Tuesday, May 24, 2016

Book review: "The Very, Very Rich and How They Got That Way" by Max Gunther

Before Forbes began publishing its list of the 400 richest Americans, Fortune magazine compiled its own annual rich list. Max Gunther's The Very, Very Rich and How They Got That Way profiles fifteen self-made millionaires who were featured on Fortune's lists during the late 1960s and early 1970s.

The Very, Very Rich is haphazardly written: Gunther wrote some of the fifteen profiles, but others are reprints of older magazine articles. Interspersed among the profiles are digressions about financial history, the psychology of the rich, and the role of luck in making money. The book is worth reading because it describes people and events that, despite their importance to financial history, are largely forgotten today. But don't expect it to have any logical organization or narrative flow.

Demographics of the ultra-rich

The ultra-rich from 40-50 years ago were a very different group from today's billionaires. Gunther mentions that more than half of the people on Fortune's 1968 list inherited their money.

Many of today's most prominent billionaires, like Bill Gates, Larry Page, and Mark Zuckerberg, went to elite colleges and became rich while they were still in their twenties. Academic success and early wealth weren't the norm for Gunther's subjects. Most of them started businesses during their twenties but didn't really make it until their thirties or even later. At the extreme end was Ray Kroc, who spent most of his adult life as an unsuccessful salesman before he came up with the idea for McDonald's at age 52.

Only one of Gunther's subjects, William Benton, attended an Ivy League college. Appropriately, he got rich by publishing Encyclopedia Britannica. Most of his subjects lost parents to death or divorce while they were young; they were also themselves far more likely than the general public to divorce.

Notable profiles

Joe Hirshhorn: Hirshhorn became rich in the 1920s by speculating in the stock market and got out before the market crashed in 1929. (The book isn't clear about whether his getting out was luck or foresight.) Later, he became an investor in the Canadian mining industry. Most of the mining companies he bought into were small and speculative, but he generally made money.

In the 1950s, he staked a geologist who discovered an enormous uranium deposit in Northern Ontario. They assembled a large mining claim in the area and then sold it to Rio Tinto for a windfall profit.

Most commercial geologists never find a deposit that's capable of supporting a profitable mine, so the discovery that made Hirshhorn's fortune was a total fluke. But I think one can say that his skill—specifically, his knowledge of mining and the investing savvy that made him rich enough to stake new ventures—put him in unique position to capitalize on that kind of fluke.

Daniel Ludwig: Ludwig was small, unsuccessful shipowner until his late thirties, when he acquired surplus ships from the US government at a bargain price. He then pioneered a new way to finance the acquisition oil tankers and grew rich after World War II. In 1982, when Forbes published its inaugural list of the richest Americans, Ludwig was in first place.

You can read his chapter here.

Jeno Paulucci: Paulucci created a brand of fake Chinese food called Chun King, grew it using innovative television advertisements, and sold it to R.J. Reynolds for nearly $63 million in 1966. When he died in 2011, however, his estate was worth only $150 million. While the story of how he made his fortune is interesting, I think the story of how he subsequently failed to grow it at even the rate of inflation would be more interesting.

Clement Stone: Stone began selling insurance as a teenager, and by his late twenties he was the founder and head of a successful insurance agency. He managed to grow the agency during the Great Depression, and in the late 1930s he received his big break: a financial conglomerate wanted to sell a small insurance company it owned, and it was willing to let it go at a bargain price. Stone didn't have enough money to buy it, but he convinced the seller to lend him the entire purchase price. Over the next few decades, he transformed the acquisition into a major insurance underwriter.

That acquisition, as advantageous as it was for Stone, isn't historically unique. Conglomerates are often dumb, motivated sellers, and buying from them is an underappreciated way to get rich. A few similar examples:

• In 2003, BHP Billiton wanted to sell the minority interest it owned in an Argentine gold/copper mine. It sold it to Northern Orion at a price below net asset value and offered financing for part of the purchase. The sale took place a month before the commodities bull market took off.

• In 1977, a conglomerate called National Kinney sold a collection of Manhattan office buildings to the Reichmann family for $325 million. The buildings were sold at a low enough valuation that the Reichmanns were able to borrow nearly the entire purchase price. Eight years later, the buildings were worth more than $3 billion.

• In 1982, Wesray acquired Gibson Greetings from RCA for $80 million. As with the Reichmanns' acquisition, Wesray bought Gibson cheaply enough that they could borrow nearly the entire purchase. Gibson went public at a $290 million valuation sixteen months later.

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