Billionaire Index: Outperforms S&P 500

Dr. Joel Shulman of Babson University has published a recent study in Institutional Investor’s Journal of Index Indexing which shows that an index of companies that billionaires managed by individuals on the Forbes billionaires list. I for years have been wondering how an index would have done. Dr. Shulman has done the research and the results. Let’s look at what he found.

When the “Billionaire’s Index” was compared to a benchmark of the S&P 500 the Billionaire’s Benchmark outperformed the S&P 500 over time. From 1996-2011 the Billionaire Index increased a staggering 400%. The S&P was up over 104% during this same period (dividends not included). If you started with $1,000 in 1986 and updated your portfolio every year to match the new Forbes billionaires list you would have ended up with $5,000 by 2011. If you had invested in other benchmarks like the Russell 2000, Russell 3000, or the S&P 500 you would have $2,500 or less. It should be pointed out the Billionaire Index is riskier than indexes like the Russell 2000 or S&P 500. As investors know you should never put all your eggs in one basket.

People often complain how the top 1% keeps getting richer. However, now there is a way to join them. In fact as a shareholder you are part owner in their business! The only problem is I haven’t actually seen a Billionaire’s Index listed on any of the exchanges. Right now Dr. Shulman works for EntreprenuerShares which has some funds yet doesn’t offer a Billionaire’s Index. One problem is that if people knew the Billionaire’s Index returns were very good they would start investing in it which might actually reduce the return. Since the index has only existed in theory and not in practice it is hard to tell how it would have actually done.

The Giving Pledge: Reducing Income Inequality

I feel as if many people misunderstand how the top 1% are important to philanthropy. To be honest some of the largest donors are in the top .001% category. People claim how greedy we are. However, the data shows that the United States is in fact the most generous nation in the world. Let’s look at the data to reveal just how generous we are. According to “Giving US: The Numbers”, in 2010 total contributions to charity were $290 billion. $211 billion of this total amount was made by individuals. Family foundations contributed $19.5 billion while corporate donations were over $15 billion. Clearly, these are some large amounts.

This brings me to my next point of income inequality. True, there is income inequality however inequality exists in so many different aspects of our live. Brad Pitt and George Clooney have an inequality of women they can get or date compared to the average guy. Obese people have inequality in the terms of the calories they consume. Bill Gates has a net worth has a net worth that is over 104,000 times that of the average American. This is something that professor Don Boudreaux at George Mason has pointed out. Sure Bill Gates has a net worth that is 104,000 times the average American however does Gates enjoy 104,000 times more calories or 104,000 times more homes as the average American or 104,000 times happier than the average person . I think the average person tends to believe that Bill Gates life is 104,000 times better than their own given how much money he has. However, I would argue Bill Gates has a rougher life than most. If you look at his work schedule, how often he travels, and people always asking him for money and the stress that creates I think people would still want their old life back. Everyone wants more money, however if you got to the point of having Bill Gates kind of money it would become more of a burden. Also people like to imagine having as much wealth as someone else but never can imagine the work that has to be put in to earn that money. This is what I call invisible inputs yet visible outputs. People see the outputs of wealth or income yet easily forget how much hard work was put in to get to that point.

Bill Gates has amassed so much wealth he is giving most of it away to charity. In fact the second richest person Warren Buffett is giving all of his money to another rich person Bill Gates! Really what is happening is Warren Buffett pledged nearly all his net worth to the Bill and Melinda Gates Foundation. If anything this will reduce income and net worth inequality. Buffett and Gates are signed the “Giving Pledge” which is a pledge to donate at least 50% of one’s net worth to charity. As of 2010, 69 billionaires were signed up to give away and at least $125 billion has been promised by the first 40 donors. Of course this figure should grow since the billionaires will no doubt get richer which will increase the amount that goes to charity. I have a feeling more billionaires will join which will also increase the amount. It would be interesting to see if anyone backs out if the economy were to collapse.

What is interesting however is that Buffett and Gates want other people to not only pledge to give their money away but also pay higher taxes. My own theory on this is that they want anyone else to never become as rich as them. If you favor the estate tax, higher taxes, and for people giving all their money to charity it makes it harder to amassed large sums of wealth which make Buffett and Gates look even better in historical terms. Buffet and Gates are extremely competitive people and it seems as if they want to enhance their legacy from beyond the grave.

