The Real Challenge: Earning vs. Keeping Wealth
People often say earning money is difficult, but I argue that keeping that hard-earned money is even more challenging. In the 21st century, the number of billionaires continues to rise, with new entrants joining the elite 1% club while existing members retain their wealth. This begs the question: how do the rich stay rich? After all, they aren’t selling companies or launching IPOs every day. They face higher taxes, and their cost of living is astronomical, yet they manage to hold onto their fortunes and remain in the top tier of global wealth. While I can’t fully explain how they initially amass their riches, I’ll explore how they manage to stay wealthy.
The Two Major Challenges for the Rich: Non-Liquid Assets and Taxes
In my opinion, the rich grapple with two significant challenges: the illiquidity of their assets and the burden of taxes. Most people prefer their assets to be liquid—easily convertible into cash. However, liquid assets often come with the downside of being heavily taxed, leading to a trade-off between liquidity and financial efficiency.
To address this dilemma, the wealthy strategically invest in assets that are almost liquid, such as art, exotic collectibles, and stocks, allowing them to sidestep some of the complications tied to liquidity and taxation.
The Art of Buying Art
Historically, people bought art for its intrinsic artistic value. Today, art is more commonly seen as an investment due to its appreciable value and relative liquidity. Fine art often appreciates over time, and collectors go to great lengths to acquire sought-after pieces. While public auctions draw attention, the true financial manoeuvring occurs in the shadow markets, where private transactions are often untaxed and invisible to government scrutiny.
A striking example is the case of Jean-Michel Basquiat’s painting, “Hannibal.” In 201
3, the New York Times reported its seizure as part of a billion-dollar money laundering scandal. The painting was brought into the U.S. by Edemar Cid Ferreira, a former Brazilian banker who amassed a 12,000-piece art collection using embezzled funds. This rare case brought to light how art is used not only as a store of value but also as a tool for laundering money.
Exotic items like luxury watches, high-end cars, and even limited-edition footwear follow a similar pattern. Take premium sneakers, for instance—companies like Nike and Adidas release exclusive editions in limited quantities. Buyers who secure these items at retail prices often sell them later for hefty profits, turning shoes into another category of appreciating assets.
The Art of Buying Stocks
Robert Kiyosaki’s famous book Rich Dad Poor Dad states, “Money should work even in our absence.” Stocks are a prime example of this principle. The value of stocks is tied to a company’s performance, allowing stockholders to see their wealth grow without active involvement. Taxes only apply when stocks are sold, making them a tax-efficient asset for long-term wealth accumulation.
For founders and company owners, stocks serve an additional purpose. By owning a significant share of their companies, they retain control while also having the option to raise funds by selling shares in the open market or through IPOs.
However, selling shares isn’t without its complexities. For example, an owner with an 80% stake in a company may decide to sell shares to raise liquidity. While this may provide cash, it could also dilute their control over the business. The challenge lies in balancing the need for liquidity with maintaining influence over the company’s operations. To address this, many founders sell shares gradually or through structured financial arrangements to optimize both control and liquidity.
Conclusion
Staying rich requires more than just good fortune; it’s an art that involves meticulous financial planning, strategic investments, and a deep understanding of asset management. Whether through the acquisition of appreciating assets like art and exotic items or by leveraging the stock market, the wealthy skillfully balance liquidity and tax efficiency to preserve and grow their wealth.
While the challenges of maintaining riches are significant, the strategies employed by the wealthy demonstrate how careful planning and informed decision-making can help navigate the complexities of staying in the elite 1%.
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