4 Ways Investing Like A Billionaire Isn’t Financially Smart
Following the financial advice and actions of the filthy rich seems like a good idea.
Many people believe that mirroring the investing strategies of billionaires will one day make them a billionaire. Shadowing every investing move of the Warren Buffetts of the world should make strong financial sense.
Well, not exactly.
“Billionaires tend to have both different money needs and access to different money tools than we ordinary folks do,” explains Motley Fool writer Chuck Saletta in an article published on the Waco Tribune-Herald. “They also tend to have the ability to lose millions of dollars and not even feel it, whereas if you or I lost that much, it would likely be devastating.
So what are the things billionaires do with their money that regular folks like us should avoid?
First, billionaires need less of their money than the average person. A billionaire can be aggressive with investments because they don’t have to worry about having money when things go wrong.
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“Billionaires not only have more money than the rest of us do but also one where they need less of what they have in order to cover their absolutely necessary costs.
In addition, it’s easier for the rich to afford more efficient & environmentally friendly things like solar panels, electric cars, and high-efficiency insulation, windows, and other building materials.”
In other words, taking an extra $500 from savings to investing seems like a smart idea until the car needs four new tires or all the appliances in the house decide to stop working.
The next reason to avoid investing like a billionaire is that most of a billionaire’s money is tied up in the company that made them rich.
The article explains:
“Many billionaires became billionaires because they were the founders of an ultimately successful company or the turnaround expert who saved a struggling business.
As a controlling shareholder or influential leader of the business, their financial fate is largely in their own hands with that setup. If you’re not in such a position, then having too much of your net worth tied up in your employer’s stock can actually end up as one of the biggest financial mistakes you can make.”
This leads us to the third reason not to invest like a billionaire – the incredibly rich can’t diversify the way the average investor can.
Billionaires can’t diversify because, to do so, it usually means dumping a ton of stock in their own company. This is typically a public relations nightmare.
“When an executive sells a large chunk of shares, it tends to raise very public questions on whether that executive really believes in the future of the company. That tends to keep billionaire CEOs and other executives invested even if they know they really should diversify their holdings.”
Plus, diversifying costs a ton of money in taxes.
“Assuming most of those billionaires’ riches come from highly appreciated stock, even a small act of diversification can be costly. 1% of a $1 billion nest egg works out to $10 million.
If that has a near $0 basis, the billionaire can easily face over $2.3 million in federal taxes. In addition, state and local taxes on top of that could drive the total tax bill above $3 million.”
And the final reason to investing like a billionaire isn’t all it’s cracked up to be is because the average investor can get in on faster-growing companies quicker than the billion-dollar players.
“With a huge asset base, you simply can’t buy enough of a small, fast-growing company to make a difference to your overall portfolio. That gives you one major advantage over the billionaires of the world: You can position the growth portion of your portfolio for the potential for higher returns than those biggest investors can.”
As the article points out, billionaires might have more money to play with, but the average investor has access to faster growth investments, and diversification is much easier. This allows smaller stock market players to make a nice little chunk of change for themselves.