Who Is the Future Self-Made American Millionaire?

This is one of those posts I’m going to write as more of a stream-of-consciousness because I haven’t, quite, solidified my feelings on it.  It’s something I’ve been turning over in my mind for the past few months as I review economic data, look at trends in retirement savings, and examine trajectories for different groups based upon education and family formation.  The result: it’s going to be a lot less structured than some of my other posts as I work my way through my thoughts.

More than generation ago – all the way back in 1996 – the late Dr. Thomas J. Stanley released a book called The Millionaire Next Door that detailed how actual wealth accumulation differed from people’s incorrect assumptions.  It was an enormously beneficial book and even played a role in my own journey to financial independence.  I have multiple copies in my library and revisit it from time to time because certain lessons contained within its pages are timeless, making it worth reading today despite the fact much of the information is out of date to the point of being effectively useless.  (I’m an even bigger fan of one of Dr. Stanley’s later works, which he released a few years later, called The Millionaire Mind, because it specifically looked at the sub-set of self-made millionaires who were much more economically productive than other millionaires, living in seven-figure houses and amassing beautiful portfolios that ranked in the tens or hundreds of millions of dollars.  As someone who was young, ambitious, and didn’t just want financial independence, but a fortune, it was far more useful to me due to the fact it highlighted the behavioral differences between doing well and becoming what Dr. Stanley referred to as “glittering rich”.  It is not for everyone.  It requires fundamentally different priorities.  The key is to put together a life that makes you happiest based on how you want to spend your time.  A lot of people don’t want the stress and hours required to pursue the larger goal.  That’s not only fine, it’s wise to know that about oneself and such honest self-reflection should be praised.)

The Big Lessons from The Millionaire Next Door

In my opinion, some of the most useful lessons from The Millionaire Next Door, as well as Dr. Stanley’s other works, were that you should:

• Focus on living below your means, running a regular surplus that you then invest into productive assets to grow your net worth.  These productive assets might include stocks, bonds, real estate, intellectual property, and, if you have the ability and risk tolerance for entrepreneurship, ownership of one or more small businesses.  (In fact, despite the higher risk and probability of failure, when a small business owner did make it, he or she tended to end up with far higher income and net worth than any other group due to the equity in his or her enterprise.  One of the key traits that differentiated successful business owners from everyone else was that they specifically sought to identify a profitable business opportunity, then established or acquired their company.  They did not say, “I want to open a [insert business here]” and then hope it was successful.  They knew returns on capital, profit margins, cost structure, capital sources, etc. before the first contract was signed.  Their first objective was to make money.  The business was the means, not the end unto itself.)
• Avoid making financial decisions that are based solely on a desire to incite envy in others, signaling that you are a success.
• Focus on cost per use.  You might find that spending 3x the amount on a given purchase actually saves you money in the long-run.
• Avoid using debt for consumer purchases.  If you do use debt, employ it judiciously and almost exclusively to accumulate cash-generating assets such as residential and/or commercial real estate, expansion of a successful operating company, etc.
• Graduate from university with at least a four-year degree.
• To the extent possible, get and stay married to the same person and only have children with that person after you are wed.
• Buy less house than you can afford, prioritizing the quality of the local school district above most other considerations.
• Live a life of reasonable temperance.  Exercise regularly.  Don’t overeat.  Don’t smoke.  Don’t drink too much alcohol.  Don’t do drugs.  Don’t gamble too much.
• Don’t waste a lot of time watching television.  Devote your time to self-improvement, reading, business, and family, instead.
• Develop inexpensive hobbies that don’t require spending a lot of money.
• Adjust your work process and hours to your own biological clock and personality, focusing on your strengths rather than your weaknesses.

The Millionaire Next Door revealed a great truth: America’s rich were nothing like the false myth that the media had propagated in television and movies.  Rather, a vast majority of millionaires inherited little to nothing.  They were self-made doctors, attorneys, professors, small business owners, executives, teachers, and nurses.  They often worked more hours in a week than the typical citizen.  They lived productive, stable lives in nice, but far from lavish, houses located in safe suburbs; often in older neighborhoods.  As a result of their decisions and conservatism, as well as the power of compounding over many decades – the typical millionaire was 57 years old at the time, meaning he or she had been working for 30 to 40 years – they accumulated significant wealth.  The wealth, in other words, was a by-product of their behavior; a justly-deserved natural consequence that was more mathematically explained by lifestyle than a matter of luck or privilege though the latter play a role in everyone’s life (simply being born in the United States, which is only 5% of the global population, already puts a person in the top few percentage of global income even if they are poor by American standards.)

