7

Seven Secrets of Spectacularly Rich People

NOT LONG AGO, following a difference of opinion with my company’s CEO that didn’t exactly go my way, I found myself with what is known in the business as “gardening leave,” which is to say a few months during which I was being paid not to work (more of that, please). I decided to celebrate by taking a three-week cycling trip in Germany, much of which was spent dodging German retirees on e-bikes wobbling amiably down the bicycle path (wine tasting is also popular). On this trip I whizzed through, or more accurately wheezed through, a somewhat forgotten town on the Danube close to the border with Austria named Regensburg.

During the Holy Roman Empire, from 1663 to 1806, Regensburg became the permanent seat of the imperial parliament. At its peak, it was a sizable empire, covering most of modern-day Germany, Austria, the Czech Republic, Switzerland, the Netherlands, Belgium, Luxembourg, and Slovenia (not to mention significant parts of France, Italy, and Poland). As such, Regensburg could have staked a plausible claim to being Europe’s political capital.

The name does not trip off the tongue now because, following the empire’s collapse in the 1800s, the town slipped into obscurity. Today, its medieval city center remains a monument to a historical moment. The streets are thick with ancient architecture; more than 1,000 medieval buildings cluster in the center along with towers and gates from the Roman fortress that gave the town its name. Another legacy of Regensburg’s past is that it is home to the family of Thurn and Taxis, one of Germany’s wealthiest, and most improbable, family dynasties.

The Thurn and Taxis dynasty is an improbable one because its origins were in the postal system. Few things are more prosaic than the postal service, but in medieval Europe delivering the mail, over bad roads plagued by bandits, was a high-stakes venture—including for the sender, as the greater the value of the posted item, the greater the temptation for your courier to sell it, vanish, and live off the proceeds. The Taxis family, perhaps better described as a clan, given their numbers, specialized in courier services in medieval Europe and enjoyed a reputation for bravery and reliability. So much so that one Roger Taxis became a member of a royal court in the early fifteenth century. But it was another Taxis family member, Francesco, who in 1489 secured the family’s fortunes by graduating to the management of postal routes extending from Brussels out to modern-day Austria, France, and Spain for the Hapsburgs. Over time, this became a contract to run key postal routes for the emperor. Meanwhile other Taxis clan members had obtained key postal positions in Innsbruck, Venice, Milan, and Spain.

At some point—it is difficult to say precisely when—the Taxis clan in effect produced the first recognizably modern postal service, based on the posthouse relay system: fresh horses stabled at intervals along key trunk routes enabled postal delivery riders to switch horses and continue journeys at speed. This approach was not new, of course. The Roman Empire had created a public post, cursus publicus, of great efficiency more than a thousand years before, based on a similar scheme. But the Taxis system was novel in combining two elements that today define our expectations for a proper postal service: first, it was available to the general public (not just the government); and second, the sender entrusted his or her letter to Taxis couriers (most previous systems required users to provide their own couriers). It was a great breakthrough, one that modern historians believe came about for the most prosaic of reasons. Essentially, the Holy Roman Empire was quite unreliable when it came to paying its bills (telling the emperor you are about to cut off his credit is a delicate business). The Taxis family wanted new, more obedient customers. Hence one member of the family, who had added “Thurn” to his last name (because the Taxis clan were so numerous), came up with the idea of selling postal services to the public. It was an idea whose time had come: for perhaps the first time in history, widespread literacy meant that members of the public wanted to send letters. The Holy Roman Emperor backed the idea, and a member of the Thurn and Taxis family was made postmaster general of the empire in 1543, a position that granted the family an effective monopoly over postal routes in large portions of Europe. The postal monopoly of Thurn and Taxis was made hereditary in 1574.

If there is one thing we know for certain, it is that a legislated monopoly is a wonderful thing. And a government-awarded monopoly that spans not just a province or a country but an entire empire is even more wonderful. For the Thurn and Taxis it was, predictably, fabulously lucrative, “the well into which all streams flow” in the rather poetic phrasing of one count belonging to the family. In 1800, more than two hundred years later, it was still paying the family an annual income of nearly $9 million (in today’s money)—which was lamented as a comedown from the truly fat years.

One reason for its longevity was that the postal monopoly helped fund the empire, since the family paid an annual fee into the imperial treasury for each region where their monopoly was protected. From a mere service provider, this family business had graduated into an important source of imperial income. Yet the clan served another crucial function. Total control of the mail provided the opportunity for espionage of hostile correspondence while ensuring the security of imperial correspondence—a benefit the family emphasized in making their case to the Hapsburg emperors for the monopoly’s continuation.

The Thurn and Taxis were made princes of the Holy Roman Empire in 1695, and thus became a new and very modern kind of nobility. While most nobles of the medieval era were landed gentry, the Thurn and Taxis had the postal service as their fiefdom. (Through creative genealogy, they were also granted a noble history and a coat of arms that, none too subtly, featured a post horn.) At the height of their power, the family took key political offices, even serving as the emperor’s representative at the imperial diet in Regensburg.

But there was trouble ahead. The power of the Holy Roman Emperor was on the wane, and the family’s monopoly depended on royal protection. The Peace of Westphalia in 1648, which ended the Thirty Years’ War, gave the territories within the Holy Roman Empire almost complete sovereignty. It was by then an empire in name only. As their political protection faded, the Thurn and Taxis began to lose postal territories to competitors. A hundred years later, following catastrophic military defeat by Napoleon at the Battle of Austerlitz, the empire was formally dissolved. It was 1806. The Thurn and Taxis family, who by then had been the imperial postmasters general for generations, were placed in spectacular peril. With the imperial Reichspost disbanded, the family’s income would collapse—a fortune on the scale of a nation-state’s dissolved, to be replaced by a few side businesses such as beer brewing. (As my tour guide to the family’s castle in Regensburg, an enthusiastic young German, noted with understatement, the illustrious postmasters urgently needed to find “a new economic basis.”)

Showing considerable bravery, Princess Therese, the wife of the last postmaster general, traveled down the Danube to Pressburg (modern Bratislava, the capital of Slovakia), where the carving up of the defeated empire was being negotiated. She had a weak hand to play. The family had a fortune but no army, and were more likely to become targets than to set terms. And yet, Therese charged in, parlaying the advantage she had—chiefly, good taste and connections in elite society—into a role hosting informal discussions on the margins of the formal negotiations at Pressburg. She must have served some marvelous cocktails. By the end Therese had somehow secured a private monopoly over a postal service connecting several successor states to the empire. This new monopoly included France, by specific order of Napoleon, even though it was Napoleon’s army that had brought the empire to its end. If they had been rich before, this new arrangement more than secured the family’s “economic basis.”

The Thurn and Taxis family’s ancestral castle. The family either sold, or were forced to give up, more than twenty-five castles, but they still own six in the vicinity of Regensburg, including this one. (Werner Böhm)

Of course, the feudal era eventually came to an end. But by this point the Thurn and Taxis family were so rich there was no stopping them. All told, in the twentieth century they either sold or were forced to give up more than twenty-five castles throughout Europe. They also once owned the spectacular Villa Serbelloni at Bellagio in the Italian lake district (today it is owned by the Rockefeller Foundation). That is only what they lost. In the vicinity of Regensburg, they continue to own six castles to this day. On visiting the city, one can admire their astonishing collection of gilded carriages and gem-encrusted snuffboxes. They are still among the largest private landowners in Germany. In 2014, Albert von Thurn und Taxis appeared on the Forbes Global Rich List with a fortune of $1.6 billion. He was by then a veteran of the list: his first appearance had been at the tender age of eight. At present he is thirty-two and single. He enjoys society parties and motor racing.

Which brings us to the first secret of spectacularly rich people:

SECRET #1: DON’T BE THE BEST. BE THE ONLY.

Any good book on business strategy will tell you that profits are determined by a vast array of external and internal factors. Circuit City rode a wave of increasing consumer demand for electronics, and fell amid rising competition. LTCM was likewise pummeled by industry rivals. Reliance Industries nearly came to grief in a commercial and political battle against Bombay Dyeing, and its performance is currently threatened by new refineries in Asia and the Middle East as well as a fall in demand from China. Microsoft struggled to come to grips with technological advances such as networking and the rise of the Internet, and now the rise of the tablet and smartphone.

One of the most famous representations of such challenges, and how they impact an industry’s profitability, is Michael Porter’s “five forces”: (1) the threat of substitute products, (2) the threat of new entrants, (3) competition among existing players in the industry, (4) the bargaining power of suppliers, and (5) the bargaining power of buyers. Usually the first two forces and the last two are depicted as external pressures acting upon the key question of rivalry among existing players. The “five forces” approach is a powerful tool for identifying lucrative commercial opportunities and can offer substantial insight into how profitable a given industry is likely to be.

