How Do The Rich Get Richer? It’s Probably Not From Chasing Performance

The world’s richest are getting richer. In fact, the top 1% in terms of wealth ownership are well on track to control two-thirds of the world’s wealth by 2030, as reported by the House of Commons library, a research arm of the UK’s parliament.¹²

In light of this growing inequality, is there a way to open up the playbook to all?

Let’s dig under the covers and see. For starters, according to Bloomberg³, the richest individuals are made rich through equity markets. However, recent research published by the National Bureau of Economic Research (NBER) has some surprising results on how well some of the richest individuals fare in the stock market.

Titled “Do the Rich Get Richer in the Stock Market? Evidence from India”, the study uses evidence from Indian stock portfolios. The evidence shows two seemingly counterintuitive findings:

1) The first finding is that investors who earned higher returns had, on average, smaller account holdings (and were therefore not very well off).

2) The second finding is that those investors with larger holdings (who were, therefore, better off), earned relatively lower returns, but earned them consistently. Instead of chasing high performance, they settled in to a long, slow, steady-but-positive grind.

Certainly, the findings in this paper are derived from one specific regional equity market. But we believe there are three implications that are much broader.

1. ) Compounding is our friend

The NBER research shows that the rich in Indian stock markets managed to do better than the smaller, more aggressive accounts, not because of top-tier performance, but because of a focus on a long-term horizon and steady and consistent growth. Compounding—the ability of an asset to generate earnings, which are reinvested to generate more earnings—can help to grow wealth. But compounding takes time, which, as simple as it sounds, is why we believe wise investors should focus on the long term. While we certainly don’t shy away from seizing opportunities, a key part of that long-term approach is the belief that winning in down markets is more important than winning in up markets.