It was a revelation of empowerment and liberation.  Despite its accuracy, it was also controversial because it was not a message a minority of financially-irresponsible Americans wanted to hear due to the implication: it meant that accumulating wealth was a choice and that if, after a period of 30, 40, 50+ years and absent certain extraordinary exceptions, you had not accumulated wealth, it was because you had made a choice to remain poor or working class.  In the same way people who are grotesquely overweight engage in learned helplessness and denial by insisting that it isn’t really their fault they are so unhealthy – that somehow they are immune the laws of thermodynamics so diet and exercise won’t work for them – many of those who chronically struggled with credit card debt or spending beyond their means in other ways rejected reality, growing incredulous at the notion it was possible to achieve financial independence by clipping coupons, driving an older car, shopping for sales, and making sure to prioritize investing each and every month.  A good number of people want a pill to help them lose weight and a lottery ticket to fill their bank account.

Unfortunately, the universe doesn’t work that way for most people under most conditions.  The sooner you accept that, the better your life will be.  There is no cavalry coming to save you.  Your life is going to reflect the choices you make.  You are the author.  This is your story.  You cannot control everything that happens to you but you can purposely, and ruthlessly, engage in behaviors that have a probability of creating the outcomes you desire.  You can learn another language.  You can get in shape.  You can learn to play an instrument.  You can write a book.  You can accumulate wealth.  Your secret weapon is the power to choose.  The power to choose how you invest your time, and money, is the power to shape your destiny.  Many people give up because the rewards tend to happen organically over long periods, not as windfall events.  You have to stick with it, and keep plodding along, even when it feels like you aren’t making progress.

People who tell you that you are doomed to live in misery because of the family into which you were born, your race, your gender, your sexual orientation, or any other number of characteristics or circumstances are lying to you.  It is a mistake to allow their lack of vision to set a ceiling on your dreams.  Sometimes, this discouragement is a form of coping with their other failures.  In many cases, it’s a form of subconscious bigotry; a way of saying, “your life is so hard, you aren’t capable or intelligent enough to achieve anything so let me feel superior by empathizing with your struggles while telling you there is no escape.”

This “soft bigotry of low expectations”, as it has been called and which we have discussed several times, shows up in all sorts of places.  It’s important to be aware of it.  A recent illustration can be found in the work of Susan Fiske, a professor of psychology and public affairs at Princeton University, and Cydney Dupree, an assistant professor of organizational behavior at the Yale School of Management, who are publishing a paper in the peer-reviewed Journal of Personality and Social Psychology.  They discovered, though caution their work is preliminary, that there seems to be a propensity for white liberals – but not conservatives – to dumb down their speech when communicating with someone who is, or who they believe to be, black.  As The Washington Post put it:

You have recently joined a book club.

Before each meeting, one member of the literary collective sends an email to the club secretary offering a few thoughts on the assigned text. This month, it’s your turn to compose the brief review.

A new study suggests that the words you use may depend on whether the club secretary’s name is Emily (“a stereotypically White name,” as the study says) or Lakisha (“a stereotypically Black name”). If you’re a white liberal writing to Emily, you might use words like “melancholy” or “euphoric” to describe the mood of the book, whereas you might trade these terms out for the simpler “sad” or “happy” if you’re corresponding with Lakisha.

But if you’re a white conservative, your diction won’t depend on the presumed race of your interlocutor.

The two academics dubbed this phenomenon a “competence downshift”.  The paper is called, Self-Presentation in Interracial Settings: The Competence Downshift by White Liberals.

America Has Changed Over the Past Generation.  This Matters for Future Wealth Accumulation.