Of course, if you follow the first habit of spectacularly rich people, you can forget all of this.

In 1659, the city of Antwerp attempted to set up a rival postal service to challenge the house of Thurn and Taxis. It could have been a cheaper service, or perhaps a higher quality one. The world would never find out. The Holy Roman Emperor dispatched troops to defend the monopoly. Antwerp mounted a token defense but capitulated quickly. Five would-be postmen were hanged.

To be sure, even with such powerful friends, the Thurn and Taxis family did need to worry about some “five forces” issues—their supply of horses; substitute services such as people carrying their own letters; customers complaining if their letters went missing. But frankly, they did not have to worry about any of these things very much, because their business was going to be hugely profitable, no matter what. It was, after all, a legislated monopoly, and it persisted for hundreds of years. When Circuit City made a strategic mistake or two, it resulted in a fire sale. When LTCM made a mistake or two, it nearly precipitated a global financial collapse. When the house of Thurn and Taxis made a mistake or two, it really didn’t matter.

Economists will tell you that even legislated monopoly businesses, facing no competition—not even the threat of competition—will tend to seek an optimal price point (not optimal for the consumer, of course, but optimal for the monopoly’s revenues). But if the Thurn and Taxis family got a little greedy and missed that optimal price point by a lot, what was going to happen to them? They might miss out on a couple of gem-encrusted snuffboxes that year, but they were still going to make so much money that, more than fourteen generations later, no one called Thurn and Taxis would have to work for a living if he didn’t want to.

At a conference I recently attended, the technology CEO Meg Whitman was asked about the lessons she had learned while serving first as head of eBay and then Hewlett-Packard. She responded: “Always, always, always start with the customer.” It is a commonly heard refrain from business executives. And there is good reason for it. Whitman’s point was that when things go wrong companies instinctively tend to focus on analyzing and correcting internal problems, rather than looking at what is happening in the marketplace. She was telling the audience, in effect, that when you are seeking to correct underperformance, you have to look at your customers first.

That may be true, but only if you have competitors. The only rationale for paying attention to your customer is that there is a risk your rivals will pay more attention to them. In the absence of any competitors, simply ignore your customers and all will be fine. The director of India’s state-owned telephone monopoly, C. M. Stephen, once defended his company against complaints that its service was terrible by noting that there was an eight-year waiting list to get a telephone in India. If so many people wanted a phone that there was an eight-year waitlist, he reasoned, the service they were offering must be really great. He had confused the wonders of a government-awarded monopoly with consumer acclaim. If any company in a competitive market ignored would-be new customers for eight years, believe me, it wouldn’t last long.

A lot of experts on personal financial success will exhort you to be the best. They will advise you on routes to self-improvement and personal growth. Business books will tell you how to make your business “great” or perhaps “excellent.” Self-help gurus will tell you how to transform your mental attitude and realize your inherent potential. These are all pretty much dead ends. The geniuses at LTCM were the best. And really, it got them nothing. Circuit City was the best as well—one of only eleven “good to great” companies in America, and far and away the top performer among them—and its assets ended up in a fire sale.

You don’t want to be the best; you want to be the only.

Unfortunately, finding a government that will award you a monopoly is, in the modern day, a challenge. The emerging markets are a good place to look. Carlos Slim accomplished it in Mexico, to great effect. In Algeria, well-connected businesspeople known locally as the “mafia-politico-financiere” do very nicely off government-protected trading monopolies. The Russian oligarch Vladimir Potanin for a time owned part of the telecom monopoly Svyazinvest.

There are even a few examples in the rich world—the three rating agencies, for instance, divide a legislated monopoly among them, which is at least better than free-market competition. Anything requiring government licensing or involving government suppliers or buyers is a good place to start looking for these kinds of opportunities. An example from the United States is the company Pitney Bowes, which eventually gained a 100 percent share of the metered mail market thanks to its close relationship with the U.S. Postal Service. By the end of the 1950s, about half of all U.S. mail was processed using Pitney Bowes machines. Perhaps unsurprisingly, the company’s profit margins at the time exceeded 80 percent, and better yet, it maintained its monopoly position for roughly forty years.

And then, of course, there is the technology sector. Technology gurus will often say things like “Technology companies are very profitable because they are very innovative.” That is only a small part of the story. Companies in many sectors are innovative (the financial sector, for example, with its deployment of Nobel Prize–winning mathematicians). But companies in the financial sector cannot patent their innovations, so they must look for profits in other ways. Moreover, even in the technology sector, the most profitable technology companies are not necessarily the leading innovators (Microsoft, for instance, lagged on graphical user interfaces, multitasking, networking, the Internet, mobile devices…). Technology companies are profitable because they have patents; and patents give them miniature monopolies. If any competitor attempts to imitate a technology company in a way that is protected by patent, the government will come around and rough them up a bit.

Of course, the house of Thurn and Taxis had already proved the underlying principle several hundred years earlier. Growth isn’t the ultimate achievement of business strategy; having one’s competitors hanged is the ultimate achievement of business strategy.

SECRET #2: BIGGER IS STILL BETTER

Classic wealth secrets never go out of style, and the next one is something of a throwback.

The famed business book In Search of Excellence, by Tom Peters and Robert H. Waterman, Jr., published in 1982, documented an important shift in business fashion. Its findings were based on a comprehensive analysis of the factors that led to exceptional business performance, drawing on structured interviews conducted with about fifty high-performing organizations. Like Porter’s “five forces,” this study, undertaken in the late 1970s, produced a framework with seven nodes and a checklist with eight attributes describing exceptional organizations. These nodes and attributes included things like “structure,” “skills,” “style,” “shared values,” “productivity through people,” and “close[ness] to the customer.”

In other words, they were a bit touchy-feely. At the time, it was revolutionary stuff. Prior to this point, U.S. businesses had largely focused on gaining scale, because scale offered an insurmountable barrier to competition. Think Vanderbilt, Rockefeller, and Carnegie. Even after they (especially Carnegie) started to face competitors, being in an economies-of-scale industry was still usually good for some decent profits, if not perhaps robber baron profits.

Peters and his colleagues had a new message. They said it was better to be focused and specialized—to “stick to the knitting,” in their chosen phrase—than to be big. (Today one might hear that a business should focus on “core competencies.”) Peters and Waterman claimed that business advantage was produced not by scale economies but by soft factors like the motivation of employees, and that some companies were better at these things than others. “All that stuff you have been dismissing for so long as the intractable, irrational, intuitive, informal organization can be managed,” they claimed.

Peters and Waterman cited a lot of evidence that bigger wasn’t better. Larger companies were plagued by labor disruptions, for instance. Factories with more than a thousand employees lost an average of two days per employee per year to labor disputes, including strikes and walkouts. Factories with between ten and twenty-five employees, by contrast, lost less than 0.02 days per employee, on average. The McKinsey consultants also argued that larger organizations were less innovative. They offered vivid descriptions of giant companies mired in bureaucratic paralysis (at one firm they studied, they found 325 separate task forces and that “not a single task force had completed its charge in the last three years”). Peters and Waterman approvingly quoted the “tough-minded” president of Motorola, who said: “Something just seems to go wrong when you put more people under one roof.”

These problems are called, as I have noted before, “diseconomies” of scale, and have plagued businesses for decades. The largest operations of the robber barons also posed management challenges, and in fact were probably less well run than the factories of the 1970s that Peters and Waterman studied. Carnegie’s Edgar Thomson steelworks employed five thousand workers and suffered extraordinary labor disruptions, including one infamous strike that was brutally suppressed, resulting in ten deaths and thousands of injuries. In the modern day, killing striking workers is frowned upon.

So, yes, Peters and Waterman were onto something. By the 1970s the simple pursuit of scale was no longer a great wealth secret—at least, not in most sectors of the U.S. economy. In the robber baron era, scale had been the basis of the largest fortunes the world had ever seen, largely because it was difficult to achieve and because the robber barons came up with schemes to turn scale economies into wealth secrets. Carnegie’s massive Edgar Thomson steelworks required so much investment that no one else could come close to matching it for years. U.S. stock markets were plagued by manipulation and conflict-of-interest schemes, which made people reluctant to invest, and hence it was hard to raise the funds that would have been necessary to take Carnegie on (at least until the early 1900s, which is when Carnegie started to get into trouble with competition and benefited from the assistance of Morgan). Furthermore, at the time, the absence of antitrust law meant that one could freely use one’s scale to bludgeon suppliers and competitors. Rockefeller’s aborted but spectacularly successful agreement with the South Improvement Company was perhaps the most extreme example.

