to make money from ideas, and then be prepared to capitalize on an original notion dreamed up by someone who is more skilled at that sort of thing.

Sam Walton, founder of Wal-Mart, prided himself on having appropriated nearly all of his good ideas from his competitors. More than any of the other retailing magnates, however, Walton thoroughly understood how to turn ideas into dollars.

You will not reach even the hundred-million-dollar level without a clear focus and single-minded commitment.

The best odds of becoming a billionaire, in summary, exist in industries that ride the key trends of economic development. This suggests that in newly industrializing countries, great opportunities may remain in infrastructure and basic industries. In the world's most developed economies, however, the cream of tomorrow's billionaires probably will emerge from communications, services, and technology.

The entrepreneur who pulls away from the pack in a young industry has a genuine shot at a billion-dollar net worth.

Overcome the leveling effects of competition by applying superior management skills or investing in political influence.

• Take Extraordinary 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
• Resist the Unions
• Pursue the Money in Ideas
• Rules Are Breakable
• Copying Pays Better Than Innovating
• Keep on Growing
• Hold on to Your Equity
• Hard Work Is Essential
• Use Financial Leverage
• Keep the Back Door Open
• Make Mistakes, Then Learn from Them
• Frugality Pays
• Enjoy the Pursuit
• Develop a Thick Skin

He first asked a farmer to name a price for the drilling rights on his land. Then, Hunt hurried to town and offered the rights to an oil driller at a higher price. Once he had both sides of the trade in place, he would buy and sell nearly simultaneously, pocketing a profit without risking a nickel.

The route chosen by Perot and Walton, requires exceptional resistance to the levelers. If you sincerely want to be superrich, you cannot let yourself be deterred by the unavoidable fact that change upsets people.

Along with his keen instinct for turning a profit, a key ingredient in Perot's success was his ability to build an organization. He recruited self-starters like himself and let them operate with a minimum of bureaucratic rules.

World's shortest procedural manual: "Do what makes sense."

Adopting the motto "whatever it takes," they put in excruciatingly long hours on projects that sometimes kept them away from home for months at a time.

His methods represent a veritable checklist of the techniques that can be culled from studying the careers of the most successful moneymakers. In most cases, he carried the concept far beyond limits that ordinary mortals would find reasonable.

"What sets us apart," Walton said in explaining Wal-Mart's success, "is that we train people to be merchants. We let them see all the numbers so they know exactly how they're doing within the store and within the company; they know their cost, their markup, their overhead, and their profit."

Success is more likely to accrue to people who find intrinsic satisfaction in the accumulation of wealth, as opposed to the possession of wealth.

• Dominate Your Market
• Do Business in a New Way
• Take Monumental Risks
• Consolidate an Industry. Thrive on DealsKey Principles
• Pursue the Money in Ideas
• Develop a Thick Skin
• Rules Are Breakable
• Copying Pays Better Than Innovating
• Keep on Growing
• Hold on to Your Equity
• Hard Work Is Essential

Vaporware. This term refers to the tactic of announcing a software product before it exists, typically to discourage rivals from proceeding with development of competing versions.

High-growth industries that most often spawn vast personal fortunes tend to be characterized by fierce struggles for survival. No one islikely to emerge from such battles without a willingness to push the envelope.

Like Sam Walton, Gates exemplifies the success achievable by those who do not fall victim to the not-invented-here syndrome.

Don't be too proud to take advantage of undeserved good fortune.

Operated within the services category, favoring rental businesses that generate recurring revenues. "If I rent something," he explains, "basically I'm selling the same thing over and over again."

He was eager to move on, spurred less by the trappings of wealth than by the challenge of increasing it.
"Wayne always keeps the carrot far enough out in front of him and he never really wants to catch it," observes Dean Buntrock. "That's his personality. He's never satisfied."

He once remarked that auto sales and rentals represented a trillion-dollar market and that he only wanted his fair share: half.

Associates report being sent back to the negotiating table 15 times or more until they emerge with terms that satisfy him.

"A deal," Huizenga once told an interviewer, with a smile, "it's like chasing a girl. You work at it until she says yes."

Determined to realize his vast ambitions, Huizenga labored hard to master his emotions and channel his immense energy productively.

What could be less complicated than purchasing an asset when nobody wants it, then selling it when no one can live without it?

"If it's truly as simple as that, why isn't everybody rich?" The standard answer offered by financial gurus is that most investors lose their nerve when they see the crowd rushing toward the exit.

Proactive behavior is one common theme to watch for as you read the following sketches of champion bargain hunters. Observe as well the two distinct ways in which billionaires squeeze pennies until they scream. Not only do they pay as little as possible for the assets they buy, but they relentlessly strive to reduce the operating costs of their properties.