That said, studying the demographics of the sample set in Dr. Stanley’s work is looking in the rearview mirror because the typical millionaire in his data set was born in the 1930s.  Much of that generation has either passed away or is now approaching the end of natural life expectancy.  Consider that the typical college freshman or recruit in the army, navy, air force, and marines – the people who will fight wars for us if we enter a conflict – wasn’t even alive in 2001 when September 11th happened!  While the great truths remain timeless, the specific economic strategies that helped those born in the 1930s is not going to be useful to wealth accumulation today.  The economy is different.  The trade-offs are different.  The opportunities are different.

What, then, does the future Millionaire Next Door look like?  That’s the question that matters for younger people who desire financial independence.

Following Dr. Stanley’s death, his daughter tried to answer this question in a follow-up work called The Next Millionaire Next Door.  While I applaud the effort, I strongly disagree with some of the conclusions and analysis.  (If you are a voracious reader, by all means, go ahead and get a copy but you’ll probably find you don’t get much additional insight beyond the original bestselling book.)  For example, one of the major trends over the past few decades has been the re-urbanization of wealth, income, and education.  We’ve talked about it many, many times.  A vast majority of the economic opportunity, rewards, innovation, and talent is flowing to, and originating from, a handful of urban areas, setting off a cycle economists have begun studying in which the proximity of successful people near to one another leads to faster GDP growth and even more innovation.  That is, if you took at technology start-up out of San Francisco, and plopped it in the middle of Indiana or Alabama, it will not be as successful.  The employees would suffer.  The owners would suffer.  The country would suffer.  When you concentrate talent in the same geographic area, it responds to, and feeds off, itself.  Some of this may be driven by creativity and inspiration.  Some of it may even be driven by envy (if your entire social circle is launching new businesses, innovating, and getting richer, you don’t want to be left behind so it changes your behavior).  These trends have resulted in rural America being discarded as it exports its best and brightest minds to the coasts as well as a few in-land cities such as Austin and Chicago with a nearly breathtaking efficiency.  Most of that human capital never returns once it finds itself in greener pastures.  Why would it?  When you find yourself surrounded with affluent, highly-driven people, better restaurants, better shopping, wider economic opportunity … isn’t it perfectly natural to want to raise your family under such improved conditions?

This has begun to show up in the data.  Certain states were always home to more self-made millionaires.  According to the updated book, this time around was no exception.  When the sample set was analyzed, they decided that too many millionaires were located in only seven states: California, Florida, Illinois, New Jersey, New York, Pennsylvania, and Texas.  Instead of accepting this reality, though, and viewing it within the larger context of emerging economic trends, the decision was made to reduce the influence of these superstar states by purposely undersampling them, reducing their weighting to 20% of the sample size, then intentionally oversampling the forty-three remaining states that had fewer millionaires, increasing the weighting of those remaining states to 80% of the sample size.  The idea was to create a more diverse picture of who American millionaires are but, instead, it created a false image that doesn’t reflect who most American millionaires are, thus limiting its utility in my opinion.  It’s a mirage.  It means little to nothing.  Such a methodology may have been justifiable several decades ago; perhaps even made perfect sense, when the gap between urban, suburban, and rural America was not as wide.  I believe it is not only asinine today, but counterproductive.  If your goal is to get rich, you should want to know how the vast majority of people did it, not engage in some theoretical diversity exercise that might lead you astray in your journey.  What counts is positioning yourself so probabilities are in your favor.  It’s more difficult to do that from the fictional portrayal of the prototypical millionaire that emerges from the newer book.  America has changed.

What Does the Future Self-Made Millionaire Look Like?

Accordingly, I would strongly argue two things:

• I believe that, all else equal and baring any sort of catastrophic national disaster that fundamentally reshapes the economic order, the basic concepts found in The Millionaire Next Door will continue to work for those who want to amass significant net worth over the next 25+ years; and
• The vast majority of future self-made millionaires will not resemble those in Dr. Stanley’s original 1996 work, and especially not those in the updated book, but, rather, differ in several material ways.