In the United States of the 1970s, however, these advantages had all but vanished. Comprehensive antitrust law was by then strongly enforced. Large competitors were springing up around the world and shipping their goods globally. Furthermore, capital markets were by then so well developed that it was possible to fund operations large enough to challenge just about any commercial venture (LTCM, after all, started with more than $1 billion in the bank). In this environment, in which large-scale companies were legally constrained from exploiting their scale and faced competition from other companies of a similar size, the better-run company just might win, as Peters and Waterman had contended.

But there was a problem: the seven nodes and eight attributes revealed in In Pursuit of Excellence were not wealth secrets either. Business executives who followed these directives were once again chasing pipe dreams of being the best, which perhaps earned them a couple of percentage points of profit before their competitors copied them. “Soft is hard,” wrote Peters and Waterman, but of course it really is not. If you have a motivated and innovative workforce, that is wonderful, but there is nothing to stop your competitors from finding out how you did it and doing the same thing. Having scale is different. A company may know it needs scale but be unable to obtain the financing to do it. Having intellectual property rights is also different. A company may know what you are doing and be able to do what you are doing, but not be allowed to do what you are doing. Just knowing that your competitors are living each day with this kind of frustration may be worth more than any amount of money. But in case it is not, the profits from such hard advantages are very nice too.

Many business leaders chased the rainbow of being better at “soft” management. But a few visionaries understood that bigger was still better, because it was still a wealth secret; you just had to find a way to make scale advantages apply. In Dhirubhai’s India, for instance, scale was the secret to winning in the licensing regime. Scale efficiencies could be used to convince bureaucrats to grant licenses for production capacities so large that it became very difficult for any competitor to enter. Indeed, scale is still a wealth secret in most emerging economies—including modern-day India—in part because in most of these countries, domestic capital markets are not yet developed to the point where they could fund a truly huge, unprofitable enterprise for the years or even decades that are necessary for it to grow.

After the United States adopted a light touch approach to antitrust law, retail became another sector where scale created hard advantages, because retailers could use their size to bludgeon their suppliers (as we saw in chapter 1). No one understood this point better than Sam Walton, and Walmart is today the source of four of the twelve largest personal fortunes on earth (each of the four fortunes belongs to a member of the Walton family). Walmart’s low prices are legendary, but they come from squeezing suppliers’ profits, not the company’s own profits, which are healthy. Amazon.com has a similar idea, and despite its low profitability throughout most of its existence, Wall Street has been eager to pour money into the company, on the off chance that it does become—as its slogan suggests—the “Everything Store,” large enough to squeeze the profits out of every producer in the world and into its (and its investors’) pockets.

I exaggerate somewhat, but these megastores offer the possibility of realizing, on a national or even global scale, the vision that one of Circuit City’s CEOs, Richard Sharp, articulated: the virtuous cycle of market dominance creating lower prices that lead to even greater market dominance. At the end of this rainbow is—whisper it softly, lest speech put this fragile hope to flight—a natural monopoly. The very thought of it, as you can tell, makes me a little giddy. Perhaps one day there will be a global retail monopolist. I’m sure there are diseconomies of scale in retail, but the megaretailers don’t seem to have reached their upper limit yet. Buy Amazon stock, and hope.

The problem is, as Peters and Waterman noted, in most industries diseconomies of scale start to set in fairly quickly. In steelmaking, for instance, there is not one giant mother-of-all-steel-factories producing all the world’s steel. Making small operations larger makes them more efficient only up to a point, after which they become less efficient. As a result, while the global steel market is far from perfectly competitive, there are lots of steel companies worldwide battling intensely with each other.

Indeed, I am struggling to think of many industries where there is a truly global “natural monopoly.” One that comes close is an industry I have mentioned before—jumbo jets, where there are really only two companies in the industry worldwide: Airbus and Boeing. Both of these companies have been subsidized heavily by their governments. Perhaps, in the absence of subsidies, there would be only one. Another industry with very strong scale economies is asset management: managing a large sum of client money generally costs about the same, in terms of overhead, as managing a small sum of client money—you make the same investments, just with more money. Yet at some point diseconomies start to set in, because the amount of money under management becomes so large that one’s investments start to move markets—a problem that bedeviled LTCM at its peak, and pushed the fund to adopt trading strategies outside its core model-based expertise.

Really, the only industry I can think of where economies of scale are strong enough to produce a global natural monopoly is computer software, where Microsoft at one point enjoyed a more than 90 percent share of the world market for personal computer operating systems. Some might say computer software is not a “real” industry—it exists in its current form only because of intellectual property law. Most “real” products can’t be copied infinitely at no cost, and therefore don’t enjoy such spectacular scale economies. (Until recently, local newspapers, another intellectual-property-law-based business, also tended toward monopoly, although only of the town or city where they were published.)

But the profits of these industries—retail and software—are real enough. For modern-day seekers of wealth secrets, it is the most obvious place to focus.

That said, sometimes it pays to go for something that’s not obvious.

SECRET #3: THE WORST PLACE TO DO BUSINESS IS REALLY THE BEST

The difficulties facing large-scale businesses in the advanced economies of the 1970s were one symptom of a broader problem. Basically, most countries in North America and Europe were becoming increasingly business-friendly. Corporate governance standards were improving, capital markets were developing, legal systems were becoming increasingly predictable, corporate tax rates were falling, bureaucratic interference was being reduced. This process accelerated in the 1980s, especially in the United States and the United Kingdom, with privatization and the downsizing of government. These changes were, generally speaking, a disaster for wealth secrets because they allowed competition to flourish. New businesses could be started easily, and successful medium-sized companies could grow quickly to challenge established titans of industry.

There were many places, though, that remained a wealth secrets paradise. Perhaps the most famous—or rather infamous—of these was post–communist Russia. The advent of democracy and extensive privatization during the 1990s was widely expected to birth a new Russia. It did, but the New Russians who popped out of the proverbial birth canal weren’t who anyone was expecting. The world waited on a Russian George Washington or perhaps a Mahatma Gandhi; instead, it got Russian Silvio Berlusconis and Bernie Ecclestones by the dozens—a new class of businesspeople who were ruthless, pragmatic, colorful, and did not play by the rules.

Also contrary to expectation was that democracy and privatization produced economic catastrophe in Russia. Communism had been a nightmare for the country’s people. Capitalism, it turned out, was worse. Roughly eighteen thousand of Russia’s industrial enterprises were privatized between 1991 and 1996. The economy responded ungratefully, by contracting to roughly half its former size. The life expectancy of the average Russian fell from sixty-nine years to sixty-four.

This economic contraction should also by rights have been nearly fatal for anyone hoping to make money in Russia. Any business that somehow managed to turn a profit became the prey of corrupt bureaucrats and a rising mafia. The New Russian industrialists who survived came to be known as the “oligarchs.” Many were forced to rely on underhanded tactics, including defrauding some major foreign investors, to survive. These oligarchs soon became famous globally for their unscrupulousness and their nouveau riche tastes.

The oligarchs were also, it emerged, laughing all the way to the bank (in most cases, a Swiss or Cypriot bank). Russian businesses had stumbled across a mother lode of wealth secrets. By the year 2004 Moscow was home to more U.S.-dollar billionaires than New York.

When this statistic came to light, many people were dumbfounded. The Russian economy had imploded, capped by a debt default in 1998 (the one that brought down LTCM), and by 2004 was a fraction of the size of the U.S. economy. So how could there be so many Muscovite billionaires?

Those left in stunned surprise simply did not understand wealth secrets. What matters in business is not having a big market; what matters is dominance. What matters is the absence of competition. And here, the oligarchs were having a field day. Some of their moneymaking schemes were little better than the proscriptions of Marcus Crassus. For instance, some managers of state-owned enterprises came up with a plan through which they could buy Russian oil from state firms at the state-controlled price of 30 rubles per ton (30 rubles was, at the time, about the cost of one pack of cigarettes) and sell the oil abroad at market prices, where it was worth millions of dollars. This particular scheme was so popular that in 1992, when reformers attempted to close this loophole, they were rebuffed by the managers, politicians, and government officials who were growing rich off the scam. As late as 1999, the scheme was still going. That year, the newly privatized Yukos oil company purchased oil from its subsidiaries at $1.70 a barrel even though the market price was about $15. In total, Yukos paid a total of $408 million for something that arguably should have cost $3.6 billion. It then exported about a quarter of that oil to world markets, earning a tidy $800 million in thirty-six weeks. Scholar Anders Aslund estimated that the total take from reselling underpriced natural resources, a scheme that went well beyond Yukos, approached $24 billion—a staggering 30 percent of Russia’s annual economic output.

