Back on May 27th, Len posted 19 Things Your Suburban Millionaire Neighbor Won’t Tell You, a topic that caught both my eye and my interest. Though I commented on the post, I have more to say on this subject – much more!
I spent years working in small business accounting—still do as a sideline—so I’ve had a chance not only to get to know a number of self-made millionaires, but also to have an insider’s view of their financial positions and behavior, both business and personal. It’s kind of like being a doctor and giving physicals—you see people for who they really are, minus their magnificent external wardrobes.
It’s an interesting position to be in because not only do you get a chance to see who really has money and who doesn’t, but you also begin to see definite patterns.
What are typical self-made millionaires like, how did they come into their fortunes and what do they do with it once they have it? The answers represent a wealth of direction to those of us who might hope to join them one day.
Money doesn’t rule them
They’re fiercely independent, and I think this quality drives them more than anything, including the quest for money. They’re quiet mavericks though, working to build their businesses and avoid any complications that might weaken their independence.
They’re survivors. The millionaires I knew weren’t MBA’s. In fact, they have little regard for credentials. They may (but nowhere near always) have college degrees, but they’re mostly graduates of the school of hard knocks. They usually come from modest beginnings and bring those philosophies to their businesses. Having been through hard times they know how to survive by having:
- Full control of their business
- A full bank account
- A frugal lifestyle, and
- A debt free position
They’re self employed. Because they’re so independent, they’re not organizational types. In fact, I doubt many of them could even survive in the corporate world, let alone in government or academia. Other than very early in life, they’ve always been self-employed. It’s not an ego thing either; they believe in themselves and have such confidence in their abilities that they can’t fit in organizations.
There are millionaires who are well employed, usually in corporate management, but they’re virtually a different animal. Their wealth is often mostly on paper. It’s usually tied up in a large personal residence, a vacation home, a retirement plan or stock options—all places they can’t get at it easily. The corporate world is a very different place from the pure entrepreneurial one the independents live and work in, and it has an entirely different dynamic. Image matters and strings are attached to compensation and wealth that the entrepreneurial types would never tolerate. It’s that independence thing again.
They’re principled. They’re not I’d-stab-my-mother-in-the-back J.R. Ewing types. Generally speaking, I found legitimate millionaires more pleasant to be around than the imitation wannabe’s. There’s a surprising humility about them, a practicality that’s disarming. And you can’t play mind games with them; consistent with their fierce independence they can sniff out B.S. a mile away and won’t tolerate it.
Contrary to popular belief, they’re NOT high rollers
A debt free business is the holy grail. An independent business is an unencumbered one. These people are keenly aware that taking on business debt puts them in partnership with banks, and they don’t share their businesses with anybody. Any debt incurred early in life was paid off as soon as possible. They don’t buy stock on margin, don’t borrow against retirement plans and mortgages for investment property—if taken at all—are short term (5-10 years) and paid off early.
They save money. A fat bankroll is their ace in the hole and it’s increased constantly by a conservative lifestyle that expands ever more slowly than their wealth and income. When they need to expand their businesses, they can do it in cash.
They’re product lines are often basic. In popular culture we think of millionaires as mostly being inherited money, dot.com entrepreneurs, semi-shady money shufflers, stock market wizards, entertainers and athletes and the occasional Jed Clampett striking oil in his backyard. Of the few I did come across who fit the popular description, most seemed better at dissipating money than building it.
One guy I knew took a flier on a stock with $25,000 that exploded into about $2.5 million in a space of a few years. He expanded his lifestyle, quit his job and made a career out of finding the next 100 to 1 hit. I knew him ten years after the golden jackpot and he hadn’t found another yet. He was also down to about $1 million and falling fast. There’s a reasonable chance he’ll “retire” on social security alone.
What businesses were the real wealth builders in? Try hardware, corrugated boxes, building products, food supply and medical products to name a few. Doesn’t sound sexy does it? No, but that’s not what they’re going for either.
It seemed to me that if anything, self-made millionaires had little interest in “hot’ businesses. They show a definite preference for tried and true. We’ve all heard the saying “don’t try to reinvent the wheel”—these people live that saying.
The millionaire investment portfolio
Patient capital best describes the investment philosophy of the group.
The images of the fast talking, wheeler-dealer millionaire, throwing money around hoping to make a killing is another media concoction of the breed. Entrepreneurial millionaires are careful to expand their investments slowly and generally to do so without incurring debt. There’s a pronounced preference for income producing investments:
- Dividend paying stocks
- Certificates of deposit
- Treasury securities
- Municipal bonds
- Un-leveraged investment real estate with positive cash flows
The basic investment strategy is like an elevator that only goes up—slowly, but always up. That stacks the deck in their favor long term, while minimizing short term losses.
A very small amount of money (think single digit percentages here) might be devoted to mutual funds or to the occasional penny stock, but the group show a preference for avoiding raw speculation. Holding non-dividend paying stocks or real estate with a negative cash flow in the hope of making a big killing on a price move is more the preserve of wannabe millionaires and the middle class.
Loading 80-100% of their money into growth mutual funds or the latest edition of the Nifty 50 is a no-go; they’re willing to leave the potential of a big hit on the table in favor of avoiding a wealth destroying bear market. They don’t trade either—that might take time away from their businesses.
All dough and no show
Real self-made millionaires don’t stand out in a crowd. Overalls or business casual are a more typical wardrobe than business suits. Armani suits and gold watches are for people trying to prove a point; a multi-million dollar portfolio means they don’t need to prove anything to anybody.
They don’t talk big about money. They don’t talk about what they’ve got; often they actually don’t have much in the way of stuff anyway, preferring to have their money tied up either in their business or in income preserving/producing assets. They’re real millionaires who could come up with seven figures if they had to, not the paper variety where it’s mostly home equity and the value of illiquid and semi-liquid possessions.
For those of us in the teeming non-millionaire class, the problem with the widespread acceptance of the millionaire stereotype of big houses, hot cars and exotic vacations, is that we might be tempted to pattern ourselves off the stereotype rather than on the reality. We might “invest” our money in stuff and in lifestyles rather than in true capital assets, like businesses and income producing investments. We might play the ever popular “fake it until you make it game” that feeds our egos and drains our finances.
Becoming a millionaire, from what I’ve seen, is a rather boring process. You work hard, you plan to work forever, you relentlessly save money, you don’t speculate, you don’t “make a killing,” you don’t live life in the fast life, and you don’t have all of the latest toys that people with fewer means often do. For the ones who do have some luxury in their lives, it usually follows many years of deferred gratification.
I have a suspicion that self-made millionaires don’t have a problem with the masses believing and following the stereotype. They’ll happily watch us spend our money to pamper ourselves in luxury and invest our money in speculations that could make us rich but are more likely to leave us broke. And if we do, there’ll be fewer of us competing with them for the real thing.
Is there a message in all of this?
This is a guest post by Kevin Mercadante, who is the host of OutOfYourRut.com, a website centered on careers, business ideas, money and more, and a frequent visitor and commenter on Len Penzo dot Com. For direct comments on this post, he can be contacted via email.