Wealth Secrets of Financial Elites

How do financial elites gain effortful power? What are their wealth management secrets?

 

Chrystia Freeland’s book Plutocrats: The Rise of the New Global Super-Rich (New York: Penguin Group, 2012) suggests three factors:

 

1. Anti-fragility or positive growth from the interaction of volatility and time. Freeland focuses on forces like entrepreneurship, globalisation, technology and political change. The “anti-fragility premia” is perhaps best discussed in Nassim Nicholas Taleb’s options trading and philosophy work.

 

2. Capital Accumulation as inter-generational wealth creation. Pick a famous dynastic family like the Carnegies or the Rothschilds. Capital Accumulation can be expressed as the positive growth of wealth over time expressed as a Present Value to Future Value cashflow. This process can also be considered in terms of the financial decisions that we make over our lifespan: decisions today set-up the potential favourable conditions for tomorrow. Warren Buffett’s official biographer came up with a memorable image to describe this process: The Snowball.

 

3. Rent-Seeking: Rent-seeking is control of financial / real assets that allow for Capital Accumulation to occur (as an extraction premia). Gordon Gekko exemplifies this in the Oliver Stone film Wall Street. Rent-seeking may be done via entity structures (such as a pass-through vehicle like a limited liability partnership) and through wealth management strategies (such as funds management and legal tax minimisation).

 

Freeland and others suggest that Superstars are able to use these three factors to gain cumulative career and financial advantages.

 

This leads to the following equation for elites: rent-seeking control of PV and FV cashflows + anti-fragility + volatility (where the first two are stronger than volatility, which in the case of events like the 2007-09 global financial crisis, can still lead to significant drawdowns).

 

An example from my own life: the 1998-2008 period of work with The Disinformation Company Ltd (now TDC Entertainment):

 

1. Pick an anti-fragile trend – such as pre-millennialist conspiracy theories in the mid-late 1990s and a web portal platform during the 1995-2000 dotcom speculative bubble.

 

2. Set-up a structure for capital accumulation: TDC as a Delaware-registered company that engaged in book, television, DVD, web, and conference projects and that built an audience.

 

3. Rent-seeking over time via the free cash-flows from the project portfolio.

 

You can find and understand examples from your own life.