Meanwhile, in 1929, the stock market crashed. While others despaired, Getty recognized the debacle as a golden opportunity to satisfy his predilection for paying bottom dollar. Thanks to the plunge in oil company shares, petroleum could be found more cheaply on Wall Street than in the oil patch. "It was foolish," Getty reasoned, "to buy oil properties with 100-cent dollars when you could buy them indirectly with maybe 50-cent dollars.

Laurence Tisch's immense wealth derives mainly from buying low and selling high.
Observers commonly overlook the negotiating skill that has enabled him to obtain bargains that otherwise might have gone to his rivals.
A typical assessment runs along these lines:
To triumph as often as he has, Tisch has thumbed his nose at conventional wisdom. He buys companies or stocks when they are wildly unpopular and shuns anything that is remotely in vogue.
In many such comments over the years, the press has celebrated Tisch's knack for finding value, while obscuring his effectiveness in adding value.

Buying when others appear to be panicking sometimes proves nothing except that there was good reason to panic.

Buffett has not merely bought some shares of a company he likes, but instead has acquired a controlling interest.

Buffett enhanced the value of his investments by becoming an active member of the board of directors.

He began buying entire businesses near the beginning of his stint as a money manager, long before his assets were great enough

An insurance company's potential as the base of an industrial empire has three sources, namely:
• Use of funds that will eventually belong to others.
• Tax benefits.
• Financial leverage.

The opportunity to use other people's money arises from cash reserves created by insurance premiums.
Eventually, the reserves must be paid out in claims, but until then, the insurance company can invest the funds.
Moreover, the earnings generated by those investments are heavily tax-favored.
The third benefit of investing through an insurance company, financial leverage, arises from the ability to generate annual premiums several times as great as the equity invested in the business.
Consider, for example, a company capitalized with $200 million and generating $800 million of annual premiums.
If the insurer earns 6 percent on the resulting investment portfolio of $1 billion, or $60 million, its return on investment (before expenses and taxes) is $60 million over $200 million, or 30 percent.

When one reads that "Warren Buffett" has bought, [for example], an interest in General Foods, it usually means that an insurance subsidiary of Berkshire Hathaway using its reserves built up against future claims-has made the investment, which can cost more than Berkshire Hathaway, the parent company, could readily afford.

He did not immerse himself in day-to-day operations. By and large, Buffett relies on strong managers who share his passion for return on investment.

A bad business usually prevails over a good management.

Buffett downplays the importance of IQ in material success, stressing instead the importance of character and drive.
Fair enough, but there are several different proven strategies for turning those traits into billion-dollar fortunes. Not all of them require exceptional intellectual capacity.
To the extent that Buffett's success has relied on discerning superior values among stocks being scrutinized by millions of other investors, on the other hand, brainpower has been an invaluable asset.
This is a fact worth considering as you try to match your own talents to a specific strategy for reaching the billion-dollar circle.

"The big print giveth and the fine print taketh away." - Bishop Fulton J. Sheen

There are several different ways to realize value in buying and selling businesses.
Negotiating favorable prices, both on the way in and on the way out, is only the most obvious.
Another means of maximizing the gain on the round trip is to finance the purchase on advantageous terms.
Further gains are achievable from increasing the asset's value, following its purchase, through capable management.
Not to be ignored, either, is the compensation that can be extracted during the ownership/management phase.
By exploiting all these profit sources in every transaction, and by doing many transactions, it is possible to amass a sizable fortune.
Identifying the opportunities requires a keen sense of where the deals are at a given time.
Clues can be found in the economic environment, the state of the capital markets, and conditions in various industries.
Essential to astute deal making, as well, is a grasp of complex transactions in which one side may wind up with a subtle, but ultimately decisive, edge.

Tenacity, willingness to risk a huge loss, and creativity in forging agreements are recurring themes.

Wayne Huizenga's creation of Waste Management:
In acquiring independent waste haulers, he minimized the haggling over price by beginning at a level within 5 or 10 percent of the maximum that he would pay.
Then, he would focus the discussion on such issues as the tax benefits of taking Waste Management stock in payment and the seller's ongoing relationship as an operator.

Wayne was famous for, "Do the deal now for $100, do it tomorrow for $90."

Huizenga sought to get deals completed quickly. His team would begin negotiating on Monday morning and work 18 hours a day, seven days a week, until the transaction closed.
He stuck rigorously to two rules:
Wayne Huizenga's Cardinal Rules for Closing Deals
1. Don't lose a deal by failing to pay attention to it
2. Never talk about a deal until it is signed

Deal making on the scale that produces billionaires requires nerves of steel. At one time or another, the three superb negotiators profiled in this chapter have all been in tight spots, facing potential bankruptcy. If they did not enjoy the rush of adrenaline that accompanies a successful deal, they could not have pursued the deal maker's route to massive wealth accumulation. To replicate their success, you too will have to learn to love the deals for their own sake.

