“Wealth Phenomenon”

Dan Gilbert was in class last week and brought up an interesting subject. We had a long discussion about the “wealth phenomenon” as he calls it. So how is wealth created? Dan actually used a great example.

Pretend James has $10,000 and Antonella has no money, but paints a picture. If James buys that painting from Antonella for $10,000, there is now $20,000 of wealth between the two. James has a $10,000 painting and Antonella has $10,000. In this scenario, $10,000 of wealth was created. What a phenomenon.

The 25th Anniversary issue in Forbes of the “400 Richest People in America” further captivated my interest on the subject. Dan Gilbert was mysteriously one of the 57 that got knocked from this list. Next to his name says “Richer than last year, but can’t keep up.” If Dan Gilbert was #384 with a net worth of $900 million in 2006, how did he get booted from the list a year later with a net worth of over $1.2 billion? The answer is, “one billion dollars is no longer enough.” In order to make it on the Forbes 400 list this year, one’s net worth must be $1.3 billion. So if you’re wondering how the net worth of this list miraculously rose $290 billion from last year, it’s a wealth phenomenon.

It really is amazing when you think about it. These billionaires created their own wealth. William Pulte created wealth from building homes. For example, he would take $150,000 in materials and $150,000 in labor and build a home that would sell for $600,000. He doubled the wealth.

In 1982, the minimum to get on the list was less than $500 million and the total wealth was $200 billion. Today, the minimum to get on the list is $1.3 billion and the total wealth is $1.5 trillion.

In the same respect though, wealth also disappears. For example, the value of my investment property has decreased about $100,000 in a year’s time. There are 26 properties within the subdivision that have each decreased the same amount. On this block alone, $2.6 million worth of wealth has simply disappeared. The disappearance of wealth is just as amazing to me as the creation.

Not only does this wealth magically appear and vanish, but it constantly shifts. Oil and manufacturing fortunes ruled the first Forbes 400 list 25 years ago. These days “Wall Street is King.” More than one-quarter of the fortunes on this year’s Forbes 400 are from finance and investments. Nearly half of the 45 new members made their fortunes in hedge funds and private equity.

Where will tomorrow’s wealth be?

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.                                                       The Forbes 400

.                                      Make-up Blog from Monday’s Class

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