The Ten Roads to Riches

by Ken Fisher

  Recent years have seen record buyout activity—making private equity firm partners huge bucks. Kravis, Kohlberg, and Roberts (KKR) went public in 2010 and has stayed busy since, making a boodle. Cofounder Jerome Kohlberg passed away in 2015, but both Henry Kravis and George Roberts are still with the firm, with matching $4.5 billion net worths. Another group taking advantage of the times has been Carlyle Group founders—William Conway Jr. ($2.4 billion), Daniel D’Aniello ($2.4 billion), and David Rubenstein ($2.4 billion).16

  Corporate Raiders Lead to a Better World

  The media paint these OPMers as greedy scumbags, but why? The stock can get a nice price bump when deals are announced. This is capitalism’s Darwinism. We all benefit from improved efficiency, productivity, and innovation. We don’t always get a better company after these deals. Things can go wrong, but the acquirer better make a good go of it or they’ll be history, too. And CEOs of lackluster public companies not wanting to be acquired (and unemployed) know they’d best improve or be history, too, adding incentive for corporate productivity, which benefits employees, shareholders, customers—everyone.

  It’s fashionable to skewer these OPMers for their super-sized incomes. (If the media’s hot over some group’s pay, you know you’ve found a righteous road to riches.) Mr. Kravis unexpectedly found himself starring in a mockumentary—The War on Greed, Starring the Homes of Henry Kravis—supposedly a “light-hearted” look at the “excesses” of private equity. It juxtaposes Mr. Kravis’s homes against the modest abodes of “Average Joes” while detailing Kravis’s earnings.

  Mr. Kravis is mega-wealthy—no crime there. (If you see wealth as a crime, you need a different book. Try Free to Choose by Milton Friedman.) Robert Greenwald, the film’s director, said, “I saw the numbers of what the guys make, I truly did not believe it. I thought they were a mistake. I’m a New Yorker, and this sort of egalitarianism is built into many of us.”18 Folks like Greenwald who object see big earnings as “unfair.” Their viewpoint is ever-fashionable today, championed by the Occupy Wall Street crowd and politicians on both sides of the aisle. If these guys and gals want “fair,” they should check out Cuba or Venezuela to see how “fairness” really works. In Venezuela, “fairness” brought the world’s most famous toilet paper shortage in 2015. Just working at these firms isn’t a bad career. There are lots of Alex Brockmann equivalents—and lots of rich ride-alongs (Chapter 3)—and those just making fat salaries who take the Road More Traveled (Chapter 10).

  DON’T BREAK THE LAW

  With OPM, it’s crucial to get that you never break the law. OPMers sometimes forget. Cheaters may get rich, but they don’t stay rich. Some OPMers may get wealthy legitimately, then cheat. Some cheat to get rich. Either way, they won’t stay wealthy. It’s not just illegal and immoral; it’s also bad business. Just ask Bernie Madoff, whose net worth went from billions to –$17 billion after getting busted for the largest financial fraud in US history in 2009. (Yes, negative $17 billion. He owes a lot.) Tack on a life sentence and the suicide of his elder son, and it’s abundantly clear crime doesn’t pay in the end.

  Lessons from the Trading Floor: Villians Like Vilar

  Those stretching morality come in various flavors. Dick Strong comes to mind: former CEO of Strong Capital Management, a once-thriving mutual fund firm started in 1973, now history. By 2003, he was number 318 on the Forbes 400, with an estimated $800 million net worth. By 2004, he was toast. Regulators homed in on Strong, who had been short-term trading his own funds for his own account—not explicitly illegal. But a mutual fund CEO doing it on a nondisclosed basis at the expense of fund holders would irritate regulators. It moves to dead wrong when based on inside information—as Strong allegedly did.18

  When the scandal broke, Strong stepped down—too late. The firm couldn’t survive—Wells Fargo bought it at a huge discount and dropped the Strong name. Was his “stretching” worth it? Never is. His trading scheme netted him a reported $600,000.19 This “gain” was probably the most costly gain in recent public record. Between the fines and decimated value of his firm when sold, Strong retained only a fraction of his prior wealth. And he was banned for life from the industry. Decimated, banished, name ruined, and a fraction of his worth. Ugh!

