The Koch Brothers are loved by some, loathed by others. That's mainly the result of their political leanings, which they back with millions of dollars in contributions. Unsurprisingly, those on the receiving end tend to look favorably on the brothers, while those on the other side aren't their greatest fans.
All politics aside, the reason the Koch Brothers are able to back their political beliefs with such large monetary might is because they are two of the four richest Americans according to Forbes, with an estimated net worth of $41.1 billion apiece.
Image source: Getty Images.
Why are the Koch Brothers so rich?
That net worth is mainly the result of the Koch Brothers, David and Charles, each owning a 42% stake in Koch Industries. That ownership stake was largely inherited from their father Fred, though David and Charles did pay $1.1 billion to buy out the stakes of their other brothers William and Fredrick in 1983 (although ownership has been contested in a number of lawsuits from 1985 to 2001).
Koch Industries was founded by the late Fred Koch in 1940 as the Wood River Oil and Refining Company. It has since been expanded by the brothers well beyond oil refining, and now has operations spanning the manufacturing, refining, and distribution of petroleum, chemicals, energy, fiber, minerals, pulp and paper, ranching, and commodities trading. As such, it's a true conglomerate in every sense of the world.
In cobbling together wide ranging industries, the Koch Brothers have built the second largest privately held company in the U.S. In fact, the reason the Koch Brothers' net worth is so immense is due to the fact that they own nearly the entire company, instead of sharing that ownership with thousands of other investors. It's an ownership stake that Charles has said will only be wrested away by the public markets "over my dead body."
A closer look at the Koch Brothers' empire
Koch Industries generates an estimated $115 billion in annual revenue through a half dozen notable subsidies that are focused on energy, agriculture, and consumer goods. Sticking to its original refining roots, the company operates Flint Hills Resources, which is a downstream refining and chemicals company. It's a major refiner of Canadian crude oil and handles about a quarter of all Canadian oil sands crude oil that makes its way into the U.S. Koch Industries also owns a midstream company, Koch Pipeline Company, which operates 4,000 miles of pipelines that transport oil, NGLs, and chemicals.
In addition to energy, Koch Industries is also heavily involved in the agriculture sector, operating Koch Fertilizers, which is one of the world's largest nitrogen manufacturers. It also owns the Matador Cattle Company, which raises 15,000 head of cattle.
The other main focus of Koch Industries is the manufacture of consumer goods. One of its subsidiaries is Georgia-Pacific, which is a large paper and pulp company. It manufactures notable consumer product brands like Brawny paper towels, Angel Soft Quilted Northern toilet paper, Mardi Gras napkins and towels, Dixie paper dining products, and Sparkle paper towels. In addition to that, Koch Industries also owns INVISTA, a polymer and fiber company that makes Stainmaster carpet and Lycra fiber.
Most of the profits generated by Koch Industries are reinvested into the business. The company pursues organic expansion opportunities, including recently announced plans to invest $1.3 billion to expand its fertilizer plant in Oklahoma, as well as outside acquisitions. In fact, last year alone Koch Industries spent $5 billion to bring new companies into the fold, paying $3 billion for inkmaker Flint Group and $2.1 billion for chemical feedstock manufacture PetroLogistics. By reinvesting profits into new profit-generating businesses the Koch Brothers' net worth should continue to grow even larger in the future.
Investor takeaways
Investors can learn two important lessons from the Koch Brothers. The first lesson is the simple fact that owning a collection of great businesses for decades and reinvesting the profits from those businesses into more great businesses is a winning formula for investment success. While we will likely never be able to own a piece of Koch Industries, there are plenty of other great businesses out there that are for sale each and every day on the stock market. Such investments might not net the average person a net worth anywhere near that of the Koch Brothers, but it will likely yield a net worth that's large enough to deliver a very comfortable retirement.
The second lesson is one that their other two brothers probably wish they'd learned a bit earlier. That lesson is to avoid selling a great business for as long as possible. By holding on to Koch Industries, David and Charles became two of the wealthiest people in the entire world. It's wealth that truly dwarfs that of their other two lesser-known brothers, who sold out way too early, even if that sale has been contested. The takeaway for us is to never sell stock in a great company, as that sale could lead to a much lower net worth in the decades ahead.
