In a recent piece, Wise Bread notes several reasons why the rich get richer. But they leave one reason out -- one that I've been thinking about for some time now:
The rich network with other rich people and as a result get opportunities that other's don't have.
Why have I been thinking of this lately? Because I've experienced it firsthand.
My wife and I have friends that are pretty well off. They own their own business and make a good income. In addition, they save and invest wisely and hence their fortune continues to grow.
As they invest, they've met more and more people who are also wealthy and that invest in opportunities most of us never get the chance at -- the "ground floor" opportunities. Now these aren't the "ground floor" opportunities that your Uncle Larry used to tout, but are instead investments in real businesses that have the potential to offer an exponential return on the money invested. Sure, they are risky, but if you have enough money, you simply invest in 10 or so hoping that two or three earn you 10 times your money (or more.) Three hold their value and the rest are worthless. Even at these odds, you're doing quite well investing this way.
Since our friends are on the inside among these sorts of investing groups, they've opened up opportunities for us. Now we're not plopping down $50k on ten different investments, but they have opened the door for us to some less risky but still much-better-than-most-people-can-do sorts of investments that are doing quite well for us. And our qualification for being allowed to invest in these opportunities? Simply that we know some rich people who opened the door for us.
So I'd suggest that one reason the rich get richer is that rich people know other rich people and get much more profitable and exclusive investment opportunities as a result. Make sense to you or am I off the deep end on this one?
While in general I agree with that, but perform all due diligence before putting money into any such exclusive investments. This is how one could get sucked into a Madoff style scheme as well.
Posted by: VK | April 20, 2009 at 04:19 PM
I agree with VK as well, but i think you make a very valid point. it's like the proverb "show me who your friends are, I'll tell you who you are" you become who you associate with.
Posted by: Personal Finance | April 20, 2009 at 04:32 PM
As an employer, we have found that the employee's friends often influence 'control' the employee's mind set in how much they can earn or be worth.
Being an Eagle is hard when you hang with Turkeys.
Posted by: Robert W | April 20, 2009 at 04:56 PM
"Madoff" is a good one word rebuttal of the concept that access to the investments of the rich will make you rich.
Posted by: Frank | April 20, 2009 at 05:11 PM
I'd agree for the most part, but I'd also warn that, as someone who is not super-rich, claiming the rich have opportunities others don't is a very convenient argument. Without a hard comparison of "rich vs. poor" investment opportunities, I'm a bit skeptical of the claim.
Posted by: Wrinkly Dollar | April 20, 2009 at 06:47 PM
I think it depends, because if I am introduced to a business owner who is interested in me as a venture capitalist, he or she will obviously have an agenda in mind, regardless of the soundness of such a business. It is then, up to you the investor, to decide based on the very little and ultimately biased information that you have to make such a decision.
In that specific scenario then, I don't think it's necessarily an opportunity at all.
Still, I do agree with your overall point that I believe wealthy people generally have more access to other wealthy people, who ultimately may have more opportunities and options to them.
Posted by: Eugene Krabs | April 20, 2009 at 07:05 PM
The SEC has limits on investment for private placements. "$1 million of investable net worth"
So in order to be offered an opportuntiy in a private placement you need to be rich to start.
These offers are not made to the average Joe. They have greater risk with greater rewards.
"Learn to sign checks only on the back"
Posted by: Steve Sershen | April 20, 2009 at 09:09 PM
I agree with this one. The rich attract the rich, for both good and bad situations (Madoff would be a negative). Rich people find more doors open for them with other rich people looking to get richer. It is like if you graduated from Harvard, you have a huge network of fellow Harvard alumnus at your fingertips willing to help you progress your careers. They may not know you but they accept you b/c you are from Harvard. Just as other rich people will accept you just b/c you are rich!
Posted by: doctor S | April 20, 2009 at 11:04 PM
Sounds like a little bit of wealth envy going on here. You hint at it, but don't really point out that your friends probably worked really hard to get where tehy are. People can talk all they want about social circles, but hard work and smart choices will bring you good fortunes.
Posted by: thomas | April 21, 2009 at 12:20 AM
I would agree in some way that getting to rub elbows with people you know is how you are able to build a network of people and become even more richer in terms of opportunities. However, this is what the revolutionary financial strategies are all about which I promote... We try to revolutionize the idea of equality among every individual either the wealthy and the middle class families even to the wage earners to at least get the chance to save up for an investment for themselves and their family.
Posted by: Matthew Sapaula | April 21, 2009 at 02:14 AM
What the post doesn't touch on is the influence very wealthy people have with politicians and other people in powerful positions. It happens at all levels, local, state, federal and international. If you have enough $$$$ or know the right people you can do almost anything.
I wouldn't call that wealth envy. I would call it the way the system works.
Posted by: rwh | April 21, 2009 at 09:18 AM
I think rwh is right. Being rich gives you an extra edge. It is not the only edge (acknowledging what Thomas says about hard work and smart choices), but it is a definite edge. Incidentally, the smart choices can also come from rubbing elbows with the rich. My husband has an uncle who was born in a dirt poor family and who, now that he has money, makes very poor choices because he was never taught how handle money. Of course, poor families can teach smart money choices, but I guess is if you come from generations of poverty, you aren't going to learn about smart money choices from your parents.
