While getting my daily dose of Warren Buffett, I stumbled across an interesting question: Someone asked the legendary investor at one of Berkshire Hathaway’s annual shareholder meetings. Something along the lines of: “As you and Bill Gates are two of the world’s richest people, you must know a lot about accumulating money. Would you suggest that I piggyback the two of you by buying shares in Microsoft and Berkshire Hathaway?” Buffett, in his usual tact, answered that “Well, I won’t give you any specific stock recommendations" but my own interest was piqued. Therefore, I decided to do a little bit of investigation to be able to answer the following question for you: “What if you invested with the world’s 5 richest people for 20 years?” Would this be a good strategy to outperform the general stock market? After seeing this post, you’ll be able to decide for yourself whether investing with the richest in the world could be a valid portfolio strategy. This is the Healthy Mind - Think Big, bringing you the best tips and tools for reaching financial freedom through stock market investing.
 |
| Photo by Giorgio Trovato on Unsplash |
Let’s pretend that you, back in 2001, had $50,000in a Roth IRA retirement account which you wanted to invest to reach financial freedom as fast as possible. Don’t worry, by the way, if you do not have a Roth IRA, you can use a similar strategy anyways it just simplifies some of my calculations massively. Also, the amount of money is of course arbitrary.
Let’s also pretend that a friend of yours told you about the iShares Core S&P 500 ETF, which is an index fund tracking the S&P 500 stock market index. You considered this one of your investing options. Your friend emphasized how simple this strategy is – just take your $50,000, invest them in the iShares Core S&P 500 and wait for 20 years while letting compounding do its wonders. Also though, the magazine Forbes had just released its list of the richest people in the world, and, as you decided that these must be people who understand money well, you considered investing in their companies as your 2nd option.
This portfolio strategy is quite simple too. In March each year, Forbes released their “ForbesBillionaire’s List” which lists the richest people in the world. You will invest with the top 5 each year, by allocating 20% of your portfolio with each of these billionaires' most important investment, аnd then change your holdings each year if needed.
Let’s see which strategy would have been the most profitable one in the last 20 years. In March 2001, you would have looked at the “Forbes Billionaire’s List” and seen: - In the first spot, the richest person in the world in 2001 - Bill Gates, the founder of Microsoft - In the second spot – Warren Buffett, investor and owner of the conglomerate Berkshire Hathaway - In the third spot – Paul Allen, co-founder of Microsoft (yes, there will be a lot of Microsoft on this list) - In the fourth spot – Larry Ellison, founder of the software company Oracle, and; - In the fifth spot - Al Waleed bin Talal, member of the Saudi royal family and founder of the Kingdom Holding Company, also a conglomerate So you decided to put 20% of your portfolio, $10,000, into Berkshire Hathaway, Oracle and Kingdom Holding Company. Also, you’d put 40% into Microsoft, as two of the top 5 people were from the company. If you did that, your portfolio would have looked like this a year later in March 2002. Shares in Microsoft gained 10.6% during the year, Berkshire Hathaway gained 8.7%, Oracle lost 12.3% and KingdomHolding Company lost 11.5%. In aggregate, you would have gained1.2%, now sitting at $50,613. That doesn’t sound too impressive, but you should consider that you’d beat the iShares Core S&P 500 ETF by about 9% as this investment lost 7.6% during the same period.
Alright – it’s the 5 richest in the lead. In March 2002, you’d find a similar group of people on the list with one exception the 5th richest person in the world was now Jim Walton of the Walmart family. I think is notable here is that Jim Walton basically shared this spot with his mother Helen and his three siblings Rob, Alice, and John. Meaning that, would Sam Walton, the original founder of Walmart, have been alive, he would have been the world's richest by far at this point. So in March 2002, you’d rebalance the portfolio to hold 20% Berkshire Hathaway, Oracle, and Walmart and again, 40% Microsoft. Then, in 2003, your portfolio would look like this. This wasn’t a great year for the 5 richest and your portfolio would have lost 17.3%. But at least it would have been better than how stocks fared in general. The iShares Core S&P 500 ETF lost 24.5% during the same period.
In 2003, Forbes listed the usual suspects among the richest in the world. After rebalancing your portfolio, you’d end up with something looking like this in 2004. Warren Buffett’s Berkshire Hathaway would have delivered a slam dunk for your portfolio by gaining 46.2% in the year. Therefore, it would now make up about 25% of the total. Unfortunately, Berkshire’s success wasn’t enough to keep the S&P 500 from catching up with you. The portfolio of the 5 richest gained on average just 16.8% during the year while the S&P 500 ETFgained a massive 40.7%.
In 2004, a new face appeared among the 5 richest. Before he had only been listed together with his brother so that made me divide his wealth in two. Now Karl Albrecht from Germany was able to secure the third spot with his Aldi Süd a massive supermarket chain. Rebalancing and updating your portfolio to reflect the holdings of these 5 individuals in March 2004, your portfolio would look like this one year later in 2005. The portfolio imitating the 5 richest would now be worth $47,304 while the portfolio consisting of the ETF would be worth $52,276.