In regards to that last point, based upon everything I’ve seen, I am presently of the opinion that the typical demographic profile of the future American millionaire will be something like this:

• The trend toward self-made millionaires dominating the ranks of American millionaires will persist as the role of outright financial inheritance continues to decline.  Despite what you read in the newspapers, more wealth is held by, and income is flowing to, self-made, first-generation rich than at any time in human history.  That said, even though we are more of a meritocracy than we have ever been in the past, and more wealth is in the hands of first-generation rich than has ever been the case, it is almost a guarantee that most future self-made millionaires are going to come from the ranks of the upper-middle class; maybe the top 25% if you forced me to put a mark on it (income of roughly $110,000+ per annum), because that group has the benefit of reinforced advantages due to wise decisions by parents.  These are the men and women whose parents have given them every advantage they could; who made sure they attended a good school, who put them in music lessons, who helped pay for their college education.  Aside from health, the best inheritance is a stable, loving household in which well-educated parents pass their knowledge to the next generation.  Few other things come close.  People may not like it.  It may seem unfair.  Again, that’s life.
• Older than the median American, though perhaps a bit younger than the 57 age in Dr. Stanley’s original sample because you now see a much earlier obsession with financial independence due to the Internet making wealth accumulation a type of lifestyle choice with its own communities and vernacular.
• College educated with both spouses holding a Bachelor’s degree.  In many cases, at least one spouse will hold one or more advanced degrees and/or professional certifications, as well.
• A majority of self-made millionaire households will consist of white, straight, married couples who met at college, work, or through online dating apps as opposed to social groups such as churches, rotary clubs, or family introductions, as was the case in the past.  Unlike past generations, they will not have grown up in the same small town, necessarily, but, instead, be more likely to have met later in life as their success trajectories tend to come together and they travel through the same institutions and career paths.  It will be far more likely that both spouses originally had high-paying jobs in one of a handful of fields, including software development, technology, energy, engineering, healthcare, and/or finance, allowing them to earn $150,000 to $400,000 combined by the time they were 30 to 35 years old.  One of the spouses may end up becoming a stay-at-home parent along the way.  That said, you’re going to see a lot more diversity in the ranks of self-made millionaires.  In both relative and absolute terms, certain demographic groups were always over-represented as a matter of self-selection and cultural priority (read: education and thrift) compared to others and I expect that to continue; e.g., in past generations, Russian immigrants and Korean immigrants were among the groups that tended to far surpass other groups when it came to amassing net worth for each dollar of income generated, which can be used as a measure of efficiency in converting cash flow to wealth.  Specifically, I think there will be a huge increase in self-made millionaires with Asian ancestry from one or more parents – China in particular – relative to the past.  Additionally, I think you’re going to see a lot more self-made same-sex millionaire households.  (Several of the private banks have already established specialty practice groups to cater to this demographic and it makes sense.  Consider male-male households.  The highest lifetime earnings expectations for any educational group are for men with a graduate degree.  Well-educated men tend to marry other well-educated men or women.  Put two hyper-earning men into a family unit, and now consider that the family has to specifically plan for children (no accidental pregnancy), and higher net worth accumulation is an almost inescapable function of the mathematics.  One recent study I was looking at examined cultural expectations of high school students and 1 out of 2 gay male teenagers now see themselves getting married and having children as a matter-of-course.  It will show up in the wealth accumulation figures a few decades down the road.)
• Waited until their 30s to have their kids.  They’ll tend to have two kids, rather than three kids, as in Dr. Stanley’s original data set.
• Much more likely than the typical American to shop at places like Costco, REI, Kohl’s, and Target than deep-discount stores such as Family Dollar or Dollar General.
• They will spend significantly more on clothing, measured on a per-item expenditure basis, than Dr. Stanley’s original sample did.  We’ve talked about this, too, but one of the areas you’re really seeing a divide among the top 20% and everyone else is the quality of clothing they purchase now that the middle-class brands and stores have been destroyed, forcing people either into “throw-away” fashion or better-made goods.  (Here was one of the few areas I had an issue with the presentation and analysis of original research.  Let’s consider suits.  Dr. Stanley looked at the typical suit worn by millionaires but did not differentiate between the source of wealth (read: career or industry) and the relationship to clothing expenditures.  Someone making $500,000+ a year working as an attorney, advertising executive, or private banker probably should spend a lot more on suits than someone making $500,000 a year from owning his own waste management company.  Trying to estimate a “typical” suit expenditures between the two when the former type of self-made millionaire not only spends more on suits, but also buys a far higher amount of absolute suits, is not only useless, it actually lowers understanding because it presents a distorted picture of actual behavior.  Data sub-sets matter and, in some cases, should not be aggregated.)
• Even when relatively young and broke, the couple most likely obsessively funded their tax shelters as a top-priority behavior.  This means stuffing their 401(k)s to the limit, putting money aside into non-deductible Traditional IRAs they then converted to Roth IRAs, setting up Health Savings Accounts, establishing Cash Balance Pension Plans (if they are self-employed and meet certain other conditions), etc.  Stocks will make up a much larger portion of holdings than they did for millionaires in Dr. Stanley’s original sample.
• Live near a major economic hub.  Millionaires who lived their lives in third-tier suburbs and towns that most people never visit will be the minority exception, not the rule.  I can see many of them falling into a handful of categories.  For example, the local real estate broker who owns the brokerage franchise, effectively dominates the property market, and then uses his or her earnings to accumulate and/or develop a good portion of the choice rental properties in town, perhaps even going further and using his or her influence to control the local zoning board and create a weak monopoly by keeping out competition.  He or she will have to be content, however, with living in a place suffering from a slow secular decline.  I know of some situations like this.  A lot of times, the person ends up with a second or third house in a much more affluent area in Florida or California, frequently traveling and maintaining two lives, each hidden from the other.  (More on that later.)
• Agnostic or only culturally religious (which is a major change from Dr. Stanley’s data set when self-made millionaires were more likely to be religious than the general population).
• Well-traveled.
• Much more likely than the typical American to hike, kayak, cycle, rock climb, or engage in other physical hobbies that are not necessarily expensive (compared to things like golf) but that have significant health benefits.
• Far less likely than the typical American to drink carbonated, sweetened beverages.
• Far less likely than the typical American to smoke, consume alcohol in excess, or do drugs.
• Far more likely to drive an electric or hybrid car (or eschew car ownership altogether and bike to work, instead).

