Forbes Billionaires List: If You Can’t Beat the .0001%, Join ‘Em

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Today, Forbes Magazine will release its 262-page “World’s Billionaires” issue. The yearly release is a red-letter day for America’s business press and is accompanied by extensive coverage of how these global tycoons made – and are likely to spend – their considerable wealth.

For Joel Shulman, a money manager and Associate Professor of Entrepreneurship at Babson College, the list got him thinking about something different – namely, how it could help regular investors cash in on a small slice of these billionaires’ success. “This sort of thing gets lost every year,” Shulman says. “It’s all about the billionaires and how they’re making money and not enough about how you can too.”

Aside from doing academic research, Shulman runs a mutual fund that invests in companies he identifies as having an “entrepreneurial sprit.” Shulman’s fund bets that successful entrepreneurs will continue to succeed, that they have that proven mix of instinct and skill that will help them persevere through the lean times and thrive during the boom years. Predictably, there is an overlap between the firms that Shulman invests in and the billionaires tracked by Forbes.

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Shulman has had success with his entreprenuer fund, and so he decided to test whether investors could have made money if they simply invested in U.S.-based, public companies controlled by the folks on Forbes’ list. He created a hypothetical basket of such companies and tracked their performances from 1986-2011. He found that this basket left other broad based benchmarks in the dust, and has since published his results in the most recent edition of The Journal of Index Investing.

The strategy requires few fancy tricks and no active management beyond updating your fund each year as Forbes issues a new list, and the results speak for themselves. If you had started this strategy in 1986 by investing $1,000 in the “billionaires index,” you would have ended up with nearly $5,000 in 2011. If you had instead invested in other benchmarks like the Russell 2000, Russell 3000 and the S&P 500, you would have finished with $2,500 or less.

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There are some caveats. The “billionaires index” is more volatile than the benchmarks Shulman’s study compared it to. That means there’s a greater chance you’ll make a lot of money in a given year, but that’ll you also lose a lot of money too. But as any stock market veteran knows, volatility isn’t necessarily a bad thing — as long as you are appropriately compensated for that risk, and Shulman’s data show that the “billionaires index” does a better job of that than the benchmarks it was compared to.

Shulman wouldn’t advise throwing in your entire life savings on a bet like this. All the usual disclaimers apply to this strategy. Past performance does not guarantee future results. You must diversify or you might get burned. Plus, some of the companies in this index “move with breathtaking speed,” Shulman says. “So you have to be fully diversified, or don’t do it.”

So what makes investing in billionaires companies so special? Shulman speculates that it’s partially due to the “entrepreneurial spirit’ that drives so many billionaires past plain-old-Mitt-Romney-wealthy into the upper echelons of the world’s most prosperous. Successful entrepreneurs “have high ownership stake, they keep their teams tight, and know how to leverage their contacts,” Shulman says. He also speculates that there’s something to the old adage, “the rich get richer” — some intrisic advantages to being wealthy when it comes to making money. Wealthy people have better contacts to leverage, better access to information, and cheaper access to capital, to name just a few.

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This may not comfort the many in this country and across the world who are bemoaning escalating income inequality, but Shulman politely suggests such people can do more about the situation than protest. Shulman argues his simple investment strategy could help some average investors grab hold of billionaires coat tails and take a ride. As he writes in his report, “Rather than grumble about the advantages of the rich and not being able to beat them . . . it may be better to simply join them.”
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