How the top 1% make their money

Summary

This video script delves into the wealth creation strategies of millionaires and billionaires, highlighting the distinct paths of real estate and private equity. It explains how real estate investments can appreciate in value or generate rental income, while private equity offers diverse ways to increase business value, such as forced appreciation and risk mitigation. The script emphasizes the importance of patience, focusing on organic growth, leveraging debt, and categorizing businesses to maximize enterprise value, ultimately leading to generational wealth creation.

Takeaways

• 🏠 Real estate is a simple business model that can lead to millionaire status, with appreciation and rental income as main profit drivers.
• 💰 Billionaires often make their wealth in private equity, which offers more diverse ways to make money, including buying undervalued businesses.
• 📈 Forced appreciation in real estate involves making improvements to property to increase its value, while in business, it can involve turning negatives into positives.
• 🌐 The potential for wealth in private equity is higher due to the ability to transform businesses with relatively low initial investment into high-value assets.
• 🔑 Key to increasing business value is mitigating risk, which can lead to higher profit multiples and thus greater enterprise value.
• 💼 Private equity investors focus on identifying and flipping risks into value pillars, which can significantly increase a business's worth.
• 🏢 Businesses can be more volatile in value compared to real estate, with potential for rapid growth or decline, affecting their market value.
• 📊 The value of a business is directly related to the reliability of its profits and its growth potential, influencing the profit multiple.
• 🚀 Businesses can be started with minimal investment and scaled to be worth billions, unlike real estate which requires significant upfront costs.
• ⏳ Patience is crucial in business growth; sticking with a business for the long term can lead to substantial increases in value.
• 🛠️ To build business value, focus on increasing customer base, improving customer lifetime value, and decreasing business risk.

Q & A

What are the two main ways to make money in real estate investment as described in the script?

The two main ways to make money in real estate investment are through appreciation, where the value of the property increases over time, and rental income, where you receive regular payments from tenants.

What is the difference between natural appreciation and forced appreciation in real estate?

Natural appreciation is the increase in property value that occurs over time without any intervention. Forced appreciation, on the other hand, is the increase in value that results from improvements made to the property, such as renovations or upgrades.

Why does the script suggest that real estate is a simple business model for creating millionaires?

The script suggests that real estate is a simple business model for creating millionaires because it involves buying a property, obtaining a loan, and placing tenants to cover the loan. The reliability of land scarcity and population growth contribute to its simplicity and potential for wealth creation.

How does the script differentiate between the risks in real estate and private equity investments?

The script differentiates the risks by pointing out that real estate investments are generally more stable due to the finite nature of land and population growth, while private equity involves investing in businesses that can fluctuate greatly in value, sometimes becoming worthless or extremely valuable within a short period.

What is the potential for wealth creation in private equity compared to real estate, according to the script?

According to the script, private equity has a higher potential for wealth creation compared to real estate because it allows for significant value acceleration in businesses through various strategies, potentially leading to returns that are multiples higher than in real estate.

What is the concept of 'forced appreciation in business' as mentioned in the script?

The concept of 'forced appreciation in business' refers to the process of transforming negatives or risks into positives, thereby increasing the value of the business. This can be achieved by addressing issues within the business, such as improving operations or acquiring new customers, which can significantly increase the business's worth.

How does the script explain the potential for a 100x return in private equity?

The script explains that a 100x return in private equity is possible due to the ability to acquire businesses at low values and then significantly increase their worth through strategic moves, such as improving operations, expanding into new markets, or acquiring other businesses.

What factors determine the value of a business in the eyes of private equity investors, as per the script?

Factors that determine the value of a business in the eyes of private equity investors include the business's profit, the reliability of that profit, its growth potential, and the risks associated with the business.

How does the script define 'EBITDA' and why is it important in private equity?

EBITDA, defined in the script as Earnings Before Interest, Taxes, Depreciation, and Amortization, is important in private equity as it represents the earnings of a company before non-operational costs are deducted. It is a key metric used to evaluate a company's financial performance and is often used to calculate the multiple for business valuation.

What are the three fundamental ways to make a business more valuable according to the script?

The three fundamental ways to make a business more valuable, as stated in the script, are by increasing the number of customers, increasing the value per customer (LTV or CLV), and decreasing the risk associated with the business, which enhances its reliability.

How does the script relate the concept of 'size premium' to the valuation of businesses?

The script relates the concept of 'size premium' to the valuation of businesses by explaining that larger businesses with more profit are worth more than smaller businesses with the same profit margin. This is due to the perception of stability and growth potential, as well as the ability to command higher multiples from investors.

What is the significance of patience and longevity in building business value, as discussed in the script?

The script highlights the significance of patience and longevity in building business value by emphasizing that a business becomes more valuable each year it operates successfully. The longer a business operates and grows, the more it is worth, and the greater the potential return on investment.