Sunday, August 03, 2008

Wealth Creation and Accumulation

"The rich are different from you and me." -- F. Scott Fitzgerald
"Yes, they have more money." -- Ernest Hemingway

Recently, I had an epiphany about becoming wealthy. Building wealth consists of two different activities: 1) creating and accumulating wealth and 2) maintaining wealth. The first part has to be achieved by an individual through their own actions. The second part can be handled by professionals since managing wealth is a skill.

My realization? Creating and accumulating wealth is partially dependent on luck, which no one controls. Simply, there are no cookbook steps, no genetic aptitude and no predictable way to creating wealth. It is a unique combination of the personal drive of an individual with the right activities and a bit of luck. Perhaps, that's why it is hard (impossible) to teach someone to create wealth and, perhaps, that's why many people only are successful at doing it once or in one way.

Of course, there are some critical elements, before luck can help. In my opinion, the elements for successful wealth building include:

  1. A good idea. It all starts with a good idea, but not necessarily a great idea. After the fact, sometimes some ideas appear obvious. For example, Starbucks, Dell Computers, and Microsoft all started with a good idea that made the founders very rich.

  2. Focus. This often includes concentrating personal and financial resources on the idea, which by definition is high risk. Rarely do individuals become very wealthy through diversification. They become rich in their own business, working for a company or investing in a few stocks.

    Of course, concentration is a two edged sword. It can quickly reduce one's wealth in bad times, e.g. Enron and Bear Stearns.

  3. Bringing the idea to life. Good strategy, excellent execution, hard work, and persistence are some of the elements to make an idea happen. An idea not implemented is nothing. As Thomas Edison once said, " Genius is one percent inspiration and ninety-nine percent perspiration."

  4. Luck. Finally, I believe there is an element of being in the right place at the right time, whether that is previously unseen opportunity or the markets are now receptive. This element is not controllable. I've seen individuals deliver the first three parts, but have circumstances go against them, resulting in failure.

    For example, an investor could have hypothetically become very wealthy in 2003 to 2005 flipping real estate. Using the same idea and doing the work in 2006 to 2008, would have yielded poor results.
Of course, it doesn't pay to just wait for only luck to happen, e.g. big lottery win. To have a good chance at creating wealth, it makes sense to do the first three steps. However, doing the first three well won't guarantee success. Luck will likely have some impact on the outcome.

For more on New Beginnings, check back every Sunday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

1 comment:

Moneymonk said...

"They become rich in their own business, working for a company or investing in a few stocks"

Amen to that.

I will also add do not folly with credit too much