But most oligarchs relied on other wealth secrets to get rich—secrets more in line with Dhirubhai’s way than Crassus’s. To get started, they needed some start-up capital, and this was often obtained in creative ways. Mikhail Khodorkovsky—later jailed and then exiled following an apparent falling-out with Russian president Vladimir Putin—reportedly got his start by converting worthless accounting rubles into real rubles in the confusion of the 1980s, and then converting these rubles into dollars. Vladimir Potanin—who today ranks among the world’s top 100 billionaires—allegedly used his connections to win control of a state bank and then entice several Russian government ministries to do their banking with him. But once these oligarchs had start-up capital, they tended to make money in more conventional ways. The problems of the Russian business environment—corruption, crime, inability to access capital, bureaucratic interference—made it nearly impossible for anyone who was not an oligarch to start a business. Hence the oligarchs spent years dominating their respective industries.

Oligarchs in the natural resources sector got all the headlines, but even oligarchs doing fairly mundane things like producing fertilizer, chemicals, candy, or tobacco made a killing. According to the research and advisory firm Oxford Analytica, one popular tactic used by oligarchs to deal with their competitors is so-called asset-grabbing: based on a tip, an entrepreneur is arrested for some sort of “economic crime” such as embezzlement or tax evasion and placed in pretrial detention. Usually, the desperate entrepreneur will cut some kind of deal to secure his release, which involves the loss of his company (sometimes into state hands, sometimes into bankruptcy). The entire process is usually instigated and even guided by a well-connected competitor. There are many variations on the theme: in one, corrupt police raid a company, seize its books, and illegally alter the ownership in the official register. In another, a rival businessperson acquires a target company’s debt and then bribes a judge to declare the company insolvent. The business association Delovaya Rossiya estimates that there have been three million such raids over the past ten years. In 2012, there were about 150,000 cases started, with 3,000 closed and 30,000 taken to court—many of the remainder, presumably, having been settled by the entrepreneurs involved through the loss of their businesses.

This makes Russia a difficult place to do business, but mostly for the medium-sized companies that are usually the targets of such tactics. Large, well-connected companies tend, as a result of such tactics, to face little market competition. Perhaps unsurprisingly, it turned out that at least some of Russia’s oligarchs appeared to rather like the system that made them rich. President Putin certainly believed this to be the case. Gathering his country’s business leaders, he told them: “I only want to draw your attention straightaway to the fact that you have yourselves formed this very state, to a large extent through political and quasi-political structures under your control.” Of course, Putin was not an entirely disinterested party. Shortly afterward he was to launch a ruthless campaign to imprison, exile, or impoverish any oligarch who failed to pledge unconditional political support. But it was undeniable that Russia’s oligarchs had taught the world a lesson in wealth secrets.

The New Russians changed the way a great many people think about poor and middle-income countries. These places might be relatively impoverished, but they are also, counterintuitively, a land of opportunity for wealth secrets. “Oligarchs,” or people like them, today thrive in a lot of places, including not only Russia, Mexico, and India, but also the Philippines, Egypt, and Venezuela. The well-connected children of Communist Party officials have become captains of industry in China. And, as I discussed at the end of chapter 5, such individuals today dominate the Forbes list of the world’s billionaires. Their hard-won fortunes are testimony to Dhirubhai’s wealth secret: the worst places to do business are really the best. Most businesspeople are instinctively attracted like moths to a flame to the largest, most lucrative markets. They see a number with a lot of zeros at the end and it overwhelms their common sense. They think that if they can get even a little bit of that huge sum of money, they will be rich. Following this line of reasoning, they conclude that going global is the ultimate achievement of business strategy, because going global increases the number of markets they are in.

They are totally wrong. Yes, going for a huge market is tempting, but then you will be forced to price competitively and probably won’t make much money. You might have a small share of a huge market, but it won’t be worth much. It is much better to go for a large share of a tiny market. There, you can turn the screws.

And that is why it’s good to go where no one else wants to go. Take, for instance, the humble synthetic fiber business of Reliance, Dhirubhai Ambani’s company, back in the 1990s when it was a tiny operation by global standards. Between 1989 and 1991, Reliance’s operating margin in its synthetic fiber business was between 14 and 15 percent. At the time, Reliance exported next to nothing. Indeed, as recently as the early 2000s, 97 percent of Reliance’s sales were in India, and India was a tiny market by global standards. By contrast, the titans of the synthetic fiber industry were global chemical companies like AkzoNobel of the Netherlands, Hoechst of Germany, and ICI of the United Kingdom. All of these companies operated factories around the world and had sales operations in about 100 countries worldwide. And they were making no money doing it. While Dhirubhai was turning in margins of 14 to 15 percent, AkzoNobel’s margins languished between 2 and 5 percent and ICI’s were even lower, at between 2 and 4 percent. Hoechst barely made it to half of Dhirubhai’s level.

Being a global competitor may be glamorous and exciting and get your picture in gray dots on the front cover of the Wall Street Journal, but it is bad for profits. Dhirubhai, having stitched up India’s domestic market, was rolling in rupees. There were probably some other Indian businesses that tried to become global players. Perhaps some even tried to take on the international giants. But there was no money in it, and so history does not record their names. It was Dhirubhai, doing business where no one else wanted to go, who built India’s largest company, lived in his own personal skyscraper, and raised one son who married a movie star and another son who lived in an even larger personal skyscraper. It’s okay to admit you are a little jealous.

SECRET #4: WHEN LENDERS CAN’T LOSE, YOU WIN

When describing the previous few secrets of spectacularly rich people, I have often used the rather anodyne phrase “access to capital.” For instance, I have noted that scale economies are a wealth secret when access to capital is difficult (because one needs a lot of cash to build large-scale operations), and that doing business in a difficult place is a wealth secret (because when other people are unable to raise capital, they cannot compete with you).

All very logical, but perhaps a little dull. Let me jazz it up a bit: access to capital is another way to say “people giving you money.” Seen this way, unlimited access to capital is the most exciting of all wealth secrets. If people just gave you money no matter what, then you would not have to worry about the five forces determining your profitability, about scale no longer being a wealth secret, or even about competition. You would just take your investors’ money and run. Or better yet, you would take their money and then ask for more. The problem is—and I hope you will not take this personally—in most cases, people are going to be reluctant to give you money, unless they are reasonably sure they are going to get it back.

Of course, you can fool some of the people some of the time. Think of the conflict-of-interest dealings of Rockefeller’s railroad, or the foreign investors who were defrauded in Russia. There are ways to make people think they are going to get their money back, or even (in the case of Bernie Madoff, for instance) to make people think they are getting their money back, when in fact they are not.

But really, these aren’t wealth secrets. We’ve already seen that one reason competition was limited in Russia and the robber baron–era United States was that access to capital was very constrained, largely because after their money was stolen a few times, people wised up and didn’t hand over any more. Stealing investors’ money might make you a few rubles, but it’s hardly sustainable. Even Bernie Madoff eventually came to a bad end.

Overcoming this challenge—finding reliable ways to misuse people’s money and still attract more of it—is a modern wealth secret breakthrough. American S&Ls were, of course, masters in this regard. Indeed, the money they were stealing was being managed by some of the most sophisticated financial institutions on Wall Street. What the S&Ls had discovered was that if lenders and depositors are all but guaranteed to get their money back (in this case, thanks to deposit insurance), they will happily give you their money even after it becomes obvious that you are probably stealing it. The extraordinary cases of S&L fraud emerging from Texas and California did not, after all, cause mass withdrawals from brokered accounts—because the deposits were guaranteed.

The same secret was then exploited by those Wall Street banks that became too big to fail. One might expect that in the wake of the global financial crisis, banks would have fallen on hard times. If anyone was under the illusion that risk management systems in banks were working, they probably don’t harbor that illusion anymore. But then, that was never the point. The point was that the banks were invincible. While you might expect the global financial crisis to have drained money from banks like J.P. Morgan by publicly demonstrating that they were taking extraordinary risks, in fact the crisis and its aftermath had the opposite effect. The crisis proved unequivocally that some banks were too big to fail. So people (and other banks) became even more eager to entrust their money to those banks.

Are there other examples of government guarantees, where investors and lenders cannot lose? Happily, yes. In England during the 1700s, the government bailed out both the South Sea Company and the East India Company (although some directors of the former were sent to the Tower of London, which was unpleasant). During the Great Depression, the U.S. government bailed out numerous banks and railroad companies, although it imposed harsh conditions of oversight on these companies. In more recent years, governments have become more sympathetic to the need for wealth secrets. In the 1970s, the U.S. government bailed out Lockheed Aircraft, a major defense contractor, with fewer strings attached.