Again, there will always be exceptions – I know many self-made millionaires right now who presently shop at Dollar General, for example, as well as many who are deeply religious – but that’s the gist of it; where I think the puck is going over the next two to three decades rather than where it has been, to borrow a concept from hockey great Wayne Gretzky.  If I’m correct, the relative wealth gap between different demographic groups is going to explode even wider after making an adjustment for changes in interest rates.  This will have some interesting, if not politically violent, social ramifications if it isn’t managed wisely.

Notably, the last item on that list – cars – is interesting to me for two reasons.

Firstly, I think in major urban areas, where self-made millionaires are going to be disproportionately represented, you’re likely to see car subscription services in a few decades as people pay for vehicles on a per-use basis, or on a flat subscription basis, with outright ownership not being seen as an absolute necessity.  That is, cars will be as much as service as they are a piece of property.  I also think the car companies will become the insurance companies, destroying the moat some insurers have as the function is in-housed due to the fact the car companies will have access to superior data and can therefore set more attractive and accurate rates on policies (unless politicians and bureaucrats intervene by requiring car companies to make data available to competitors as part of an anti-trust regulatory overhaul).

Secondly, I’ve long been fascinated by how Dr. Stanley’s research into the car buying habits of self-made millionaires was misrepresented.  For example:

• It is true that more millionaires drive Toyotas than drive Mercedes.
• It is also true that most people who drive Mercedes are not millionaires.

Seems simple enough, right?  No.  It turns out, two other statements are also true:

• If a person drives a Mercedes, he or she is much more likely to be a millionaire than a person who drives a Toyota.
• A millionaire who drives a Mercedes is much more likely to be obscenely rich compared to a millionaire who drives a Toyota.

This means if you are standing on a street corner and want to identify a person likely to be a millionaire, statistical probability demands that you always guess it’s the person driving the Mercedes not the Toyota.  If you want to maximize your probability of identifying someone who is Ultra-High Net Worth (UHNW), which means $30,000,000+ or more, you absolutely want to choose the Mercedes over the Toyota every time.

