Don't Trust Your Gut 3: Structural Opportunities to Become Rich
Don’t Trust Your Instincts 3: Structural Opportunities to Become Rich
I think the ideal life is to do what you love, have family and friends, and if you’re lucky maybe achieve a little bit of success in some field, you don’t necessarily have to be rich. But what should you do if you say you just want to make money, and a high income in general isn’t good enough, you have to be, say, in the TOP 0.1% of rich people?
That’s a much harder goal than getting a PhD. In recent years in the United States, getting into the top 0.1% means earning at least 1.5 million dollars a year [1], or having total assets of 36 million dollars [2]. To get to this level from nothing, it’s not enough to work hard, struggle, study hard and have a high IQ. You may need a very different way of thinking.
Let’s talk about a mindset that is needed to thrive in the modern world: * Look for ‘structural opportunities’. *
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In his book Don’t Trust Your Intuition, Seth cites a lot of data to show that society is not perfect. It’s not fully competitive and it’s not very fair. It has some structural flaws - structural features, if you will. This means that you’re more likely to succeed at doing things in some places or areas than in others.
An example. American high school students engage in sports programs in large part to get college scholarships, because colleges give preference to athletic students. So if you’re a high school student, which sports program should you take? If you don’t have a sense of structural opportunity, you may think that any program will do, and that you just like it. In actuality, this is not the case at all.
For boys, practicing gymnastics is the best option. There are roughly 2,000 boys in the country who practice gymnastics, and colleges have 100 acceptances in the gymnastics program, an acceptance ratio of 20:1. In contrast, if you choose to play volleyball, you’ll have to compete with over 50,000 boys in the country for fewer than 300 spots, an acceptance ratio of 177:1.
Girls should actually practice sports more. For girls, if you practice rowing or equestrian, the acceptance rate is 2:1 and 3:1. if you practice track and field and bowling, the acceptance rate is 64:1 and 94:1. for soccer, basketball and volleyball, the acceptance rate is between 40:1 and 50:1.
The logic is clear, right? Again, it’s a struggle, and some programs are several or even dozens of times more successful than others.
Of course you can’t just say practice whichever program you want, it has to do with talent and family conditions. But this sense of structural opportunity is something you have to have. You better think a little strategically before you choose what to practice.
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Back to the topic of this talk, making money. What are the structural opportunities to make money?
Of these rich people in the top 0.1% of the United States, only 20% of them are that rich primarily on paycheck to paycheck. They are generally executives of large corporations, ballplayers, American soccer coaches, that level. It’s not a very promising route to “wealth”, the rate of becoming “rich” is too low.
Most rich people own their own companies and their wealth comes from business profits. You have to be the boss to do that.
If you were to be the boss, what business would you choose? The first thing that comes to mind for many people is to open a restaurant. It is true that a lot of people have gotten rich by opening restaurants. Seth’s data shows that 4,471 people out of top0.1% own a restaurant - but you have to consider that there are over 210,000 restaurants in the United States. The success rate for opening a restaurant is only 2%.
The truth is that restaurants are not a very good business. Most restaurants don’t make much money, and it’s a very hard business. The key you can not be productive, every dish is human labor, every table is a fixed cost; to be tasty and distinctive can not be standardized to open a chain, open a chain becomes a standardized cost game ……
But restaurants are not the least profitable business. The businesses that are least profitable – or most likely to lose money – are the ones that look “sexy”. These include record stores, amusement parks, toy stores, bookstores, clothing stores, cosmetics and beauty stores, and so on. These are popular stores, but the median survival time for these stores is generally 2-4 years, and they go out of business when they’re done. In contrast, the average survival time for dental offices is 19.5 years.
Why? Because these are the stores that many people dream of opening. Music enthusiasts think the best way to support themselves is to open a record store, and game lovers say when I’m rich in the future I’ll open a game store specializing in toys and video games. That’s right, you want to open a store not because the store will make a lot of money, but because you like it. But other people like it too. The competition in the field of dreams is very fierce, so most of them are eliminated …… you are paying for the dream.
So you say I don’t think about the dream, I’m only in it to make money, I don’t care how hard or tiring or uninteresting it is! Does that make money? Neither.
There are over 49,000 gas stations, over 15,000 laundromats, and over 8,000 personal care stores in the U.S. …… No one’s dream is to be in business like this, but these industries don’t make money either. These, plus construction equipment contractors, residential building construction, automotive repair and maintenance, building and residential services, remodeling companies, etc., are industries where almost none of the owners make it into the TOP 0.1%.
The reality is that the vast majority of business people are not particularly wealthy.
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So what exactly does one do to make money? Seth looks through tax records to find real - money making - industries.
He set up two search criteria. First, at least 10% of the owners in the field, located in the top0.1%, which means that the rate of making money in this business is relatively high; second, at least 1,500 owners in the field must be in the top0.1%, which means that a lot of people go down this road to get ahead.
