How Do Billionaires Become Billionaires?

There’s a viral TikTok “proving” that being a billionaire is immoral.

The creator brings up salient points. Like how it would take you 527 years to amass $1 billion, if you earned $5,000 every single day.

Or how worker productivity has increased by 64.6% since 1979.

While wages have only grown 17.3%.

So far so good. However, the argument itself hinges on the idea that billionaires build their billion-dollar wealth by exploiting others.

Something I agree with. When it comes to certain industries.

Almost all fashion, including many high-end luxury brands, relies on sweatshop labor.

And many gig economy businesses “disrupt” their competition by undercutting them. While also destroying industry wages and being unsustainable in the long-run (see Uber).

However, the vast majority of billionaires are “equity rich” and achieved their wealth through the creation of an asset. One that’s typically a technological innovation.

Larry Ellison, currently the world’s 4th richest man, owns 42% of Oracle.

Oracle is a massive company that processes 33 billion transactions daily.

If you go to Starbucks and buy a coffee, Oracle software processes your order. This is a business-to-business technological asset. And one that helps track store inventories, credit card transactions, and customer purchases.

It’s not a steel foundry or a lead smelting facility.

Likewise, a billion dollar net worth is not a billion dollars in cash.

Most billionaires are billions on paper, via equity in a business or asset.

And, much of that value is based off a perceived sales multiple.

Put another way, Amazon stock trades at a price to earnings ratio of 85.

Every $1 Amazon earns is worth $85 in share price value.

PE ratios fluctuate greatly. And they are often determined by intangible factors like market sentiment.

A billionaire looking to sell their billion dollar position would struggle to off-load shares. Additionally, the news of this happening would create negative market sentiment and drive the stock price down.

Warren Buffett has a famous story about knowing Coca-Cola was overvalued, but not being able to sell.

Because any attempt to exit his position would crater the stock’s price.

Saving your way to a billion dollars is virtually impossible. But most billionaires (or billion dollar family fortunes) are the result of creating and scaling an asset. With much of that perceived wealth being illiquid and based off potential sales multiples.

Disclaimer: This article is for entertainment purposes only. It is not financial advice, always do your own research.