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Some Interesting Facts about the Ultra Wealthy

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A few days ago, a client directed our attention to this CNBC article about ultra-high net worth (UHNW) people around the world. According to a report issued by UBS and Wealth-X, individuals worth $30 million more now number 211,275, making up .004% (1 in every 25,000) of the world's adult population and controlling 13% of its wealth. Their number grew by 6% from 2013. The U.S. portion is 69,560 or about one-third of the total. About one in every 3,500 American adults belongs to this elite group. The male/female breakdown is 87%/13%, which is rather unfortunate because women in that group donate an average of 26% more to charitable causes than men. The majority (64%) of the UHNW population is self-made while only 17% have fully inherited their wealth. The predominant industry of employment is "Finance, Banking, and Investment".

The part of the report that we found most interesting pertains to how the wealth of UHNW people is deployed. According to Simon Smiles, the chief investment officer at UBS Wealth Management, "This report finds that UHNW individuals hold nearly 25%--an extremely high proportion of their net worth in cash." Having such a large allotment to cash subjects them to the erosive effects of inflation, but for the ones that are careful to live below their means (which still allows them to live pretty large) inflation is probably not a major concern. Some observers may interpret this large cash position as a bearish sign for the financial markets, reasoning that if the smart money is ducking out then it must be the dumb money that is staying invested. We would strongly disagree with this point of view. The list of Stock Market Guru Grades maintained by CXO Advisory Group includes a disproportionate share of UHNW individuals, and they have demonstrated no special ability to forecast the direction of the market.

Since UNHW individuals have two-thirds of their equity holdings in private businesses (with the remaining one-third in public equities), wealth concentration is perhaps the biggest risk facing UHNW individuals, according to Mr. Smiles. In some cases, of course, concentration is simply unavoidable and not necessarily a bad thing. In past articles where we have cautioned investors about the difficulty of achieving acceptable risk-adjusted returns as minority shareholders in private companies where they are purely a supplier of financial capital, we were definitely not referring to the situations of UHNW entrepreneurs who bring their full human capital into their businesses. An important part of their human capital is their network, and according to the report, they tend to have large social networks that include about seven other UHNW people of whom at least one is a billionaire.

At Index Fund Advisors, we believe that there are many positive lessons we can learn from UHNW people, especially the self-made ones. Jealousy of them is both unwarranted and personally destructive. Regarding the much-discussed issue of inequality in America, we thought that Professor John Cochrane of the University of Chicago Booth School of Business made a great point in a Wall Street Journal Op-ed when he said, "Yes, the reported taxable income and wealth earned by the top 1% may have grown faster than for the rest. This could be good inequality—entrepreneurs start companies, develop new products and services, and get rich from a tiny fraction of the social benefit. Or it could be bad inequality—crony capitalists who get rich by exploiting favors from government. Most U.S. billionaires are entrepreneurs from modest backgrounds, operating in competitive new industries, suggesting the former." Like Cochrane, we are grateful to live in a country where the accumulation of wealth is facilitated by property rights, rule of law, economic and political freedom.