The U.S. auto sector is a more recent example. Chrysler, when it was headed for bankruptcy in 1980, was bailed out by the U.S. government. The auto sector was rescued again during the global financial crisis. Broadly speaking, the sector is too political to fail, as its workforce is a major source of campaign support (although U.S. automakers haven’t really made much use of this potential wealth secret, preferring to overpay their executives and unionized workers).

A more go-getting approach to the government guarantee was taken by two government-sponsored enterprises: the Federal National Mortgage Association, nicknamed “Fannie Mae,” and the Federal Home Loan Mortgage Corporation, nicknamed “Freddie Mac.” These institutions were created in 1938 and 1970, respectively, to buy mortgage loans from banks and sell them on to investors. Both Fannie Mae and Freddie Mac eventually became quasi-public institutions. That is to say, they had private shareholders and operated to some degree as private companies, but both operated according to government-directed business models and with implicit government support.

Initially, these semipublic organizations operated much as you would expect a government bureaucracy to operate. They employed people who did not make much money, but nor did they work very hard. (Think of the U.S. Postal Service, or Amtrak.) But then, in the 1990s, a new CEO, James Johnson, took charge of Fannie Mae. He realized he was sitting on a gold mine. Fannie’s debt was, in effect, U.S. government debt, so it was rated AAA (a point the rating agencies took the trouble to make explicit when there was talk of a law that might make it possible for Fannie to go bankrupt). So, like the too-big-to-fail banks, no matter how much risk these quasi-public companies took, people would continue to hand Fannie Mae money. Johnson and his predecessor, David Maxwell, brought in a new hard-charging work ethic. They brought the capital held in reserve against losses down to next to nothing (specifically, 2.5 percent of assets, as against roughly 8 percent for even the most gung-ho banks) and threw everything they had into taking lots of risk in mortgage securitization. Investors didn’t worry: Fannie had a government guarantee.

And that was extraordinarily lucrative. A Congressional Budget Office study quantified the value of the implicit U.S. government guarantee at $7 billion annually in 1995. The study also alleged that one-third of the subsidy (about $2.3 billion) was retained in the form of larger profits and higher staff salaries. Between 1993 and 2000, bonuses for Fannie executives more than quadrupled, from $8.5 million to $35.2 million. Johnson himself made $5.1 million in 1995, which was comparable to the CEO of Chase Manhattan Bank—not bad for government work. When the global financial crisis came, both Fannie Mae and Freddie Mac collapsed and required a government bailout. In contrast to the U.S. bank bailouts, the conditions of this bailout were fairly harsh. Still, it was a great wealth secret while it lasted.

SECRET #5: YOU’VE GOT TO OWN IT, BABY, OWN IT

There are any number of books on the topic of how to get rich. The good ones—those with some basis in economics—will tell you that rather than working for a salary or investing in a broad portfolio of stocks, to get rich you need to own your own business.

This is sage advice, based on sound economic logic. You may recall that in chapter 1, I said that in perfectly competitive markets, economists expect that firms will earn no economic profits. I also mentioned that economists look at business profits a little differently than most people do. An economist would not be surprised to see a business earning profits roughly equal to its cost of capital, because to an economist the cost of capital is part of the cost of doing business (along with wages, production machinery, and so on).

In most cases, this observation doesn’t tell you anything really interesting about getting rich. The cost of capital for large firms in advanced economies might justify profit margins in the single digits—nowhere near wealth secrets territory. But say that you’re running a business that is exceptionally risky. If most businesses of a particular type fail, in order to attract investors, these businesses will need to offer the possibility of significant returns. Even in perfectly competitive markets, these businesses can earn substantial paper profits because investors will only back new entrants if they are earning a return that justifies the risk. This means that if you start such a business, and put all of your money into that business, and keep reinvesting in that business as the profits roll in, you could end up reasonably rich, even in a competitive market. Of course, if you do that, it’s much more likely that you are going to lose everything. This strategy involves putting all your money into one very risky basket. It’s not really a wealth secret. It’s getting an appropriate return on the incredible risks you’re taking. That’s an outcome of a well-functioning market, while the wealth secrets described in this book tend to involve the engineering of catastrophic breakdowns of market competition. (Being rewarded for the risks you took is not a wealth secret—being rewarded for the risks borne by someone else is a wealth secret.)

Nonetheless, owning things is, in fact, a very good way to get rich. The key is to think about the bigger picture.

In chapter 6, I talked about how intellectual property rights are the basis for miniature monopolies. That’s actually a special case of a more general rule, which is that “All private property is, in a sense, a monopoly,” to quote Harvard professor Lloyd L. Weinreb. That is to say, private property rights generally give you the exclusive right to something—the right to use something, to make money from it, and to exclude others from using it. As noted in a briefing prepared for a U.S. Senate subcommittee, “‘property’ and ‘monopoly’ are one and the same thing from an economic point of view.… The ‘owner’ of an invention has a monopoly of its use just as the owner of a house has a ‘monopoly’ of its use.”

Once you own something, it’s yours, exclusively. As with intellectual property rights, so with broader property rights: you have a miniature monopoly, not over a market but over an asset. So if an asset produces ongoing revenues—say, the “numberless” silver mines that Crassus acquired via proscriptions—then any revenue streams from that asset will be yours in perpetuity, guaranteed. No competitor is going to take that from you (as long as you can defend your property rights). In practical terms, this is why Marcus Crassus’s wealth secret worked so well, and why the Russian oligarchs, in the early days of post-Soviet collapse, were able to get so rich so quickly. It is why people who inherit a lot of assets don’t need to work particularly hard, or indeed at all, to continue to do well.

When climbing the greasy pole to the top, each piece of property that produces a stream of revenues offers a secure handhold. Real estate produces tenant rents; mines produce revenues from minerals. Of course, as with intellectual property rights, the value of the associated revenues can vary (as many people in the United States and Ireland, who had assumed that house prices would go up indefinitely, learned the hard way).

You might think that property rights are so fundamental to capitalism that pointing this out is a little silly. But actually, property rights vary quite a bit. In Mongolia, land was until recently held communally, although the herds of animals that grazed the land were privately owned. In Germany, property rights don’t generally include subsoil rights (the rights to exploit what’s under the ground), so unlike North Dakotans, who have been falling over themselves to invite shale gas companies onto their land, Germans, who wouldn’t personally see any revenues from fracking, have been largely opposed. Hence understanding what kinds of monopolies private property rights can produce for you is crucial to exploiting this wealth secret.

John D. Rockefeller, even after he had rolled up more than 90 percent of America’s refining capacity into Standard Oil, might in theory have been vulnerable to future competition. His monopoly was, after all, a natural monopoly, and so the spectacular profits he was earning might eventually have attracted determined, well-funded competitors.

And indeed they did. In the early 1870s, Russia began developing its oil fields in Baku (today part of Azerbaijan) and began exporting oil globally. Since the Pennsylvania fields were starting to run dry, meeting this competition from overseas required Rockefeller to make a large bet on new oil fields to supply his refineries. He chose the oilfields near the Ohio-Indiana border, which were rich with oil but of a type that could not be refined using the technology of the day. It was risky: Rockefeller had to offer to put up several million dollars of his own money to convince his reluctant board of directors to make major investments in this region. But the bet was made good after a German chemist Rockefeller had employed discovered a way to process the oil. Standard Oil then unleashed its acquisition machine in oil production. By 1891, in addition to 90 percent of America’s refining capacity, the company controlled a quarter of the country’s oil production.

A quarter does not sound like much of a monopoly. But Standard Oil’s position was now based on property rights: it owned the oil fields, free and clear. As long as the oil fields continued to produce oil, and as long as oil remained a mainstay of global energy supply, Standard Oil would be assured a steady stream of revenues via its property rights on the output of these fields.

The benefit in this was demonstrated when Standard Oil was broken up by government antitrust regulators in 1911. Once the pieces of the former monopoly began to compete with each other, Rockefeller no longer dominated oil refining. But it didn’t matter: his oil production companies, with their value based in part on property rights, weren’t going to be undone by a little competition. The successor companies to Standard Oil included Exxon, Mobil, Chevron, Amoco, ARCO, and Marathon Petroleum, among others. Delightfully, in the year of the antitrust breakup, the value of Rockefeller’s personal fortune actually grew. Property rights tend to be resilient in the face of market competition.

In the modern era, most property rights are acquired the hard way: by buying them. Conquest and theft are risky and increasingly challenging in a world of well-functioning legal systems. However, when legal systems suddenly break down due to well-intentioned but poorly conceived liberalization schemes (in post-Soviet Russia, for instance), the way is thrown open to the minting of new fortunes. And there is at least one modern arena that harkens back to the valor and glory of ancient Rome, when the assets of others were ripe for the taking: intellectual property rights. In the world of intellectual property, armies of lawyers (often employed by non-practicing entities, as I mentioned in chapter 6) do battle to seize the property of others—usually small businesses that are relatively defenseless.