In 2005 Forbes listed two newcomers. The third-richest person in the world this year was Lakshmi Mittal from India, founder, and owner of the largest steel producer in the world – Arcelor Mittal. Moreover, in fourth place, we had Mexican Carlos Slim. Carlos Slim’s wealth seems to stem primarily from two sources: América Móvil, a Mexican telecommunications corporation, and Grupo Carso, a diversified conglomerate. Slim has been facing some controversy over his wealth, but his influence as a businessman cannot be denied. Just consider that when Slim invested in American companies in the early 2000s, the running joke among Mexican businessmen was that they moved because “there’s nothing left to acquire in Mexico”. Mexico itself is sometimes referred to as “Slimlandia” as it is almost impossible to go a day in the country without contributing to Carlos Slim’s wealth. After holding on to these 5 people’s companies for a year, your portfolio would look like this. Note that I assume that you’d invest 50-50 in América Móviland Grupo Carso to replicate the wealth of Carlos Slim. And well, while most of the holdings in the portfolio failed, this would have been a good move. The returns on América Móvil and Grupo Carsowas an average of 63.3% during the year, taking the portfolio total to 16.6%, which would have beaten the S&P 500 ETF.
While it seemed utterly impossible to steal the top 2 positions from Bill Gates and Warren Buffett in 2006 we finally got some Swedishviking-power added to the list of the world’s richest. Enter: Sweden’s Ingvar Kamprad. Ingvar Kamprad was the founder of the furniture store company IKEA. IKEA has mastered the art of building maze-like warehouses which you cannot escape without accidentally buying something you didn’t actually come for. Secondly, they’ve mastered the art of forcing customers to do it all themselves. Also, they serve really good meatballs. Investing with these people in 2006 would make your portfolio look like this in 2007. The portfolio strategy replicating the 5 richest would once again be on top of the leader board when you consider aggregate returns. Now, your portfolio would have been worth$67,402 versus $62,829 for the S&P. There’s nothing much to say about 2007 really. You invested with the same people as in 2006. Your portfolio would have looked like this after a year. You’d beat the S&P 500 by a hefty margin.
In 2008 though, boom! We finally saw the greatest investor of all Time Warner Buffett topping the charts. Also, in the fifth spot, we now had IndianMukesh Ambani, son of Dhirubhai Ambani, who founded the conglomerate Reliance Industries. With the benefit of hindsight, we now know that during the ensuing 12 months, a financial calamity hit the world. And who’s the financial equivalent of the Fort Knox? That’s right, it’s your Warren Buffett’sBerkshire Hathaway. During the period, Berkshire Hathaway lost the least of its market cap among many, many other companies. It is truly as Buffett has said: “Only when the tide goes outdo you discover who's been swimming naked.” Nonetheless, the portfolio of the 5 richest would have lost more than the S&P 500 did during the same period.
In 2009 Sweden’s pride Ingvar Kamprad was back on our list and you’d imagine that with this strong setup, the S&P 500 should have been no match this year. The portfolio rebounded, led by Microsoft and by Slim’sholdings, and managed to return an average of 51.5%. Impressive stuff. Unfortunately, for the credibility of this investment strategy, the S&P 500 returned even more – a whopping 62.6%. While the portfolio of the 5 richest would still have been in the lead, I’d say that the returns of both strategies have been quite lazy so far. It is no wonder that, among the investing community, this period in the stock market is referred to as the “lost decade”.
2010 came around. Forbes magazine said: Round up the usual suspects! The portfolio didn’t do anything spectacular really and was crushed by the S&P 500 ETF. We’re now hoping for a regression to the mean.
In 2011 we had a newcomer to the list – Bernard Arnault- the owner of the luxury conglomerate LVMH which owns brands such as Moet and Louis Vuitton. Apparently, the top 1% changed their spending habits most peculiarly as their response to a financial crisis. Moreover, at this point, Carlos Slim’s wealth represented 7% of the total economic output of Mexico. No wonder that some referred to the country as “Slimlandia”. Microsoft and the newcomer LVMHoutperformed the rest of the holdings, but still didn’t manage to get the average of the portfolio up high enough to beat the iShares Core S&P 500 ETF.
2012 came around and Spanish Amancio Ortega made it into the top 5. Ortega owns the company Inditex, which is most famous for its apparel retailer Zara. I have a quick side-note on this. Zara is one of the major competitors of Swedish H&M. Early on in my investment career I was choosing between H&M and another Swedish clothing company called Björn Borg (named after the Swedish tennis player) for the final pick of my portfolio that year. Zara was one of two reasons why I picked Björn Borg instead of H&M, the other reason being that a friend of mine liked Björn Borgbetter. I know – big mistake. And the stock market showed me how wrong I was in the next year. Anyways, after investing 20% of your capital with each of these five gentlemen, your portfolio would look like this in 2013.
