If you think the stock market is the ticket to membership on the Forbes 400 list of the richest Americans, you are mistaken. In fact, most of the ultra-rich are on the list not because of their stock-picking or market-timing skills but because of their entrepreneurial efforts. They turned to the stock market after their fortunes were made, with what appears to be the relatively modest goal of maintaining long-term purchasing power.
Of the 400 members on the 2022 list, 275 were classified by the magazine as “self-made” — or about 70%. Consider the chart below, which reflects the 1-to-10 scale that Forbes used to rate the 400 members according to how self-made they were, with 10 being totally self-made. The largest grouping — 38% of the list members — received a rating of 8, meaning that according to Forbes they were “self-made [but] who came from a middle-class or upper-middle-class background.” Examples are Jeff Bezos of Amazon.com
and Mark Zuckerberg of Meta Platforms
This year’s large majority of ultra-rich being self-made is in line with previous years’ lists, but it’s worth highlighting because it provides a valuable reality check on the myth that’s taken hold of many investors — especially those in Gen Y and Gen Z, as well as some adherents of the so-called FIRE early retirement movement — that the stock market is an engine that can create Forbes-400-scale wealth.
To illustrate how unrealistic this is, consider what it would take for a stock investor to qualify for this year’s Forbes 400 list. If we assume a 30-year investment horizon with a portfolio that is 100% invested in the S&P 500
and no withdrawals along the way, your portfolio would need to have started with $82 million in 1992 to have amassed a portfolio worth $2.7 billion today — the minimum required to make it onto this year’s Forbes list. Good luck with that.
Many investors might object by pointing to Warren Buffett, CEO and chairman of Berkshire Hathaway
who ranks fifth on this year’s Forbes 400 list. Wasn’t the stock market the source of his incredible wealth?
Yes, but his approach of buying entire companies, or major chunks of them, is hardly one that you or I can emulate. So the exception that proves the general rule.
In any case, even my back-of-the-envelope calculation is too optimistic, since the past 30 years have been some of the absolute best in U.S. history for equity returns. If you instead conduct this thought experiment using the stock market’s average annualized total return since 1793 (courtesy of the database maintained by Santa Clara University’s Edward McQuarrie), you would have had to start with $301 million 30 years ago in order to make it onto this year’s Forbes 400 list.
The Forbes 400 and the stock market
Though these are just hypothetical illustrations, they make my point that members of the Forbes 400 made it onto the list because of wealth created before turning to Wall Street. And once they did commit to the market, their results have been decent but not exceptional.
Consider the performance over the past several years of the Forbes 400 list members as a group. The table below shows that the group as a whole produced an 8.8% annualized return over the past six years, 2.3 annualized percentage points below that of the S&P 500 — additional confirmation that the ultra-wealthy are in the Forbes 400 because of their pre-Wall-Street activities.
|Increase from previous year’s list of the combined wealth of those on the Forbes 400 list||Comparable gain of S&P 500 (including dividends)|
|Forbes 2022 list||-11.1%||-12.2%|
|Forbes 2021 list||40.6%||43.30%|
|Forbes 2020 list||8.1%||9.80%|
|Forbes 2019 list||2.2%||3.70%|
|Forbes 2018 list||7.0%||14.80%|
|Forbes 2017 list||12.5%||14.40%|
|Annualized 6-year return||+8.8%||+11.1%|
The bottom line? If you want to be on the Forbes 400 list several decades from now, go out and create something the world needs. The stock market will be waiting after you have made your fortune.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org