  Then came Alberto Vilar, a villain who seemingly set out to cheat. He was capable but also twisted. I’d see him around in the early days when we were both first building our firms and would be in the same venues, seminars, conferences, and competitions. We’d chat. Something about him bristled. Too haughty, rigid, and regal! The women he dated were too young and pretty—showed too much skin. At least my wife thought so—said he gave her the “creeps.”

  He bragged of all the super-successful startups he helped fund—like Intel. It was unclear what was true versus not—it just sounded too much. He boasted of growing up privileged in pre-Castro Cuba, then being impoverished when Castro seized his family’s assets. But his closest friends later recounted that as fiction—he grew up in New Jersey.20

  His investing stories were stunning, too, as were his late-1990s tech returns. In 2004, he ranked 327 on the Forbes 400, with an estimated $950 million net worth.21 But his firm wasn’t that big. At its peak in 2000, it managed only $7 billion. By 2004, it imploded to under $1 billion. Use the tables earlier in this chapter—at the peak, you don’t get near $950 million. He convinced folks (including Forbes) he owned lots of securities outside his firm—worth much more than his firm. Some people are. But an insider’s rule about the Forbes 400 is the Forbes folks are skeptical of those trying to get on the list. They know they’re usually worth less than they say—maybe lots less. That was Vilar. Still, he was convincing.

  Vilar was a huge opera patron. Over the years, it’s estimated he gave beyond $300 million to the arts.22 (However, some, if not much of it, may not have been his to give.) When Vilar’s tech-heavy funds lost over 80 percent during the tech crash, he delayed millions in pledged donations to the Metropolitan Opera House. (They’d already put his name on the building!) Investigators came looking. He was charged with mail fraud in 2005. He, who claimed to be mega-rich from investments outside his firm, couldn’t make $10 million bail.23 In my opinion, much of his net worth, like his background, was fiction—what he hadn’t fabricated he’d given away to the opera.

  Vilar’s performance may not have been up to opera standards, but for a long time, it gave him a grand lifestyle. My wife of 46 years still wonders what his hot young women with excess skin showing think now. There are more Vilars. Don’t be one.

  Not Quite Big League, but Big Enough to Do Big Damage

  The occasional Vilar-like villain may hit the Forbes 400 briefly before blowing up, but most evildoers get caught long before then. Frank Gruttadauria was. He served about seven years in the 2000s for copping maybe $300 million in client funds, plus perjury, obstruction, bribery, and racketeering—even an escape charge!

  Seriously. Don’t break the law.

  As a Lehman Brothers branch manager in Cleveland, Gruttadauria basically ran a Ponzi scheme, targeting mostly elderly clients. Clients deposited money that he transferred to accounts under fictitious names—for 15 years! Clients never knew because Frank doctored fake statements, inflating account values. Who complains when statements show huge growth and no losses? When clients wanted withdrawals, Frank wrote checks from other clients’ accounts. Meanwhile, Frank enjoyed country clubs, a ski condo, a private jet, and a mistress.25

  The Internet Age did Frank in. He told elderly clients Lehman had no online access. One relatively Web-savvy grandma wondered why her account wasn’t being impacted by the tech crash.26 She led clients in an online charge and they found their accounts empty—despite monthly statements showing, in some cases, millions. Because Frank had faked documents for so long, it was hard to know how much he stole—investigators estimate at least $40 million from 50 different clients. But because of the doctored returns, clients believed they lost much more.27

  In 2015, Michael Oppenheim of JPMorgan
Chase & Co. admitted he stole more than $22 million from clients over seven years to fuel his gambling addiction. At one point, he’d had about 500 clients and managed more than $90 million. He pleaded guilty to securities fraud and embezzlement. He said, “Judge, I am ashamed of my conduct. I wish I would have been caught sooner.”28 I do, too.

