Editor’s note: This article was first published in June 2015, and describes Chhabra as Merrill Lynch’s chief investment officer, his role as of 2015. Its Forbes 400 observations also date from then.
Billionaires may look like geniuses, but in reality they are pretty dumb. At least, that is how the average person sees them before they become rich.
Merrill Lynch’s chief investment officer, Ashvin B. Chhabra, decided to study the 400 richest Americans on the Forbes 400 list to see what they had in common, even though they made their fortunes in very different ways.
In his book The Aspirational Investor: Taming the Markets to Achieve Your Life’s Goals, he divides billionaires into four categories: entrepreneurs, money managers (mostly hedge fund managers), real estate moguls, and those who inherited their fortunes.
He found that whatever category they fall into, they all share one trait: they ignore conventional wisdom about how to invest.
(Read: This is the most important trait of top entrepreneurs)
They skip some of the advice that the rest of us consider smart. For example, they do not grow their wealth by investing in diversified portfolios.
One of the most common pieces of advice from financial advisers is “don’t put all your eggs in one basket” and to diversify sensibly. For some of these billionaires, however, diversification is something that protects you from your own ignorance when you don’t know what you are investing in.
Either way, whether we are talking about investors or entrepreneurs, in most cases they did the opposite: they went all in and all out, probably putting all their eggs in one basket. But, mind you, putting a lot of eggs in it.
Chhabra says:
“The four main sources of wealth represented on the Forbes 400 list involve ‘idiosyncratic risk’, the kind of risk that, according to the theoretical principles of modern investing, ‘rational’ investors are advised to eliminate or limit through diversification.
However, most of the people on the Forbes list believed, and still believe, that focusing on what they do best and going all in is the least risky strategy.”
Of course, Chhabra also points out that although this risky strategy has worked for America’s 400 richest people, for every success story like theirs there are plenty of failures we never hear about because they did not work out.
He also notes that landing on the Forbes 400 list is one thing, but staying on it is another: not everyone who appeared on it a few years ago is still there today.
Chhabra concludes that idiosyncratic risk can be a good way to build wealth, but it may not work as well for keeping it.
The bottom line: you have to take risks to win, but once you have won, you have to limit your risks to protect what you have achieved.
Further reading
- 10 ways the rich think differently from everyone else
- 6 things the middle class doesn’t quite understand about the rich
- What is the best way to make a million? Millionaires answer
Featured image: United Soybean Board, CC BY 2.0, via Flickr.