Kerkorian employed a core billionaires' technique of sidestepping petty regulations.

Kerkorian lost his investment. He resolved not to invest thereafter in a business he did not run.

The impetus behind Kirk Kerkorian's success has been his restlessness.
The wide variety of businesses he has engaged in supports his claim that he started out with no specific ambition.
"I just tend to get dissatisfied easily and want to do something else," he once explained.
Day-to-day operations hold little appeal for him, but buying and selling companies clearly does, even when incumbent management fights him tooth and nail.

Thriving in the high-stakes environment he relishes requires a strong stomach for fluctuations in fortune. In his first go-around with MGM alone, Kerkorian came close to being wiped out on three separate occasions.

If (weaker people) got into the kind of situation Kirk got into they'd blow their brains out or just fall to pieces. Kirk goes right back in there and says, "Well, what can we do here? Let's start working on it."

It was impossible to deal with Icahn. Every time he thought he had reached an agreement, Icahn would come back to the negotiating table with a new wrinkle or a revised number that altered the terms radically in his favor. He delighted in extracting one wage concession after another.

When a transportation officer admitted he did not know the whereabouts of a customer's overdue shipment, Moyers snarled, "Well, you'd better know tomorrow or you won't have a job."

Soon after arriving at Southern Pacific, Moyers called together 27 vice presidents and told them that within two months many of them would be gone. The meeting was over.

The transaction created the nation's largest railroad and left Phil Anschutz as its largest shareholder. Now it was time for him to go into high gear by applying the billionaires' principle "Keep on Growing."

An ordinary entrepreneur might have simply declared victory after parlaying $90 million into $1.4 billion, but not Anschutz. While cashing in his railroad investment, he held on to a fiber-optics operation he had constructed along the Southern Pacific's rights-of-way. The company, Qwest Communications International, went public less than a year after the Union Pacific-Southern Pacific merger cleared its last regulatory hurdle. Within six months, the stock had risen by about 175 percent. The 85 percent stake that Anschutz retained was valued at $3.5 billion; his initial investment in the venture amounted to only $55 million.

Phil is very astute in analyzing what it is that is going to be the next most important business or marketplace. He takes advantage of his assets in ways most other people don't.

Like most successful deal makers, Anschutz showed a keen eye for value from his earliest days. He was only 27 when he learned of a collection of western art in the basement of the Atchison, Topeka & Santa Fe Railway's Chicago headquarters. The railroad had originally commissioned the paintings as models for travel posters. Managing to gain an interview with the company's chairman, Anschutz offered to catalog the largely forgotten works in exchange for the right to purchase a few. The 85 paintings that he bought for a song a few days later were eventually valued at several million dollars.

"It's important to have your back to the wall," Phil Anschutz commented, recollecting the oil-field fire. "It teaches you how to think outside the box."

Sheer determination has been a consistent theme of the marathon runner's long-run success in amassing wealth.

He lays down his stipulations and then won't budge. He's a smart guy out to make a buck. The amount he's already made doesn't matter.

It would be inaccurate to characterize the subjects of How to Be a Billionaire as hands-on managers. Getting bogged down in operational details would have diverted their attention from the more essential task of amassing personal wealth. Instead, they have focused on three essential aspects of management: organization, recruitment, and motivation.

Group-thinkers have not cracked the Forbes 400 in significant numbers for one simple reason: Doing the same thing in the same way as everyone else is decidedly not the way to overcome the leveling effects of competition.

Outorganizing the competition, in contrast, is one proven method of breaking away from the pack. The opportunity arises precisely because of certain maladies that give the word "organization" a negative connotation. Companies that exhibit the following sorts of behavior become sitting ducks for rivals that can respond quickly and effectively to an evolving competitive environment:
• Long lines of communication keep senior management unaware of changes in the marketplace.
• Fear of rocking the boat discourages employees from coming forward with worthwhile ideas.
• Primary focus on avoiding mistakes deters managers from taking risks.
• Obsession with defending turf diverts managers from capitalizing on business opportunities.

What makes the self-made billionaires' knack for building effective companies distinctive has little to do with the formal elements, such as organizational charts and performance measurement. It is more a matter of giving their organizations the stamp of their invariably strong personalities.

Most self-made billionaires have preferred to focus on more lucrative activities. By swinging more deals and overcoming the leveling effect of competition, they have become far wealthier than managers who were much more adept at handling the details.

