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The Rich Take a Big Hit
by David Stanowski
20 January 2008

Everyone who owned stocks in 2008 took a beating, but many forget that this applies to the rich, too. If the rich have demonstrated that they are far better with money than the rest of us, why didn't they see this Bear Market coming?

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Global stock markets lost $28.7 Trillion of their value, last year, while real estate lost Trillions of dollars more, so anyone who held their positions in these markets was going to lose big. On average, U.S. millionaires lost 30% of their assets last year, with 17% of respondents saying their assets declined by 40% or more, according to a recent survey by Spectrum Group.

Only 36% of respondents said they were pleased with their financial adviser's performance last year, but 14% said they will increase their use of advisers. Getting good advice requires far more than the ability to pay for it. You need to learn that most financial advisers follow the herd and just dispense Conventional Wisdom; a practice that is deadly when major trend changes occur.

Income analysis shows that the rich capture their biggest total share of national income at the end of major Bull Markets in stocks, because they have the opportunity to make enormous sums of money in financial transactions. After that, the Bear Market performs the function of redistributing the income and wealth as the rich lose the most!

The graph below shows that, in 1929, the top 1% of earners received about 24% of the total national income. From there, their share declined until the beginning of the 1982 Bull Market, and has been climbing ever since. By 2006, the top 1% was earning 23% of the total income, but when the 2007 figures are in, their share will probably surpass the 1929 peak of 24%. However, the share of income enjoyed by the rich should now decline for many decades.

Income Disparity

U.S. Billionaire Losses:
Billionaire Company/
2008 Loss
in Billions of Dollars
Sheldon Adelson Las Vegas Sands $30.0 B
Sergey Brin +
Larry Page
Google $23.6 B
Warren Buffett Berkshire Hathaway $16.5 B
Kirk Kerkorian MGM Mirage $13.0 B
Bill Gates Microsoft $12.3 B
Larry Ellison Oracle $8.2 B
Sumner Redstone Viacom, CBS, National Amusements $7.2 B
Steve Balmer Microsoft $6.5 B
Charles Ergen Dish Network $6.1 B
Carl Ichan Investor $5.1 B
Eddie Lampert Sears, AutoNation, Autozone, Home Depot, Citigroup $5.0 B
Jeff Bezos Amazon $4.6 B
Dan Duncan Oil & Gas $4.1 B
Rupert Murdoch NewsCorp $4.0 B
Stephan Schwarzman Blackstone Group $3.8 B
Min Kao Garmin $3.4 B
Michael Dell Dell Computer $3.3 B
Pierre Omidyar eBay $3.2 B
Micky Arison Carnival Cruises $2.6 B
Gary Burrell Garmin $2.6 B
Steve Jobs Apple, Disney $2.3 B
Hank Greenberg AIG $2.3 B
Steve Wynn Wynn Resorts $2.0 B

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World-Wide Billionaire Blowups:

It was a dreadful year for the world's wealthiest as markets and currencies around the world tumbled.

More than 300 of the 1,125 billionaires we tallied on our annual list last March have since lost at least $1 billion; several dozen lost more than $5 billion. The 10 richest from our 2008 rankings dropped some $150 billion of wealth, dragged down by steel tycoon Lakshmi Mittal, estranged brothers Mukesh and Anil Ambani and property baron K.P. Singh, who together dropped $100 billion. America's 25 biggest billionaire losers of 2008 lost a combined $167 billion.

But even in such an awful year, the stories of a few billionaires and now former billionaires stand out as particularly dreadful.

Take David Ross, one of the U.K.'s most successful entrepreneurs. Earlier this month, Ross notified four public companies in which he was a major shareholder and director that he had borrowed against his shares to fund real estate investments that had soured. He will likely have to sell some of those stakes to pay off his debts. So far he has resigned from three of the four boards and stepped down from his post as an Olympics adviser. His fortune, which we estimated at $1.4 billion in March, is now worth about $150 million.

Bjorgolfur Gudmundsson, former chairman and a large shareholder in Landsbanki, Iceland's second largest bank, saw the firm seized in October as the worst of the credit crisis tore through the island nation. The failure wiped out his $1.1 billion fortune. He has since had to put his holding company, Hansa, into voluntary liquidation and is selling his U.K. soccer team, West Ham.

Russians were some of the biggest losers in the past year. Vladimir Lisin's Novolipetsk Iron and Steel is down three-fourths since its June peak. Dmitry Rybolovlev's fertilizer company, Uralkali, has fallen 90% since it peaked around the same time.

But those losses pale compared with the troubles facing Oleg Deripaska. In March he was the world's ninth richest person and Russia's richest man, with a fortune we estimated to be worth $28 billion. Since then Deripaska has been forced to sell shares in Canadian carmaker Magna International and German construction firm Hotchief, and had to borrow $4.5 billion from a state-controlled bank to hold on to his stake in Norilsk Nickel. He will likely sell off additional assets to avoid losing even more of his fortune, now estimated at $10 billion. Or less.

The biggest loser of all was Anil Ambani. Touted on the cover of our 2008 billionaires issue for having added $24 billion to his fortune in one year, Ambani has dropped $30 billion since then. But don't worry too much. His Reliance Entertainment is investing $500 million in a new studio venture with Steven Spielberg's DreamWorks. Plus, he remains quite wealthy, worth $12 billion That's something many others can't claim.
Source: Billionaire Blowups of 2008

Many people would say that the rich lost so much in 2008 due to their arrogance, but I think it is primarily because of their confidence. They have done so well for so long that they have achieved great wealth, so they can no longer imagine themselves faring badly in business deals or investments. The inability to imagine a wide range of possibilities, including major losses, lead to their set backs.

There is no need to feel sorry for the rich, because most of those named above are still very wealthy, however, that may not last. If there is another leg down, in this Bear Market, later this year, most of these tycoons will probably ride it all the way down! They are the ultimate buy-an-hold investors.

The moral to this story is that everyone needs to make a new effort to understand what they are doing with their money and investments. If you are not convinced by now that you can't rely on the Conventional Wisdom spewing forth from Wall Street, economists, and the government; then your money is truly in peril! 

It is time to determine how you will preserve your capital under a wide range of possible scenarios!
Is Your Money Safe?

"He who blames others has a long way to go in his journey. He who blames himself is halfway there. He who blames no one has arrived".
Chinese Proverb


The information contained in this article reflects an analysis of market trends and conditions, and nothing contained in this article, or on this website should be interpreted as, or deemed to be, a recommendation to any investor, or category of investors to purchase, sell or hold any security.

Any investment decisions must in all cases be made by the reader, or by his or her investment adviser. Nothing contained on this website is intended as a solicitation for business of any kind, or for investment.

As a matter of law, INVESTMENT ADVICE may only emanate from members of the government-created monopoly of federally-registered brokers and investment advisers. The author falls into neither category.

In contrast, what you just read is simply INFORMATION, that was obtained from what are believed to be reliable sources. It is ALWAYS wise and prudent to undertake investment positions only after considering a wide variety of information and opinions, on the subject, and after consulting with those who are authorized to give INVESTMENT ADVICE, if so desired. Although consultation with "experts" may be helpful, everyone should do their own DUE DILIGENCE regarding ANYTHING that may affect their financial well being.

The author is an active participant in the markets, and may trade the securities that are discussed in this article, both before and after publication, and/or may have a long-term position in such securities. In other words, the author usually has a financial interest in the subject of the articles on this web site.

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