All that said, there can be a downside to associating with rich people: you may be expected to make certain displays of wealth that will encourage you to spend too much money!
Posted by: Kate | April 21, 2009 at 10:34 AM
FMF,
I think your point has some validity. However I think a number of rich people actually rely on the opinions of other rich people to do their vetting for them. If these other rich people are doing this it must be on the up and up ... etc. Obviously that is how Madoff happens. So in some sense I think there can be a kind of mental due diligence inbreeding that happens among the rich where many of them can follow the same kinds of "unique opportunities" and in some sense for at least a certain period of time, the money chasing it can guarantee it will have positive results and it can be difficult for a while to determine if the investment has true underlying explosive wealth potential or if it's masked by the rich money chasing it.
So out of curiousity, I would be very interested if you would be able to give any specific details about the investments you have been able to participate in. Not sure how much you can or are willing to share but it would be interesting to see what one of these looks like. Can you tell us some things about the investment you are in? What the opportunity is or invests in? How the money and the venture is managed? How you track your returns? How and when you could extract some or all of your investment? etc?
Thanks.
Posted by: Apex | April 21, 2009 at 11:14 AM
+1 to apex. I'm interested in hearing about your opportunities and approaches to following them or not. Obviously, feel free to make up a similar story in a different industry if you don't feel comfortable giving details.
Posted by: Matt | April 21, 2009 at 11:44 AM
FMF,
I'm a new reader, fellow blogger (although in the home improvement space), and stumbled upon the site by looking up some bible money topics for a devotional I was preparing for a school board meeting last night. You've got me coming back... and I noticed you've got about 13,000 other folks coming back.
Great blog.
And, great article... In addition to investment opportunities, there's more that networking with the wealthy gives you: access to capital for your own business ventures, access to potential clients who have control over a company's budget (for instance, if you sell widgets that companies use, its great if you know the owner/manager of the business and get the venue to convince them your widgets are the best). Sometimes that venue alone will translate to increased sales.
You also get to learn how the rich get rich... which Wise Bread touches on in the original article. I met another blogger who used to work for me who inspired me to turn some of my TV-watching evenings into blogging ... to have fun and make a little extra $, and its worked great... but I would have never done it had I not met that person.
Posted by: Fred @ One Project Closer | April 21, 2009 at 08:33 PM
they way you win a war is not giveing up your life but making the other guy give up is life. Same way with money. you accumulate wealth by having income from the money boys instead of you giving money to money boys. Other wards the only way the money boys will get your money is they will have to pry it out of your cold dead hands. Never make an investment if your principal is not secured. Only invest when you have return and your principal is 100 percent safe. Don't give the money boys any wiggle room to get your money. If you do your money will become there money. Thats how they make living off people who have money.
Posted by: Doug | April 22, 2009 at 12:34 PM
Great post! Any ideas how to get into that circle the rich are in? I know it can be done it just takes a lot a work.
Posted by: Chris Holdheide | April 29, 2009 at 07:20 PM
Chris --
For me, the access was being friends with someone who was rich, which then opened up some opportunities for me. May joining clubs, volunteer organizations, etc. where rich people might be would also work...
Posted by: FMF | April 30, 2009 at 08:06 AM
Ok for all those comments regarding people being lazy and not working hard
enough to progress throughout life is ridiculous. Also I do believe you missed
the point the author was trying to convey. Although I do agree skilled workers
should be compensated according to their specialization, but the differential
between high-end executives and people working minimum wage is absurd.
The problem that arises is that inflation is caused by ever increasing
salaries, personal bonuses, and more positions in the company that have above
average salaries(there are many other factors). This increases the cost for the
company, which in turn leads to raising product cost for the consumer (inflation). It's not only one company itself causing this, but every company doing the same thing. Which leads to one company selling to another at a higher price, and that being passed along to the consumer. Which in turn all boils down to greed.
So the saying "The rich get richer, the poor get poorer." is right. This is
partially because of inflation, and greed. As prices continue to rise, less then
average salaries are not adjusted accordingly. This is due to the fact that
companies want to keep production costs at a minimum while maximizing profits,
essentially good business practices. So the money an individual earns, does not
allow one to buy what it used to. Thus making an individual poorer in relation to lets say 10 years back.
This is even worse for a person working at a minimum wage job. With inflation on the rise, and wages not being adjusted puts these individuals further into poverty. So essentially the rich is taking from the poor. Although everyone wants to progress in the workforce and make more money. When does it become too much. As to the people who say figures in the millions of dollars for salaries is not shocking, these are the people that look to the poor and say "I worked hard to get where I am, and if you want to achieve something you need to work hard too". These people neglect to look at how high-end salaries affect the general public.
To sum this up even those unskilled jobs need to be filled, and just because
there are no educational requirements does not mean a person should barely be able to make a living. As to letting the "capable" worry about economics, the economics they focus on is upper class with little or no regard for low/middle class.
Posted by: Adam | May 16, 2009 at 09:23 AM