  You might think investors got better at spotting scammers after Bernie Madoff’s bust put fraud—and fraudsters’ tricks—on the front pages. But sadly, con artists still find plenty of prey. Even among smart, otherwise savvy people! Rep. Alan Grayson (D-FL) was one of America’s richest congresspeople in 2013. Self-made millionaire with an economics degree from Harvard and JD from Harvard Law, both with honors, and a successful lawyer representing whistleblowers in fraud cases. On paper, he looked immune! But a “financial advisor” named William Dean Chapman duped him out of $18 million.29

  How’d Chapman do it? Flashy tactics and incomprehensible jargon. He convinced Grayson and 121 other victims to sign their stocks over to him as collateral for a three-year cash loan worth 85 percent of the stocks’ value. According to the SEC’s filing, he “assured borrowers that [he] would engage in ‘hedging’ strategies, would ‘hedge’ or would enter into contracts with counterparties that would ensure the portfolios could be returned.”30 If you know finance or do three minutes of Googling, you know that isn’t what a hedge does, but dupes don’t bother with due diligence. After the loans matured, Chapman was supposed to return the stocks. Instead, he sold them all to pay earlier loans and fund his lavish lifestyle. Now he’s serving 12 years.

  Spotting the Fraudsters

  Fraudsters are easy to spot if you know what to look for. I wrote a whole book about it in 2009—How to Smell a Rat—but crooks have three common threads:

  They take custody of clients’ assets.

  They advertise too-good-to-be-true returns.

  Their strategies are complex, murky, and jargon-laden.

  Many also exploit perceived prestige or social connections—like Gabriel Bitran, a former professor and dean at MIT’s business school, currently serving three years. He and his son started a hedge fund boasting a “complex mathematical trading model” developed at the school. In reality, they ran a “fund of funds” and decided to help themselves to $12 million of clients’ money.31 Sean Meadows, who just started a 25-year sentence, swindled family friends out of millions by promising 10 percent a year, every year.32 Instead of investing their money, he blew it on Vegas debauchery, online gambling, Rolexes, property, a fancy boat, and a 1968 Camaro.33

  Again: Don’t break the law. Do it the right way. Be honorable. Base a business on doing right for your clients. Make their goals your goals. Be on their side. Set yourself apart with your values. Earn people’s trust with honesty, hard work, and good results, and they’ll tell their friends, who’ll tell their friends. Your success will be bigger and longer-lasting than all these shysters who took the easy way out. And you’ll spend your retirement somewhere other than prison.

  LOVE CAPITALISM, NOT SOCIAL ACCEPTANCE

  Warning: This road can make you unpopular. Sensational stories like Vilar and Gruttadauria are fortunately rare exceptions—but their existence is a reason this road’s big bucks make it a hot Hollywood target, proliferating the bad-guy image in our culture. Movie villains are often rich Wall Streeters, cruelly enriching themselves off the poor proletariat. OPMers aren’t movie heroes. Hollywood and pop fiction are littered with villainous OPMers: Boiler Room, American Psycho, Bonfire of the Vanities, Rogue Trader, Ghost, The Wolf of Wall Street, and the granddaddy, Wall Street. Even Trading Places, an otherwise hilarious movie, implies rich OPMers are crooked. Only a few are.

  If you succeed on this road, you subject yourself to being degraded by social stereotypes. Some folks may not like you. But successful OPMers don’t place high value on social acceptance. They place high value on capitalism. They operate close to the heart of the capital markets pricing mechanism and live and die by competitive forces. This is a great road to mega-wealth. I know. I’ve lived it all my life. It’s a wonderful world where you get rich by helping others get richer. It’s a world you can be proud of. It’s also a world where many will assume you shouldn’t be proud. If you’re tough like Eddie Lampert, but won’t become a villain like Alberto Vilar, and you want to be rich pretty easily—or put yourself where most of the richest are—OPM is, in my view, as fine a road as you can choose.