Taken together, property rights are the basis for a wealth secret that appears often on the Forbes Global Rich List. In chapter 6, we discovered that among the top fortunes in advanced economies, 75 percent are attributable to either fund management or intellectual property rights. On the broader Forbes list, of over 1,600 billionaires, including emerging markets fortunes, there is more diversity. But fortunes attributable to property rights in general nonetheless appear frequently. For instance, about 130 of the roughly 1,600 fortunes are in real estate. A further 40 or so are in oil and gas or mining. About 120 are in fashion or retail, where companies often own not only valuable brands but valuable properties. Roughly 65 are in pharmaceuticals or health care, 90 or so are in technology, and about 70 more are in media. In other words, on a rough estimate, at least a third are property rights fortunes of some kind. And that is without trying to factor in the fortunes gained in the post-Soviet collapse. Own it, baby, own it.

SECRET #6: SPIN LAWS INTO GOLD

Remember those nineteenth-century farmers from chapter 3? While you were busy mocking their silly accents and off-trend clothing, they became wealth secret masters. There was a time when they couldn’t organize themselves out of a paper bag. In the robber baron era, every piece of legislation the farmers wanted seemed at the last minute to go wrong somehow. They demanded a bill restraining railroad pricing, and instead got one that enabled the railroad presidents to create a cartel. The farmers demanded antitrust laws, and got something so vaguely worded it was used to prosecute labor unions (at least at first).

Today, the tables are turned. Almost no one pays any attention to agricultural programs like the U.S. Farm Bill (which is updated every five years). And the farmers, now a cohesive and effective lobby group, have turned the program into a cash bonanza. Lobbying expenditures on the 2008 Farm Bill alone amounted to $173.5 million—more than $500,000 for every day that the 2007–2008 U.S. House of Representatives was in session. The lobbyists employed in this cause included 45 former members of Congress and 461 former congressional and executive branch staffers. And the lobbying paid off: by the early 1990s, direct federal farm subsidies amounted to more than $20 billion per year. The 2008 Farm Bill alone directed about $307 billion in federal spending.

U.S. sugar beet farmers in particular have acquired an almost legendary status among political science researchers. During the 1980s, it turned out American sugar beet farmers (there were only 11,000 of them at the time) were receiving benefits from the U.S. government equivalent to about $1.5 billion in annual gross income. That’s more than $100,000 per farmer (about $217,000 today). Now, even among readers who have one or two wealth secrets of their own, there are probably few who would scoff at a guaranteed annual payment of $217,000 from the government. It sure beats welfare. (The cost, incidentally, was about $6 per year in higher sugar prices for every U.S. household.)

Of course, the subsidy for sugar beet farmers did not appear in the form of a simple U.S. government budget line item (“$1.5 billion payment to farmers” or similar). Rather, it involved a complex mix of moving parts including country-by-country import quotas for foreign sugar exporters, government loans to U.S. sugar producers, and a related program to support U.S. sugar prices based on an esoteric formula.

And there you have the key to spinning laws into gold. It is what the American humorist P. J. O’Rourke called “dictatorship by tedium.” As he put it, government officials can do “anything they want, because anytime regular people try to figure out what gives, the regular people get hopelessly bored and confused, as though they’d fallen a month behind in their high school algebra class.”

O’Rourke was referring to the S&L bailouts rather than agricultural subsidies, but the same principle applies in both cases. Indeed, it applies to just about every wealth secret explored thus far in this book. You might call it “hiding things in plain sight.” Wealth secrets are hidden in laws and regulations so complex and boring that even though they are publicly accessible, it is unlikely that anyone will ever find them, and even more unlikely that anyone will do anything about them. The Dodd-Frank Act, for example, which was supposed to put an end to too big to fail in the United States, ran to 848 pages, and required regulatory agencies to produce about 400 further rules and clarifications, producing 30,000 pages of rule making in total. A rough estimate was that postcrisis financial reform in Europe would double this figure, requiring 60,000 pages of new regulations. And one more example: at the end of chapter 6, we saw how the seemingly boring topic of intellectual property law has enabled the existence of “non-practicing entities” that exploit patents to wrest profits away from other companies. While reading that section on “patent parties” you may have thought, “This is really abstract and convoluted and I don’t see how it applies to me.” Which is precisely the point.

While “dictatorship by tedium” has a great ring to it, in reality, hiding things in plain sight works just as well in democracies. The reason is that each regulation that produces wealth secrets (like intellectual property law) has only a tiny impact on most of the public. On top of that, each member of the public, by voting, has only a tiny impact on these regulations (try to recall the last time you changed your vote because you didn’t like your country’s agricultural policy).

Understanding complex issues takes a lot of time. Understanding which politicians are likely to adopt positions on the issues that are aligned with a voter’s own views takes even more time. Monitoring politicians to make sure they actually do what they said they would is perhaps most time-consuming of all. Hence most people not only don’t vote based on issues like agricultural subsidies or banking regulation—they don’t pay any attention to what is going on. Why should they, if there is no benefit in doing so? As a result, voters tend to be—in the phrase favored by political scientists—“rationally ignorant” on complex policy topics. The more complicated an issue is, and the less direct impact it has on each individual voter, the more likely it is to be, in effect, invisible.

In the wake of the global financial crisis, many people tended to assume that bankers were incompetent or foolish. “Jimmy in Virginia” called in to CNN’s Lou Dobbs Tonight to claim that “what we have in this bailout of the banks is the inept, corrupt politicians trying to save the incompetent, corrupt CEO’s.” On the campaign trail, Barack Obama blamed the crisis on the fact that “too many people in Washington and Wall Street weren’t minding the store.” U.S. senator Claire McCaskill was more colorful, blaming the crisis on “a bunch of idiots on Wall Street.”

I have bad news: there were some idiots involved in the global financial crisis. But it wasn’t the bankers. It was us.

Or, more accurately, we were not idiots, but rational ignoramuses. We may well be smart, but we definitely were not paying attention. I’m not sure how many of the academic volumes on too-big-to-fail issues you read prior to the global financial crisis (how about Too Big to Fail, edited by Benton Gup, published in 2004?), but I didn’t get through many of them. And I was writing research papers on the global financial sector.

For seekers of wealth secrets, these complex regulations—whether they are the Farm Bill, intellectual property law, or financial sector regulation—are hugely important. They may be boring, but they are well worth studying, because they are worth lots of money to a few beneficiaries. When it comes to spinning laws into gold, therefore, the battle between beneficiaries of complex laws and the general public is a very uneven fight.

And the best part: if you are caught red-handed (as the sugar beet farmers eventually were), fixing the laws will inevitably require a lot more laws. With any luck, and some determined lobbying, you’ll be able to spin those laws as well.

SECRET #7: IF YOU WANT TO SUCCEED IN BUSINESS, NETWORK, NETWORK, NETWORK

In the mid-1860s, Cornelius Vanderbilt took control of the New York & Harlem Railroad, one of only two railroads with direct access to Manhattan. To do so was no easy task. The New York & Harlem was, at the time of the takeover, on the verge of gaining a connection via streetcar all the way to Battery Park at the south tip of Manhattan. Vanderbilt had to counter insider trading schemes by politicians exploiting their control over the streetcar-line approval process not once but twice. When he had finally, by virtue of his vast fortune, triumphed over the market manipulation efforts of the New York legislature, he was exultant: “We busted the whole legislature and scores of the honorable members had to go home without paying their board bills!”

Selling off his steamboat empire to raise the necessary funds, Vanderbilt went fully into railroads, next adding the Hudson River Railroad to his collection. Both the Hudson River Railroad and the New York & Harlem were short lines (144 miles and 130 miles, respectively), but by controlling both, Vanderbilt had gained a monopoly over rail traffic into Manhattan. He next took control of the New York Central, a 500-plus-mile trunk line that, by linking Buffalo to Albany (where Vanderbilt’s two New York lines began), controlled crucial links in the connection between New York and the Midwest. The New York Central was a much larger company, and its track length far exceeded that of the two lines Vanderbilt owned, yet he was able to seize this large prize via clever use of his two smaller lines. He made the New York Central an offer it could not refuse, by imposing an embargo. He ordered his lines to stop accepting any New York–bound traffic coming off the New York Central. Because Vanderbilt controlled rail access to Manhattan while the New York Central was only one of several trunk lines, Vanderbilt had greater leverage. The New York Central had to give in, and by the end of the 1860s, Vanderbilt had assumed control.