It was such a bizarre thing – the way car purchases were seen in the U.S. after Dr. Stanley’s work became mainstream – because people who weren’t good at understanding word problems and mathematical logic tended to erroneously conclude that folks driving luxury cars weren’t really rich.  It’s just the opposite.  In fact, if you wanted to maximize your chances of identifying someone in the top 1%, look for a Bentley.  While most members of the top 1% don’t drive a Bentley, and a lot of Bentley’s are driven by people who do not have top 1% wealth, the typical driver of a Bentley has a net worth that exceeds $15 million as well as household income in the low seven-figures.  Furthermore, for a variety of reasons, the “glittering rich” Bentley owner disproportionately opts to lease the Bentley rather than buy the car outright, which defies middle class expectations of behavior as most prefer to buy, not lease.

You run in to this same thing when talking about university.  For example:

• It is true that most self-made millionaires in the United States did not attend an elite college.
• It is also true that if a person attended an elite college in the United States, he or she is much more likely to be a self-made millionaire.

Thus, if you have to make a probability bet about who is a self-made millionaire, the odds are better it’s someone who attended a school such as Harvard, Princeton, Stanford, Columbia, etc., even though alumni from these institutions represent a minority of self-made millionaires, because the universities themselves are magnets for a self-selected crowd, tending to attract highly-motivated individuals who are materially above average in almost all respects and thus more likely on an individualized basis to accumulate a large net worth.  As an added point, some universities have a knack for producing self-made millionaires.  The University of Michigan – Ann Arbor is one.  The University of Texas – Austin is another.  So is the University of California – Berkeley.  The richest family in the United States, the Waltons of Wal-Mart fame, trace their fortune to the late Sam and Helen Walton.  Sam graduated from the University of Missouri and Helen from the University of Oklahoma.  Your alma matter is not your destiny, it’s just a tool to help you on your journey.  The role it plays will differ from person to person.

Going further, while Harvard produces more billionaires than any other university, most billionaires did not go to Harvard.  Again, both statements are true.  Hell, Harvard does dumb things from time to time, too.  It rejected Warren Buffett when the legendary Berkshire Hathaway CEO applied for business school, deeming him not good enough.  In retrospect, that was a moronic decision though it worked out marvelously for Buffett, who was able to study value investing under Benjamin Graham.  Sometimes your biggest perceived setback turns out to be your biggest opportunity.  Look at what happened to Sam Walton.  He got screwed out of a lease renewal by a landlord due to his own inexperience, effectively wiping out his early successful retail operations and forcing him to start again.  Had that not occurred, the odds are good his family wouldn’t be worth hundreds of billions of dollars.

Thoughts on Economic Drag and Perception Differing from Reality

Building upon this, it really is strange how completely off-base most people’s perceptions of the wealthy are.  Let’s continue with our discussion about cars since that is something most people can understand.  You see them everywhere.  You likely drive one yourself.

Consider that, according to a recent Bloomberg article, the typical car buyer across all types of vehicles is around 52 years old.  Bentley buyers tend to be a bit older at 56.2 years old.  Now, think about Rolls-Royce, one of Bentley’s major competitors.  Reflect on the brand in your mind.  Picture the typical buyer or setting in which you are likely to see it.  What do you envision?  How old is the person?  What does the setting look like?

For many, Rolls-Royce is associated with one of two images depending upon the person’s age and whether or not he or she lives somewhere where Rolls-Royces are common:

1. A wealthy, elderly gentleman who wears perfectly tailored suits and is chauffeured around large country estates as he lives off the investment income generated from a diverse portfolio stuffed with gilt-edged bonds and blue chip stocks; or
2. A barely-literate rapper with half-naked women hanging off the car.

Reality couldn’t be further from the truth.

At only 45 years old, the typical Rolls-Royce buyer is materially younger than the typical car buyer, not older.  Furthermore, a vast majority of Rolls-Royce buyers are not only self-made – they didn’t inherit their money – they tend to be entrepreneurs as opposed to executives, entertainers, or athletes.  (If you see a rap star with a Rolls-Royce in a music video, the odds are decent it was temporarily rented from the entrepreneur, who got paid to allow his or her car to be used as a prop.)  Usually, the Rolls-Royce customer is “quiet money”, as The Washington Post described them in an analysis several years ago; people who fell in love with the extraordinary craftsmanship of the car, the expenditure for which is small fraction of their income and net worth, but are too embarrassed to drive it in their hometown because it attracts attention.  Instead, they ship it off to a second home in a coastal enclave where they isolate themselves with other rich people around whom they don’t have to be self-conscious, coasting down the highway with ocean views in beautiful weather (though Chicago is one of the few in-land areas where the market is successful.)