The newcomer delivered an absolutely massive performance during the year, but again, the S&P 500 ETF proved to be a formidable competitor.
I think I’m going to speed through two of the years here because nothing of major importance happened with the companies in the portfolio. Microsoft performed quite well going into 2014 so that 2013 would have yielded 14.7%. We would have invested with the same people again next year, Zara did a great job, and we returned 16.1% on the year. At this point, this feels like the end of a Rocky movie. The 5 richest, our protagonist, has been taking L's for no less than 7 rounds straight. He is down and seriously injured. But will he be able to get up again before the closing credits …? It seems like it's time for some change, but apparently, we'll have to hold our breath for another year.
2015 showed quite unimpressive returns, but at least the strategy would have beaten the S&P 500 for the first time in what, 8 years? When we entered 2016 we saw a small glimpse of hope through. At the 5th spot of the richest people in the world was Jeff Bezos, the founder of Amazon. Something that I find interesting is that Bezos was close to making this list already in December 1999at the top of the dot.com bubble. His Amazon was valued at some $30b and he owned about 35% of the outstanding shares at the time putting his wealth at $10.5b. It then dropped about 95%, but in 2016 Bezos was making a strong comeback. Amazon was the big winner in the portfolio this year, and by 2017 it would have made gains of 51.8%. It wasn’t enough to beat the S&P ETF, but the team of the 5 richest seemed to have found its new golden boy.
So Bezos climbed to become the 3rd richest in the world in 2017 thanks to those stock market gains. Meanwhile, we were joined by another internet entrepreneur in Facebook’s Mark Zuckerberg. Together, the two produced huge returns during the year and helped the portfolio of the 5 richest to crush the S&P 500. Note that we are finally looking at some real gains here. Both strategies have managed to just about triple the $50,000 that was initially invested in 2001.
A massive yearly 85.9% return put Bezos into the position of being the world’s richest in 2018. It turned out to be a mediocre year for stocks in general, but investing with the 5 richest proved more profitable than average stock market investing.
In March 2019 Forbes would have given us an update that Carlos Slim wanted to join the portfolio once again. Remembering the good old days when Slim used to contribute with returns in the 60%+ category, we would not have hesitated. That proved to be a mistake, but hey, you can’t be right every time. At this point, it was a really close race. The investment strategy imitating the portfolio of the 5 richest was at $178,739 cumulative versus $181,601 cumulative for the S&P 500 ETF.
In March 2020 we already knew that there was a virus spreading, which potentially could cause all sorts of problems in the global economy. What I think most of us couldn’t really foresee was how incredibly beneficial this would turn out to be for the wealth of the five richest people in the world, and therefore for this investing strategy. Amazon, Microsoft, and LVMH contributed towards a massive average return of 51.7% during the year. The average gain of the S&P 500at 25.8% didn’t stand a chance. As this is the final year of the comparison of the two strategies, investing with the 5 richest is the winner.
Over the course of 20 years, it returned about $40,000 more on a $50,000 account than regular index investing did. There are some limitations to these results which you should hear before you head out and try to imitate the same strategy, but first, let me give you some interesting statistics about this data. Bill Gates and Warren Buffett seem almost impossible to knock off these leader boards as they’ve appeared in all 20 of the years we’ve looked at. That’s quite impressive. Something else that I find interesting is to look at the number of entries on this list per country. We can see that the US wins by a large margin here. But when we look at a more important figure, which of course is the number of entries per capita, we can see that Sweden takes the number 1 spot. 300 entries per billion inhabitants. Yea … pretty good huh …?
Multiple limitations are surrounding a study of this sort which you should know about I’ll go through some of them quickly here:
1. Some of the companies would have been difficult to invest in as they do not appear on a regular stock market exchange. IKEA is one example.
2. Although both investing strategies would have been hit by taxes had we not simulated them in a tax-exempt account such as a Roth IRA, the strategy of investing with the 5 richest would have been hit harder as|there’s more portfolio turnover.
3. Speaking about portfolio turnover – investing with the 5 richest would also have created more fees which you'd have to pay to your broker.
4. This comparison may suffer from some selection bias. I may not have thought about doing this research at all hadn’t I known that the wealth of the richest people have exploded lately.
5. Historical returns are never a guarantee for future results and I’m suspecting that we might see some regression to the mean in the holdings of the 5 wealthiest in the coming years. Especially if Forbes decides to include a certain carmaker among the top 5 in 2021.
Alright, that’s it for today! I hope you enjoyed the history of the richest people in the world and that this might have sparked some investment ideas of your own. If you want to learn about Warren Buffett’s 25 most important investments, the investments which enabled him to end up on the Forbes list of billionaires in the first place, check out this post. Cheers!
How Warren Buffett Made His First $1,000,000 at age 31 | Healthy Mind - Think Big