How to Become a Billionaire

Every year, Forbes releases its list of the 400 richest Americans. The year's list was particularly notable, because you had to be at least a billionaire to be included.

As you might expect, a significant number of the folks on the list made their fortunes by investing. That subset includes Warren Buffett (worth $50 billion), Carl Icahn (worth $12 billion), and Jim Simons (worth $7 billion).

So here's important lesson No. 1: You can make a lot of money if you learn to manage your portfolio like a pro.

Easier said than done ...
Of course, that collection of billionaire investors offers no clue regarding what strategy is most likely to make you a billionaire. Warren Buffett is a dyed-in-the-wool value investor. That strategy has helped him achieve annual returns greater than 20% for more than 40 years on the back of investments in boring companies with competitive advantages at value prices, such as GEICO and Washington Post. That investment tack continues in his company's portfolio today, with Tyco (NYSE: TYC  ) , Costco (Nasdaq: COST  ) , and CarMax (NYSE: KMX  ) among the company's current holdings.

Jim Simons, though, can point to greater than 34% annualized returns at his Medallion fund since 1982, net of what are believed to be some incredibly stiff fees -- though I've heard rumors that this has been a very tough year for Renaissance. He favors a mechanical strategy based on computer models that are constantly refined by an army of Ph.D.s.

So while there is no best strategy, important lesson No. 2 is obvious: You gotta dance with the one that brung ya.

Say what?
Colloquialisms aside, all of these investors are astoundingly successful because they've figured out how they make money best, stuck with their strategy in good times and bad, and refined their best practices over time.

Buffett was mocked during the technology bubble when companies that he avoided and professed not to understand as well as others, such as eBay (Nasdaq: EBAY  ) , were zooming to the moon. But they've come back to earth, and Buffett's still doing just fine today.

Icahn has a reputation as a corporate raider; he's made a lot of money instituting changes at underperforming companies. Although Icahn's recent efforts at Lear (NYSE: LEA  ) and Biogen Idec (Nasdaq: BIIB  ) did not end as well as he must have hoped, don't expect him to go soft. He's worth $12 billion. Why mess with success?

And Simons doesn't try to analyze businesses as Buffett does, because that's not where his expertise lies.

Mimic the masters
The secret to successful investing, then, is not found in any single strategy, but rather in picking the strategy that's right for you and executing it faithfully. As lauded NYU finance professor Aswath Damodaran writes in his book Investment Fables, "Each strategy has the potential for success if it matches your risk preferences and time horizon and if you are careful about how you use it."

That's it. That's the secret. Because if you get too cute -- chasing hot sectors, buying high and selling low, and giving yourself only six months or less to master a given investment strategy -- you're simply setting yourself up for failure.

Allow me to introduce ... myself
Of course, if you're looking for the right investing strategy for you, allow me to suggest our approach at Motley Fool Hidden Gems. There, we use bottom-up fundamental research to identify small companies that we believe will beat the market over time.

We also advocate diversifying broadly, using a buy-to-hold mentality, minimizing taxes and transaction costs, and adding savings to your portfolio on a regular basis. Taken together, we think this strategy will help you achieve your financial goals. If that catches your fancy, you can be my guest at Hidden Gems free for 30 days. Just click here for more information.

This article was originally published on Sept. 30, 2006, as "Join the Billionaire Boys Club." It has been updated.

Tim Hanson does not own shares of any company mentioned. Tyco and CarMax are Inside Value choices. Costco, eBay, and Biogen are Stock Advisor choices. The Fool's disclosure policy assures you that no stocks were harmed in the writing of this article.

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  • Report this Comment On July 13, 2011, at 10:07 PM, MichaelFinch123 wrote:

    I have watched and listened to many people since i was 10 i am 46 as of now tried to become a Billionaire since i was young lost all based on individuals Lieing ,Stealing, and not standing beside me when called on . Well These people had stand up people beside them some have Network Marketing companies under them that made them their money, Warren Buffett has several..Donald Trump is behind several companies even gets paid to give speaches . here are a few ways to get wealthy if you have money or time ACN business ownership through network marketing and now a third way is investments in Small cap issues pink sheet stocks always are very volatile yet they can make you large amounts , now if you get together with like minded people do a property deal developement you dont need to be a contractor to do this you just bring people together find property find architech then put before city or county council ordinences get a contractor to put down the electrical and pipes then sell parcels through a cooop of realestate Brokerage and realtors it takes some planning I can give you persons in California to reach you must tell them you were refered by me

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