We see this phenomenon first-hand: Aaron and I relocated to Newport Beach less than a year ago.  In the community in which we live, there are a few dozen parking spaces between our two reserved spots and the security gate.  Those spots are usually filled with a range of cars that include Mercedes, Audis, Range Rovers, Porsches, Ferraris, Lamborghinis … and at least two Rolls-Royce convertibles at any given time.  You can’t throw a rock around here without hitting one.  Yet, sometimes we’ll see neighbors show up after months away at their primary home back East, arriving in a car that is 10+ years old with license plates from states such as South Carolina or Indiana.  This is economic drag worthy of RuPaul’s Drag Race.  Dr. Stanley talked about it with clothes in some of his earlier works – how the self-made rich learn to “code switch” and dress down when shopping or visiting real estate they own in less affluent parts of town.  In a lot of cases, the luxury purchase has nothing to do with status but, rather, the pure, unbridled joy of experiencing something that is higher quality than anything else; the same reason someone buys a cashmere sweater or a top-of-the-line television.

Again, most people with a $15+ million net worth do not own a Rolls-Royce.  However, those who do drive a Rolls-Royce are far more likely to have a net worth of $15+ million.  Both statements are true.

I’ve gotten a bit sidetracked but it’s because economic drag is such a fascinating concept to me.  Economic drag is a big thing.  Code switching is a big thing.  When you’re poor, you don’t realize this.  At least, before becoming wealthy myself and growing up in a farm town with little to no connection to serious money, I didn’t.  It’s fascinating to see first-hand.  It’s often a learned response as people don’t want to be seen as an easy target due to their success.  They don’t want less-affluent friends and family asking for handouts all the time.  It leads to this weird situation where the rich only tip their hand at how rich they are around other rich people, the rest of the time dressing down or hiding it so as not to be noticed.  Meanwhile, the aspirational poor buy badges of success to appear more affluent than they are.  This leads to a huge gap between perception and reality.

Since I mentioned him earlier, let’s look at someone like Warren Buffett as a small case study.  People talk about the fact he still lives in the same “modest” house he bought when he was young – even though it is worth $650,000+ and has a lot of upgrades, putting it well above the median home value in the United States – but conveniently ignore (or aren’t aware of) the fact during much of his life, he also owned other houses where he spent considerable time.  The famous shareholder letters were ordinarily written overlooking the ocean in Southern California, not on Farnham Street in Omaha.  He had a beach house in Laguna Beach that recently sold for $7.5 million (down from its original $11 million listing price).  Back in 2005, he sold another beach house next door for $5.5 million (he had purchased this second beach house to accommodate family guests, connecting the properties with a staircase.)  He owned a farm in Nebraska.  I think there was an apartment in San Francisco, too, but I can’t recall off the top of my head.  Not to mention the private jets.  Or the $28,000 gold Rolex he wears a lot of the time.  Or the fact that for a long time (prior to the switch to a Chinese label), he wore Ermenegildo Zegna suits, which cost several thousand dollars each.  The man lives very, very well and his success is richly deserved.  It would cost millions upon millions upon millions of dollars per annum in expenditures to replicate his lifestyle.  Yet, the economic drag is what people see – the fact that he spends a few bucks at McDonald’s for breakfast and drives a modestly-priced Cadillac bestow upon him this “aww shucks” reputation.  Meanwhile, he is brilliant, ruthless, and one of the most sophisticated people in the world, living the life of the elite.  It’s fascinating the way the narrative differs from reality.

