How the Rich get Richer

Once in a while magazines and websites like Forbes, Fortune, Bloomberg or even your newspaper publish an article which comes down to ‘ the Rich have become more Rich this year’. What follows is a nice overview of who became more rich and what made them became more rich. You never read how the Rich get Richer. It’s like giving a man a fish instead of teaching him how to fish.……

In reality the formula on ‘how to become Rich’ and how the rich get richer isn’t that difficult. The most important aspects of the formula are time and patients.

In other words ‘let money work for you’.  The question to answer is ‘how do I let money work for me ?’  This is something the rich understand very well.

When we look at the self-made richest of the rich they all have something in common. They grow their income on a day to day, month to month, year to year basis.

To generate income they put their money to work by using scientific precision.  They use the principal of buying income generating assets with the lowest risk and the highest potential return.

One of the world’s most famous examples of buying a low risk income generating asset with the highest possible return has been the purchase of 7% or 23.4 million shares of Coca Cola by Warren Buffet the Chairman and CEO of Berkshire Hathaway.

Warren Buffet bought the shares for Berkshire Hathaway in 1988 when Warren Buffet found that the price of Coca Cola shares had a substantial discount to the real value of the stock. Buffet also found that the risk of Coca Cola was very low at the time due to it being the leading soda company worldwide and its focus on global expansion. Buffet knew that all these factors combined meant growth of the free cash flow in the near future against minimal risk.

Today the investment in Coca Cola made by Warren Buffet has resulted in a dividend yield of more than 50 percent! Which made Coca Cola the investing opportunity Warren Buffet loves.

The example of buying assets below real value just shows one of the ways the rich get richer. Other ways the rich get richer are mainly related to the growth of free cash flow of their investments, by focusing on:

           Increase of income

          Decrease of  expenses

          • Lowering debt.

When a company raises its sales price per unit it potentially can increase its income. By cutting costs the company decreases expenses. And by lowering the company’s debt, the interest on the debt no longer has to be paid and the income grows.  All these actions result in the growth of free cash flow.

Another very common way the rich get richer is the buyback of shares. This is when a company buybacks its own shares. This has two positive effects for the rich get richer.

1. By buying back shares companies decrease the shares outstanding, making the remaining shares more valuable.

2. Companies use a certain percentage of their free cash flow to pay dividends to their shareholders. When a company lowers the amount of shares it pays dividends to, it can raise its dividend per share, because the company will keep on paying the same amount of dividend. That means that there are fewer shares to pay the dividend to, which increases the dividend per share.

3. In the case of the richest of the rich they own a (majority) of shares in (multiple) companies. The increased dividends and higher valuation of the shares they own make them become more rich.

However the dividends they receive from their investments is their real income, they use it to their own pleasure. They re-invest the dividends to build more assets and income streams and with that more wealth. Or they realize their dreams of traveling, building their dream houses or buying their desired cars.

By taking their time, being patient and keep on holding their investments (shares) the rich get richer