It was an early and marvelously effective application of “network effects” in business strategy. Most railroads in the 1860s were point-to-point operations (like the New York Central, which stretched from Buffalo to Albany). These railroads generally used incompatible track gauges, and freight would need to be unloaded and then reloaded when it reached the end of each line. This inconvenience was in many cases entirely deliberate. Local merchants did not want passengers and freight to ride right past them; they wanted to make money at the transfer points.

What Vanderbilt had discovered was that the value in railways could come from controlling network connections, not just the traditional focus of point-to-point routes. In effect, he was able to control New York’s connection to the nation’s rail network.

It was a wealth secrets breakthrough. By 1870, Vanderbilt’s merged railroad was paying the largest dividend of any company in U.S. history. Following a market crash in 1873, most railroads were no longer making profits, but Vanderbilt’s line kept up the dividends. Although they did not perhaps quite understand it, people knew that something had changed. The New York Times was a little scared by Vanderbilt’s unsurpassed control: “We already begin to feel the first grindings of the approaching tyranny of capitalists or corporations.… Every public means of transit is in the hands of the tyrants of modern society.”

Even today, network effects can be a little scary. The industries most likely to develop into natural monopolies on a local or even global scale tend to be network businesses of one kind or another. Even after its government-awarded monopoly ended, Carlos Slim’s empire showed little sign of succumbing to competition until Mexican antitrust authorities threatened to break it up. In the United States, AT&T eventually came to dominate telecommunications in the early 1900s (it made the nation’s smaller networks acquisition offers they could not refuse, by threatening to turn away any calls their customers made to AT&T customers). AT&T maintained that dominant position until it was finally broken up in 1982. And of course the computer software industry, with its platform strategies (exploiting indirect network effects) and its social networks (exploiting direct network effects), is the home of numerous monopolists, or at least companies that dominate their subsectors.

Governments today attempt to limit such advantages by forcing companies to interconnect their networks. The laws that do so are called “common carrier” laws, and these require companies such as railroads, airlines, taxicabs, and telephone companies to serve members of the public without discrimination (which means, in effect, that they must accept travelers, freight, or callers originating from other networks).

Sometimes these laws have the effect of almost completely undermining network effects. Take the case of airlines. The major airlines that operate global hub-and-spoke networks tend to be unprofitable. The airlines strive mightily to reintroduce these effects—for instance via frequent flyer programs that reward travelers for staying on their network (even if it’s a little more costly or less convenient than other flights on offer)—but it doesn’t seem to work. Travelers tend to book the lowest-cost, fastest flight. The airlines that are profitable tend to be budget airlines that operate point-to-point networks, and they appear to make their money on those routes that face little direct competition (not unlike the point-to-point railroads of Vanderbilt’s day, with their local monopolies).

However, some network businesses continue to do well. U.S. railroads, for instance, tend to be reliably profitable—although one could argue that this is because regulatory barriers limit the number of operators per region. There are a lot of telecoms-related fortunes on the Forbes global billionaire list, especially in emerging markets. Most stem from companies you have probably never heard of: HKT in Hong Kong, Digicel in the Caribbean, Orascom in Egypt, Investcom in Lebanon, Turkcell in Turkey, MTS in Russia, Airtel in India, and Maxis in Malaysia, among others. All of these companies have made people billionaires. So have the package shipping networks FedEx and DHL.

You see, even in the modern day, the mail can be really exciting.

SO YOU’D LIKE TO BE A MASTER OF WEALTH SECRETS?

This book has so far not said much about the personal qualities of those profiled. As noted before, it is not a book about inevitable success; it is a book about the strategies people have used to become rich. However, while undertaking the research for this book, I did come across a few characteristics that many of history’s überrich seem to have in common.

The first is a love of math. I don’t mean abstract math (the kind of math that helped the geniuses at LTCM). I mean basic figures, accounting, bookkeeping, and balance sheets. In most cases, the wealth secrets practitioners profiled here had an almost alarming fondness for this kind of thing. Pierpont Morgan may hardly have said a coherent sentence in his life, but he was a whiz with numbers. The same can be said of Dhirubhai Ambani, with his “razor-sharp brain for finance,” and also of Bill Gates (even if Gates realized that others in his Harvard math class would surpass him in the esoteric world of theoretical math).

For these men, math was not only a passion but a primary means of communication. None, aside from perhaps Carnegie, were particularly comfortable with writing or speaking, as the incoherent quotations from Gates and Morgan (the most “reserved” man his minister had ever known) indicate. A family friend said of Dhirubhai: “When he talks, he doesn’t bother about mundane things like correct sentences, grammar, etc.” But in the language of figures—the language through which businesses describe their current health and future prospects—these men were undeniably fluent. Even Carnegie, a writer and public intellectual, was most at home in the world of numbers. When one of his factory employees saw him walk by, he said: “There goes that damned bookkeeper.”

It was John D. Rockefeller who perhaps best expressed the quality I am trying to describe. His first job (literally as a bookkeeper) was, he said, “delightful to me—all the method and system of the office.” Later, after he had become stupendously rich, he claimed: “I chartered my course by figures, nothing but figures.” If you have ever looked at a balance sheet and thought you saw a bit of poetry there, you may have wealth secrets potential.

Another personal characteristic common to many successful people profiled in this book is an abiding love of money and the desire, expressed from a very early age, to possess it. Not just money as an instrument to obtain something, but money itself. Bill Gates is one example, repeatedly informing his school friends that he would be worth $1 million by the time he was in his twenties. Rockefeller made a similar pledge from an equally young age. In his case the amount was $100,000—which may appear more modest, but that would be equivalent to about $3 million today. As a young man, Dhirubhai dreamed of oil refineries, one presumes for financial reasons rather than based on their inherent beauty. Once again it falls to Rockefeller to express this trait most fully, with his tale of repeatedly opening the office safe to gaze open-mouthed at the first high-denomination banknote he had ever seen. One detects an almost erotic fascination.

Another characteristic is a willingness to throw out one’s early business partners. (I hesitate to even mention this, lest your business partners take the hint and guess what’s coming.) John D. Rockefeller banished one of the business partners who had joined him in starting his Cleveland refinery and then tricked his other partners, the Clark brothers, into agreeing to auction off the business, while secretly lining up enough capital to outbid them and thus obtain sole control. Dhirubhai Ambani founded Reliance Commercial Corporation in partnership with Chambaklal Damani, and not long afterward took sole control—although the split was reportedly amicable, and Dhirubhai paid for his partner’s share. The departure of Bill Gates’s early business partner in Microsoft, Paul Allen, was somewhat acrimonious—or at least Allen felt that Gates had plotted to dilute his equity holdings, and then later attempted to underpay for his share of the company. If you are going to be rich, it pays not to divide the loot—especially not with those who were there at the beginning.

A final characteristic, not wholly unrelated to the above, is that wealth secrets masters tend to be ruthless.

I don’t think it’s a coincidence that a lot of the people profiled in this book are rather unpleasant, hard-as-nails kinds of people. Marcus Crassus, killing off Rome’s richest citizens in order to build his own fortune, was in that respect less an outlier than an exemplar. Vanderbilt, the brawler competing for monopolies, was nearly as rough-and-tumble. Although most individuals profiled in this book were more civilized than these two, I think many of them have a mean streak. For instance, a retired Indian industrialist said to me: “One thing that made Dhirubhai successful was that he was brutal. I wouldn’t have wanted to compete with him.” Gates, recalling the ownership percentages of his peers to the decimal point, clearly was not deficient in his desire to win—his competitive instincts so well honed he wanted to challenge even those people who weren’t his commercial competitors. Wealth secrets often involve winning in a market where there is only one victor. It stands to reason that people who would choose such a career path would need to be a little ruthless.

There are, however, a couple of exceptions. Both, I must admit, come from the financial sector. Although I am loath to endorse any aspect of the lifestyle of the moneyed herd, one must acknowledge that despite all their macho one-upmanship, they aren’t trying to wipe anybody out. They are just a little annoying. The author Kevin Roose crashed a meeting of the Wall Street secret society Phi Beta Kappa in 2012 (membership roster at the time: the CEO of AIG, the CEO of Bear Stearns, a former chairman of Goldman Sachs, a former CEO of Lehman Brothers, etc.). It turned out that they weren’t plotting world domination. Instead, they turned out to be doing exactly what you might expect: enjoying an overgrown frat party involving lots of alcohol, men in drag, and various parody songs about receiving government bailouts sung spectacularly off-key (the audio is posted on New York magazine’s website). At least with these guys you know what you’re getting. And, generally speaking, it’s a more-the-merrier situation, because my government guarantee doesn’t preclude your government guarantee. Unlike most of the people profiled in this book, the traders and executives of the moneyed herd operate at some remove from their wealth secret. The government guarantee is inherent to their industry, not something they have labored personally to put in place.