It makes perfect sense, though.  Imagine you made your money owning a chain of fast food restaurants in the rust belt.  Your typical employee makes $12 an hour or something.  Even if it took you enormous risk, and spent 30+ years breaking your proverbial back to get where you are, you’re probably going to have a more difficult time if you show up to work in a Rolls-Royce (even though Ray Kroc did this on purpose to bring attention to McDonald’s as a success, encouraging people to sign up for franchises.)  Your workers are going to demand a raise even if the economics can’t support it on a wide employment base.  You might be targeted by criminals.  As I mentioned a moment ago, relatives and friends might expect you to give them handouts, even if they were irresponsible with money and are broke as a result of their past decisions.  You’d be better off having the car at a second residence in Florida so nobody else sees it except other wealthy snowbirds.  On the flip side, as Charlie Munger has pointed out, if you are an attorney, there is a lot of wisdom in buying the most expensive car you can because people will judge your success in the legal field, and thus decide to hire you, based on outward symbols of affluence in a lot of situations.  The outlay for the car can result in exponentially more income as a result of more revenue running over the fixed cost base.  Likewise, it can be perfectly rational for a law firm to spend millions of dollars on a beautiful office in a trophy high-rise because, properly executed, it can pay for itself many, many times over, representing one of the most intelligent investments the managing partners can approve.  That’s what Ray Kroc was doing.  Plus, of course, Kroc could afford it easily as one of the most successful entrepreneurs in American history and he was a showman.

Other Thoughts on Self-Made Millionaires

Keep in mind my thoughts, thus far, are about large numbers, not specific cases.  You don’t have to fit any of these predictions to be successful.  Think about my family.  Aaron and I attended a private music conservatory, started an online retailer specializing in sporting goods, moved back to a nondescript drive-through (at best) city that had no draw and very little going for it, and amassed our wealth before coming out of semi-retirement, launching an asset management firm, and moving to California.  There is no playbook for that.  When I was a student, it wasn’t unusual for some of my aunts and uncles to ask my parents what I was going to do post-graduation because it looked, to the outside world, like I had no plan.  While I didn’t know the specifics of how it was going to materialize, I did know what I wanted: to get my name on the title deeds and stock certificates of cash-generating assets so money flowed into my coffers in ever-increasing amounts.  The path, though unconventional, worked for me.  It was a function of my own opportunity cost, temperament, skill set, and interests.  Now, our kids won’t have to do that.  They’ll have all of the advantages we didn’t.  That’s life.  It strikes me as strange that people spend so much time bemoaning their starting position on the board because such self-indulgent misery is a waste of time.  Accept it or do something about it.  Those are the only two choices that hold the promise of bringing contentment.

If I were 18 years old, though, and just starting out in life, it’s safe to say all of my attention would be on software.  There are few other places where a person with a good idea and limited capital essentially amass an enormous fortune in a matter of a few short years.  I cannot get over how the core economic engine of many software enterprises has exponentially increased in terms of intrinsic value over the past ten years.  I’d want to find a way to start one from scratch, even if my strategy were solely to get bought out by a larger technology company.

Anyway, there it is.  If you’re young, ambitious, intelligent, and hardworking, and you want to get rich, it’s more possible now than it has been at any time in American or global history.  That doesn’t mean it will be easy, only that you have more doors open to you than any generation in the past.  (In contrast, if you want to sell low-skill labor, you’re going to have a much more difficult go at it than in past generations.)  The trick is to position yourself so you are lifted by the tide, rather than having to swim upstream.  Don’t move back to a slowly-declining municipality and go to work for a business that is in secular decline.  If you do, you’re setting yourself up for a harder time than you otherwise would have needed to experience.  Find someone you love who is equally-as-driven and successful so your combined efforts will let you soar.  Wake up every day and try to get closer to your goals, improving constantly even if irregularly.  Above all, enjoy the journey, as cliché as that sounds, because your life is happening along the way.  It’s a terrible mistake to wait until you have the money to start living.  If you’re doing everything right, and you’re on track to achieve your goals, it’s okay to indulge your passions.  Yes, you can blow some cash and go travel through Europe or Asia for awhile.  Yes, you can buy that expensive watch if you really want it and it brings you joy, even if it isn’t as financially rewarding as picking up additional shares of stock.  Small things matter but it’s more important to get the big things right because they carry most of the water.  You want to have your life, and career, so well-structured that they can absorb a lot of mistakes without sidelining your family.