  The Guide to Other People’s Money

  OPM wealth is a fairly reliable road to riches, if you follow this fairly easy guide.

  Love capitalism and free markets. Many folks—even misguided Wall Streeters—think capitalism is wrong, bad, or cruel. No! There’s no better system for generating and building societal wealth. Yes, there are losers and winners. But capitalism isn’t a zero sum game. Every dollar you earn isn’t a dollar someone loses. Capitalism allows opportunity for all. What folks do with that is up to them. Without capitalism, you don’t have free markets. And without free markets, you don’t have an OPM road. So love it.

  Get the client. You must sell. You can: (a) Get referrals, or (b) sell directly. Both work. You can do both together. Selling directly, you find a way to get in front of someone who makes up his own mind. Most people have seen my firm’s advertising, whether direct mail, Internet ads, radio, newspapers, or on TV. Many folks assume that if you advertise a lot, your product can’t be good. Anyone who says that hasn’t thought it through very fully. Tell it to Procter & Gamble. The marketing channel you use and how you do what you do otherwise for clients have simply nothing to do with each other—ever.

  Seeking referrals means calling on people to get them to refer friends and connections. Common approaches are calling on accountants and estate-planning attorneys who have clients who may need your services.

  Keep the client. Keeping clients has two subcategories: Performance and customer service. Performance. Performance doesn’t mean blowing the market away each and every day, week, and year. It means setting realistic client expectations and achieving them. Sound easy? No! Clients often have too-high expectations, like high returns without risk—a fairy tale. Setting expectations is basic to client education and falls into the mantra: “Underpromise, overperform.”

  Speaking of which, avoid overpromising. OPMers—particularly new ones—may overstate what clients can expect in an effort to get business. Doing so sets you up for failure and a high client termination rate.

  Exceeding client expectations helps keep clients around and keeps clients from doing something potentially harmful to themselves—like chasing hot markets but getting cold ones.

  Customer service. If you have great performance, but don’t attend to your clients, you lose them to someone who will. After nearly 45 years as an OPMer, I believe performance is important, but success is half performance and half customer service. (In a different way, the third “half” is sales and marketing.) Too many people think it’s either performance or service, but neither alone is adequate. Customer service doesn’t just mean answering the phone when they call. The better and more high-touch your service, the likelier your clients will remain with you.

  Know your clients and understand their needs. Do they want to be called quarterly? Monthly? Daily? Find out, agree to a service level, and exceed it. Keeping clients is better. Most OPMers suffer high turnover. Part of what has made my firm successful is unusually low client terminations.

  Don’t break the law. OPMers operate in a regulated industry. Breaking the law may land you in jail. But even if you don’t get caught (or simply are a rule bender), you’re likely not best serving your clients. Revisit the previous step, “Keep the client.”

  Focus on core competencies. OPMers wear multiple hats. They’re salespeople, servicers, and traders. They do marketing and research. They watch screens, people, and employees. They may be a manager or CEO! With all that, how well are you really doing staying abreast of global markets, economies, and making accurate forecasts?


  Salespeople shouldn’t manage money. Marketers shouldn’t sell. Service people shouldn’t research. The best business model has segmentation of responsibility so everyone focuses on core competencies. To make it to the top in OPM you must have all those skills, at least have rotated through them, and be able to orchestrate others engaged in them. That’s a tall order, but also why this is the most common road among America’s very richest people.

  NOTES

  1. Copyright © 2016 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; (3) does not constitute investment advice offered by Morningstar; and (4) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Use of information from Morningstar does not necessarily constitute agreement by Morningstar, Inc. of any investment philosophy or strategy presented in this publication.