How do I become a billionaire?

How do you become a billionaire, and why aren't there far more of them than there actually are?

Back in 2013, former fund manager Victor Haghani delivered a TED talk titled "Where are all the billionaires? And why should we care?" His argument was striking: given how many millionaires there were at the start of the 20th century, and how enormously stock markets have risen since, the world should be home to many more billionaires today than it is.

In this video, Haghani explains the thought experiment behind that idea. If investors had captured the returns they ought to have earned over the last century, we'd see vastly more billionaires. The fact that we don't reveals something important, that investors have historically captured a surprisingly poor share of the returns available to them. It isn't a comment on whether more billionaires would be a good thing; it's a powerful illustration of just how much return ordinary investors have left on the table.

You'll learn the two main factors Haghani blames for this. The first is frictions, the costs of active management, transaction costs and inefficient, heavily taxed investing driven by high turnover. The second is self-inflicted, the way we mismanage our own money through poor decisions. Together, these two forces quietly erode the wealth investors could otherwise have built.

The video also quantifies the damage. Choosing actively managed funds over low-cost index funds typically costs an extra 1.5% to 2% a year. But poor investor behaviour, especially chasing performance, can be even more costly. Researchers comparing "fund returns" (what you'd have earned by staying invested the whole time) with "investor returns" (based on the actual timing of money moving in and out) frequently find a gap of around 3% a year, a huge drag on long-term wealth.

The takeaway: the path to building serious long-term wealth is less about finding the next big winner and more about avoiding these two costly leaks. Keep your costs low, and, even more importantly, manage your behaviour, ideally with the help of a financial adviser who genuinely understands you and the kind of investor you are.

Chapters / Key points

• Victor Haghani's TED talk: "Where are all the billionaires?"
• Why there should be far more billionaires today
• What the shortage reveals about investor returns
• The first factor: frictions, costs and taxes
• The second factor: our own self-inflicted behaviour
• Why active funds typically cost an extra 1.5% to 2% a year
• Fund returns versus investor returns explained
• Why chasing performance opens a 3% annual gap
• Why keeping costs low and managing behaviour matter most

Transcript

How do I become a billionaire?

Robin Powell: In 2013, a former fund manager called Victor Haghani delivered a TED talk entitled "Where are all the billionaires? And why should we care?" Given the number of millionaires there were at the beginning of the 20th century, Haghani says there should be far more billionaires today. After all, in that time, financial markets, particularly stock markets, have risen hugely.

Victor Haghani: The basic thesis of it was saying that if investors were able to get the returns that they ought to get, then we should see a lot more billionaires in the world today than what we see. I'm not saying that it's a good thing to have more billionaires, but the thought experiment was to show that investors must be getting a really poor share of the return that they should get, by the fact we have so few billionaires that exist today that should exist based on how many millionaires there were, say, in 1900. So, it's this thought experiment that is helping us to think about just how poorly investors have done in terms of capturing the returns that they ought to.

Robin Powell: So, why aren't there more billionaires today? Victor Haghani puts it down to two main factors.

Victor Haghani: The first one is frictions, which is the cost of active management, transaction costs, inefficient investment in terms of taxation, so very heavy turnover that generates a lot of taxes every year, so frictions is one. The other one is really our own self-inflicted problems, the way that we manage the money ourselves.

Robin Powell: What sort of damage, then, are those two things causing to our investment returns? Well, using actively managed funds instead of low-cost index funds will typically cost you an extra 1.5 or 2% a year. But bad investor behaviour, particularly chasing performance, can be even more costly than that.

Victor Haghani: A number of different researchers have analysed those numbers, and what they generally look at is what's called "investor returns" and "fund returns." They look at, if you invested a dollar in a particular fund, what the return would have been if you had kept it in the whole time, and that is called the "fund return." They compare that to what they call "investor returns," which is where they look at the cash going in and out of each fund and look at the internal rate of return on that. Well, guess what, they find that 3% is very often the difference between the fund return and this investor return, which is huge.

Robin Powell: In conclusion, then, keep your costs low. But, even more importantly, manage your behaviour, preferably with the help of a financial adviser who understands you and what sort of person you are.