Success rate and high, and there are a lot of people doing, so good industry are what? There are six areas that meet Seth’s criteria.
The first is real estate related. If you own a property and rent it out, if you manage a property for someone, or if you do appraisals, the real estate industry does produce rich people.
The second is investing, which means managing and investing other people’s money.
The third is car dealerships.
Fourth is independent creators, such as artists, performers, and writers. If you can really make a living in this line of work, your success rate is still OK - but note that many people who majored in art, acting, and writing in college don’t later make a living at it, and they aren’t counted in the denominator. So the success rate in this line of work is probably overestimated.
Fifth is market research, such as consulting and writing business reports.
Sixth is wholesaling, which means buying goods from manufacturers and selling them to retailers.
Why do these industries make money? Especially like what car dealers and wholesalers, it seems that they are all silent, how do you know that there are a lot of rich people hidden in them.
They make money because they have a moat.
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The reason why those industries we mentioned earlier do not make money, the root cause is the existence of price wars. You do this line of work is not easy to make a little money, others see you make money on also come to do, you compete with each other will only be able to pressure the price of …… the laws of economics require you to lower the profit to almost 0, everyone does not make money.
Record stores or laundry and gas stations, these things are not difficult, no threshold, you can do others can do, is bound to be fully competitive.
On the other hand, the six most profitable industries have some form of barrier - in Warren Buffett’s words, a “moat” - so that no one else can just come in and compete.
The first moat, in case you didn’t think of it, is the law.
There are laws in the U.S. that may be subjectively intended to protect consumers, but objectively protect the vested interests of those who practice them.
For example, the laws of many U.S. states provide that cars cannot be distributed directly by the manufacturer, but must be sold by car dealerships that specialize in selling cars. Now of course Tesla is an exception to this rule, you basically have to buy all other cars from a car dealership. The purpose of the law may be because car dealerships are easy to regulate, but the intangible result is that you can’t just open a car dealership if you want to, so the ones that do make money.
Another example is beer wholesalers. The law says that beer companies can’t distribute their own beer; they must sell it to qualified wholesalers, who in turn sell it to individual stores and bars. The result is that beer wholesaling is a particularly lucrative business.
The second moat is technological threshold and scale.
Investment and market research have high thresholds and are impossible to do well without years of rigorous training and specialized experience, so there are few competitors. You must have deep research to understand what is going on in each industry to write a valuable report; and once you have written a report you can sell many copies; it is difficult for others to take away this business from you at a cheaper price.
The third moat is branding.
Why are some artists very profitable? Because he has fans. Maybe another person sings and sings well, but the fans only buy him.
Then you say like the sneaker industry also has brands, why did not produce a lot of rich people? It’s because there are big companies in this branded industry. Big companies can hire the best people, develop the best products, and engage in the best advertising and marketing, which is difficult for small companies to compete.
This brings us tothe next moat: localization.
Localization ensures that big companies won’t come in and compete with you. Seth says the real estate market is a very localized market. I don’t know the details of it, but real estate seems to be one of those industries where the strongest dragon can’t beat the local snake, for example, you might have to have a better relationship with local politicians to do well. Same with car dealerships, the law just doesn’t allow giants to open chains everywhere.
There’s also a localization factor that makes beer wholesaling particularly lucrative: you’d have to have good personal relationships with local retailers to do well. If you have a lot of hotels that get their goods exclusively from you, you’re basically making money lying down, and your day job is just to look at boring reports.
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To summarize: * Most industries don’t make rich people, industries you think are very profitable are actually very difficult to make money in, and some really profitable industries are very inconspicuous. * The get-rich-quick stories that the media likes to report, like a couple of young people starting a business and sitting on billions of dollars with a great idea, are not typical. A lot of really rich people are invisible.
Of course, the market structure in China is certainly different than in the U.S., but this is the same thing: * To make high profits, you have to have some kind of moat. *
You say you want to be in the TOP 0.1%, Seth asks you three questions first:
do you have your own business?
Can your business avoid simple price competition?
is your business immune to suppression by the giants?
If the answer to one of these three questions is no, you are unlikely to be in the top 0.1%.
So you say I don’t know any special talents, I don’t have any special connections, and the beer wholesalers and car dealers in my area don’t want to transfer their business to me, how can I become rich?
How would I know. There is no column that can teach you to be rich. In fact, the real truth of our talk is just to look for structural opportunities.
NOTES
[1] https://www.chicagobooth.edu/review/never-mind-1-percent-lets-talk-about-001-percent
[2] https://ritholtz.com/2022/12/top-01-how-much/
Getting to the point
- most industries don’t make rich people, industries you think are very profitable are actually very hard to make money in, and some of the really profitable industries are very inconspicuous.
- to make high profits you need to have some sort of moat.
- To get into the TOP 0.1%, think about three questions first: do you have your own business? Can your business avoid simple price competition? Is your business immune to the suppression of the giants?