The other exception to the winner-takes-all wealth mentality so frequently profiled in this book is, of course, Pierpont Morgan. Perhaps this was because he, almost uniquely among the masters of wealth secrets described herein, was rich from the day he was born to the day he died. As a result, while he certainly had a taste for the finer things, he didn’t seem to care about money. But more importantly, his relaxed attitude—like the good-natured fraternity hijinks of Phi Beta Kappa—stemmed from the economics of the financial sector. Morgan, as a lender, didn’t covet the huge profits that came with victory in winner-takes-all contests; he just wanted everyone to pay their bills on time. And indeed, Morgan’s most dramatic monopolization efforts (U.S. Steel, Northern Securities Railroad, International Harvester) tended to make other people rich.

Now, isn’t that nice?

There is also one characteristic that I did not find among the masters of wealth secrets profiled here: they did not appear to be superhuman. In daily life, one tends to find that smarter, luckier, or more determined people tend to do better than others. Hence it is natural to extend this logic and assume that the superrich must have achieved their position by being so much smarter, or more determined, that they are essentially superhuman.

But that isn’t what I found. The superrich profiled in this book are certainly impressive, and compelling, individuals. But their outsize wealth comes from the economics of what they have done. The best competitor in a highly competitive industry will earn a little bit more profit, and therefore be a little bit better off than everyone else; the best competitor in an industry that tends toward natural monopolies (like software) will end up with huge profits and, over time, a colossal fortune. The difference between the two is not that one is superhuman and the other is not. It’s in the economics.

INVESTIGATING WEALTH SECRETS

I must admit, there are many millionaires and billionaires whose wealth secrets I don’t understand. The Koch brothers, for instance. Of course, they have scale economies on their side, but why have these been so exceptionally lucrative for the Kochs? Such straightforward, heavy-industry scale economies were supposed to have died out in the 1970s. Or the great investor Warren Buffett. Of course Buffet is a genius, but on the surface he doesn’t appear to have any more protection from competition than the geniuses at LTCM. And yet he doesn’t seem set to crash anytime soon.

While I don’t understand Warren Buffett’s personal wealth secret, he does have a technique for evaluating other people’s businesses that, as I mentioned in chapter 5, is not entirely out of keeping with a wealth secrets perspective. This technique is his concept of a “moat,” which he says is something that will keep competition at bay for a “decade or two.” From Buffett’s perspective, a business with a moat is a good business.

While a moat is not a perfect analogue to a wealth secret, there are similarities. After all, a decade or two is a long time in business, so if a moat is not quite the equivalent of having your competitors hanged, it is still a pretty effective way of getting and staying rich. Something along the lines of throwing sand in your competitors’ eyes, tripping them, and then kicking them repeatedly while they are down.

Buffett rarely talks about the particular businesses in which he invests. But some of his moat businesses are companies I would credit with having wealth secrets. I mentioned in chapter 4 that Buffett invested in Moody’s, which is protected by a government policy that essentially limits competition in the industry to three companies. Buffett repeatedly emphasizes that maintaining the moat is the most important thing a business can do. Short-term goals in business matter, of course—maintaining earnings, most notably. But Buffett says that “when short-term and long-term conflict, widening the moat must take precedence.”

If you don’t have a moat, there is nothing you can do about it, no matter how good you are. One example Buffett gives is the U.S. textile company Burlington Industries. They were once the dominant company in American textiles. Between 1964 and 1985, they invested about $3 billion in improving their business—dwarfing the expenditure of any other U.S. textile company.

But the U.S. textile market (like oil refining in India today) is open to global competition, and so, Buffett says, Burlington’s proactive strategies did them no good. Burlington Industries stock lost, in effect, about two-thirds of its value by the mid-1980s, and by the early 2000s the company was bankrupt. They are the best in the industry, they tried hard, they did all the right things, and the result was the destruction of shareholder value. In sum, Buffett contends, the performance of any business “is far more a function of what business boat you get into than it is of how effectively you row (although intelligence and effort help considerably, of course, in any business, good or bad).”

The businesses that Buffett likes—the “good” businesses—are in many cases businesses that I might recognize as having a wealth secret or two. An example is MidAmerican, an electric utility operating mainly in Iowa, Wyoming, and Utah. Buffett’s company owns 89.8 percent of MidAmerican. Buffett writes: “With few exceptions, our regulators have promptly allowed us to earn a fair return on the ever-increasing sums of capital we must invest.” Basically, the government decides how much they will earn, and it’s a lot. Yes, MidAmerican is well run. But most importantly, its profits aren’t determined by market competition. Now that’s the kind of business I could really start to like.

Perhaps Buffett’s wealth secret is knowing about wealth secrets?

GUTS AND LUCK

When Dhirubhai was asked about the keys to success, he said: “Two things: guts and luck.”

At first, it seems like a singularly unhelpful remark. But in the context of what we know now about wealth secrets, it makes more sense. As a financial analyst I met at an investment bank in India put it: “Dhirubhai had a tremendous capacity for risk. And the risks he took paid off. Had they not paid off, he would have been just another failed entrepreneur.”

Framed in typical business language, this is a warning for seekers of wealth secrets. Entrepreneurship is generally seen to be risky because entrepreneurs are not diversified: they tend to throw everything they own into a single business venture (which, as noted above, justifies a higher return). Hunting wealth secrets—at least those that don’t involve a government guarantee—tends, if anything, to be even more risky. Not only are you putting everything you own into a venture, but it’s a venture from which, ideally, only one winner will emerge. How many failed contenders risked everything in operating systems before Windows emerged as the sole winner? I can think of at least five that came close to challenging Microsoft. Presumably there were many more that tried and failed catastrophically. Four hundred Indian companies applied for that crucial polyester-filament yarn production license in 1980. Dhirubhai was one of only two winners. Two out of four hundred is not good odds.

That, I believe, is what Dhirubhai was trying to say in his “guts and luck” comment. He had the guts to risk everything on a game that he appeared to have little chance of winning and the good fortune to see it pan out.

The good news is, there are probably more wealth secrets in the world than there ever have been before. I can’t prove this, but the rise of the emerging markets and the explosive growth of the Forbes list of global billionaires make it almost a given.

Even in the United States, it seems that wealth secrets are on the rise. Take the data on corporate profits, for instance. After-tax corporate profits in the country have generally fluctuated between about 5 and 7 percent of total U.S. output since the 1950s. Then, in the 1990s, corporate profits began to climb. There have been fluctuations here as well, most notably during the global financial crisis, but by 2011 (the latest year for which data are available) after-tax corporate profits had doubled to about 11 percent of U.S. output. While the financial sector played a large role in this growth in profits, I can’t help but think that other relatively new wealth secrets—intellectual property laws, for instance, or economies of scale in retail—played their part as well. And so far there is no sign of this trend coming to a halt. If one draws a straight line from the 1990 data plotted on a graph through the 2011 data, after-tax corporate profits should triple, as a share of output, by about 2016. Of course, drawing a straight line is generally a stupid way to forecast any economic indicator. But the popularity of almost every wealth secret discussed in this book—OK, perhaps not military conquest—seems to be on the rise.

A more sophisticated analysis of performance data by the consultancy McKinsey, covering 5,000 nonfinancial companies in the United States since 1963, finds a spike in companies with “very high returns on capital” since 2005. Superhigh returns were at one time extremely rare: in the 1960s, only 1 percent of companies in McKinsey’s database achieved returns of 50 percent or more. By the mid-1990s, the figure had climbed to about 5 percent. By the 2005–2007 period, the most recent period for which data are available, 14 percent of companies were making these kinds of superreturns. They were winning the wealth secrets way.

Think of the world’s population as standing before a cliff face. To achieve wealth, one must climb it, but the face is sheer and each person who makes progress is soon dragged back by others seeking to raise themselves. The ground is a little higher under the lawyers and doctors. The bankers have a ramp, built with the taxpayers’ money, although it doesn’t go all the way up.

And then there are a few people who walk straight up, ascending the cliff face, defying the forces of economic gravity. One might think they are superhuman, and indeed this is a narrative one often hears. But really, there are hidden ladders. These ladders are wealth secrets. It is not quite fair to say that only one person is allowed on each ladder. One can invest in companies with wealth secrets, and climb up behind the company’s founder. Or one can work for a company with wealth secrets, and climb partway up the ladder while the founder stands on one’s head.

There are only a few people standing at the top of the cliff, drinking champagne and partying with Brazilian supermodels (or, if they are straight women, strolling around the party in stunning couture with a Ryan Gosling look-alike on each arm).

But there are more ladders now than ever before. So grab a rung.