50% of Americans No Federal Income Tax Liability

From the Heritage Foundation this graph shows the number of people who have no federal income tax liability. The number has only increased since the 1960's and I am afraid this percentage will keep increasing. Politicians talk about how the 1% don't pay their fair share, however how is it fair that 50% pay nothing. If anything we need more taxpayers. Also doesn't Congress already do more than their fair share of spending?

Bloomberg Billionaire Index

Today, Bloomberg released the Bloomberg Billionaire Index. The billionaire index is updated every day at 5:30 P.M. will price the net worth of the top billionaires. Before this we had to wait towards the end of the year when Forbes would list the 400 richest people. Forbes has had the Forbes 400 since 1982.

Carlos Slim debuted at the top of the list with $68.4 billion. However, in just one day he lost over $135 million. To most people this seems like an extraordinary amount of money. It should be pointed out however that the rich by definition have to take more risk than regular individuals. You can’t become a billionaire working a 9-5 job. I have no formal psychology training (other than the course I took in high and college) but I would be willing to bet that a large majority of people on the Forbes 400 list or now the Bloomberg Billionaire Index are workaholics. Being a billionaire is a side effect of being a workaholic. What is somewhat irritating is how people complain that people don’t need all this money. Of course, people would like to supersede the voluntarily decisions of millions of people who vote with their feet and their wallets. What seems to be more incredible is that even when people fall into “sudden wealth” they seem to mismanage it. One thing that comes to mind is lottery winners. Often you seem them blow through their money relatively quickly and ultimately file for bankruptcy. It seems as if the 99% when given extreme wealth ultimately end up back in the 99%. Perhaps the universe tends to unfold as it should. I don’t think I have ever heard of a lottery winner who then bolstered their wealth to new heights. Also a majority celebrities and athletes are notorious for blowing through their money.

One thing that is curious is how Bloomberg actually values the net worth of billionaires. Evaluating someone like Warren Buffett or Bill Gates is easy since most if not all of their net worth is in a publicly traded company. However, what about calculating the net worth of individuals that work for private companies? If you compare some of the numbers to Forbes they are different. For instance, Charles Koch on Bloomberg’s list is worth $34 billion yet last year he was worth $25 billion on Forbes. Of course Koch is CEO of Koch Industries which is privately held company. Bloomberg in evaluating the net worth of privately held companies looks at publicly held companies with similar values and price to earnings ratios. This is not a bad proxy but how does it lead Bloomberg and Forbes to be off billions in their evaluation of net worth?

Backup Camera Regulation: In Rearview Mirror For Now

Last year the National Highway Traffic Safety Administration (NHTSA) proposed regulation that would require rear view mirror cameras. The regulation was delayed until November. The legislation was first proposed by George W. Bush back in 2008. It may not be until 2014 until the cameras would be required in all vehicles. The idea is to allow drivers to see what is behind them when they are backing up. According to data from the NHTSA 300 people are killed every year from back over accidents.

The cost of rearview mirrors would be around $2.7 billion according to BusinessWeek. The backup cameras would add around $58-$203 to every vehicle. The cost of every a save life would be $18.5 million. The primary people who are at risk for the back-up accidents are children and the elderly. What is interesting however is that many more kids die from drowning every year. Roughly 175,000 children die from drowning every year. Why isn’t Congress requiring parents to have video monitors to watch their kids while swimming? If we do some quick calculations we would find that the cost per life saved would be more than $18 million per person. Of course, any loss of life is never a good thing. However, when the cost of life is this high is it really worth it? Also I would be willing to bet that even if every vehicle had the rearview mirror installed that we would still have accidents and deaths related to back up accidents.

The regulation would benefit Gentex Corp who would be a major benefactor if this rear view mirror cameras were actually required. I would be curious to see if Gentex donated any money to certain politicians. For some years now some manufactures already have rear view mirrors installed in the center console (usually part of the navigation system).

Automobiles will continue to get safer. When you consider that only 300 people die a year considering there are over 254 million vehicles on the road it seems as if the odds of getting run over are very slim. Of course this doesn’t mean we shouldn’t try to improve auto safety. However, if we want to improve auto safety it should be done voluntary. Consumers demand safe cars and car companies listen. I am surprised insurance companies don’t have an interest in this. If cameras were installed in cars (front, side, and rear) insurance companies could more easily determine who was at fault for an accident. This would make paying out claims much easier and more accurate.

Until we reach the age of driverless cars we will have to deal with what modern technology will afford us. Requiring rearview mirror cameras would not only increase the cost of cars but also save very few lives as a result. Car companies already have incentives to make vehicles safe since consumers care more about their live than anyone else.