How Millionaires Are Made, Part 2

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
robert frank thomas stanley 0

In my last column, I discussed New York Times columnist Robert Frank’s book Success and Luck and his claim that there is no real meritocracy in this country.

In his view, what best explains the difference between the economically successful and the economically unsuccessful - the so-called “haves” and “have-nots” - is not education, talent, skills, work habits, persistence, ambition, risk-taking, resilience or grit... but luck.

It’s a dispiriting message. It’s also untrue.

In his book, Frank never addresses the work of Dr. Thomas Stanley, the nation’s most widely recognized authority on the habits and behaviors of high net worth individuals.

Stanley died in a car accident in 2015, unfortunately. But you may be familiar with his many books, including The Millionaire Next Door: The Surprising Secrets of America’s Wealthy.

Stanley didn’t write about wealth for rich people. His goal was to learn how ordinary individuals become financially independent and share what he discovered with the rest of us.

In this, he was spectacularly successful. The Millionaire Next Door - a perennial best-seller - has sold more than 3 million copies.

Sadly, what most people - including Mr. Frank - assume about millionaires is dead wrong.

Many think the rich got that way from family connections or a generous inheritance.

Yet Stanley discovered that the vast majority had no special connections. Approximately 85% of them built their own fortunes. And 68% received no inheritance, gifts, estates and/or trusts.

Many believe that millionaires have advanced degrees from prestigious universities. Some do. But while there is a direct correlation between educational attainment and lifetime earnings in this country, the nation’s most highly educated individuals do not have the highest net worth.

Most millionaires have a college education. But many were dropouts or learned a high-paying technical skill that created opportunities for greater compensation down the road.

People typically assume that most millionaires are business owners. (After all, you can’t get rich working for somebody else, right?) Not so. Stanley discovered that 72% of millionaires in this country do not own a business and are not self-employed.

People tend to believe that the middle and lower classes work far longer hours than the rich do. Wrong again. According to the Census Bureau, 75% of households in the top quintile have two workers. Less than 5% do in the bottom quintile. For every hour worked by a poor household, a rich household works five hours. No quintile works more hours than the richest do.

Most people think the wealthy are big spenders. And, of course, the glittering rich - those with a net worth above the eight-figure mark - often are.

But Stanley discovered that the average millionaire in this country doesn’t own a second home, has never owned a boat, is more likely to wear a Timex than a Rolex, would rather drive a Mazda than a Mercedes, and spends very little on prestige brands and luxury items.

What do they spend their money on? Sporting events, concerts, travel, professional trade association activities, and investment and tax advice.

In other words, they value experiences over “more stuff” - and relationships that build and protect wealth.

The common denominator is that millionaires develop habits conducive to asset accumulation. In The Millionaire Next Door, Stanley lists seven attributes:

  1. They live well below their means. Most of us quickly learn that expenses rise to meet the income available. But millionaires tend to maximize their income, minimize their expenses, and religiously save and invest the difference.
  2. They allocate their time, energy and money efficiently, in ways conducive to building wealth. As the old saying goes, “Rich people plan for three generations. Poor people plan for Saturday night.”
  3. They believe that financial independence is more important than displaying high social status. So who, you might ask, is buying all those luxury cars, powerboats, top-shelf wines, and expensive bling from Tiffany? People who Stanley calls “wannabes” or “aspirationals.” These are folks who have high incomes - and the desire to appear rich - but can’t get there thanks to their spending habits. (The Texas term, I believe, is “all hat, no cattle.”)
  4. Their parents did not provide economic outpatient care. They learned responsibility, frugality and self-reliance at an early age.
  5. Their adult children are economically self-sufficient. Take note if you have a millennial currently living in your basement.
  6. They are proficient in targeting market opportunities. In our competitive economy, success accrues to those who figure out what people want or need and then move heaven and earth to deliver it. That’s the beauty of capitalism. It says you can have whatever you want, if you just provide enough other people with what they want. Successful businesspeople recognize this.
  7. They chose the right occupation. If your fervent desire is to be an archaeologist, a hairdresser or a high school basketball coach, more power to you. You will fill an important need and might live a thoroughly enjoyable life the rest of us could only envy. But some professions are more conducive to wealth building than others.

What careers are in greatest demand today? Carpenters, electricians, plumbers, engineers, computer support specialists, software developers, healthcare workers, sales representatives, doctors, surgeons and registered nurses, to name just a few. If wealth accumulation interests your kids and grandkids, you might have them look at this list before they declare a major in women’s studies or sociology.

In his decades of research, Stanley discovered that wealth creation is not primarily about fortuitous circumstances or “getting the right breaks.”

Overwhelmingly, the economically successful make choices and develop habits that create and build wealth.

What are these habits? Integrity, optimism, ambition, persistence, resilience, frugality and calculated risk-taking, to name just a few.

As I’ve told my own kids since grade school, “Successful people make a habit of doing the things unsuccessful people don’t want to do.”

In his last book, Stop Acting Rich... And Start Living Like a Real Millionaire, Stanley wrote, “I have spent a lifetime identifying and profiling the myths and realities of the rich... Among the least important were high academic achievement and luck.”

If Frank’s real goal was not simply to stoke a sense of grievance and argue (as he does) for sharply higher taxes on “the undeserving rich,” he might have taken the time to study and evaluate Stanley’s research.

But when I googled “Robert Frank Thomas Stanley,” nothing came up.

Why has Frank not bothered to address Stanley’s lifetime of work on the habits and characteristics of America’s wealthy?

I don’t know. Bad luck, I suppose.

Good investing,

Alex

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