John D. Rockefeller Sr. hired talented people whenever he found them, rather than according to need, confident that Standard Oil's growth would create many spots to fill.

He recognized talent even in opponents.

Perot put extraordinary effort into evaluating new hires. He devised a 20-page application that asked candidates, among other questions, what they considered the greatest accomplishments of their lives. He met with the wives of the candidates, exploring whether they would tolerate the demands that EDS would put on their husbands. In the early days, a candidate did not get hired before interviewing with every single existing EDS employee.

While Microsoft has attracted aggressively intellectual types characterized as clones of Bill Gates, Sam Walton's top aides were typically ambitious small-town men like himself.
Wayne Huizenga's senior managers have tended to be former football players with middle-class, Midwestern backgrounds.
Ross Perot created EDS in his own image by hiring hard chargers with military backgrounds.
In recruiting people who shared their views of the world, however, the billionaires did not seek yes-men.
Confident enough not to feel threatenedby strong subordinates, they generally valued aides who were willing to defend opposing points of view.

Gates estimates that he devotes 70 percent of his time to review meetings with small product development teams.

The main reason for taking Perot Systems public in 1999, he says, was to motivate employees. "I want them to know what their work has produced in the way of value. Nothing motivates a team like having them have stock."

The personal loyalty that Perot commanded by taking a direct interest in his employees' lives.

• Attract managers with enough self-confidence to challenge your own judgment on matters.
• Delegate authority to detail-oriented executives who can free you to concentrate on billion-dollar ideas.
• Stay close enough to operations to be aware of problems and opportunities, making sure that your lieutenants follow up on suggestions for improvement.
• Constantly reinforce a focus on controlling costs.
• Use equity incentives to provide your managers and other key employees a realistic chance to become millionaires.
• Show genuine, personal concern for people within your organization.
• Promote morale by maintaining a sense of fun along with seriousness of purpose.

Branson motivates employees to excel by putting them into slightly higher positions than they expect. Like Kirk Kerkorian, Branson has no difficulty delegating day-to-day operations, much preferring to spend his time on new ventures. As long as a business is doing well, he does not bother to meet with management, while making himself available for crises.

"He's only interested in the chase of the deal-at the point he feels he has it locked up, he loses interest in the details."
Associates of consummate deal maker Wayne Huizenga describe him in similar terms.

You will have to supplement your native talent with acquired skills.
To become an outstanding builder of organizations, Wayne Huizenga had to correct an early tendency to be curt toward people who did not grasp points he considered self-evident. Intimidated by this reaction, employees would sometimes fail to pass along important information.
Ross Perot and Sam Walton had to revise their original inclination to reward only senior managers generously, which caused lower-level employees to feel like second-class citizens.
This sort of adaptability is one of the most important traits that you should strive to stamp on your organization.

"Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort." - Franklin D. Roosevelt

An analysis of the great fortunes founded since the nineteenth century showed you that they greatly improved their chances by focusing their energies in high-growth industries. You then studied the nine fundamental strategies that the self-made billionaires pursued:
• 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
• Resist the Unions

The billionaires' stories showed you the extraordinary power of the following key principles:
• Pursue the Money in Ideas
• Rules Are Breakable
• Copying Pays Better Than Innovating
• Keep on Growing
• Hold on to Your Equity
• Hard Work Is Essential
• Use Financial Leverage
• Keep the Back Door Open
• Make Mistakes, Then Learn from Them
• Frugality Pays
• Enjoy the Pursuit
• Develop a Thick Skin

Genuinely resolving to become a billionaire means committing yourself wholeheartedly to the goal. It requires a dedication no less intense than training to swim the English Channel. Making up your mind to be superrich means subordinating other goals to an all-consuming quest for wealth.

You will not prosper by performing any activity in a perfunctory way, regardless of whether it has to do with making money. Far from distracting you from the goal of becoming superrich, intensely applying yourself to other aspects of your life will cultivate the habit of excelling.

Bill Gates's intensity extends beyond the workplace. When he was dating Ann Winblad, another pioneer in the computer software industry, the couple chose motifs for the brief vacations they could spare the time to take. On a physics-themed vacation, for example, they read as many books on the subject as they could pack and listened to recordings of a lecture series by Richard Feynman.

To perform like a champion, you also have to outflank thousands of competitors who are perspiring every bit as profusely as you are. To avoid being leveled out with the rest of them, you must do something different. You have to contemplate bigger risks, try unorthodox business strategies, or raise the ante in making deals. It is all right to copy someone else's idea, but you have to execute it better. Ordinary efforts and conventional approaches do not produce extraordinary wealth.