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3 Reasons You Shouldn't Invest Like Billionaires Do

By David Butler - Updated Mar 4, 2021 at 1:17PM

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You actually have some advantages over those with tons of wealth to invest.

A couple episodes of watching Bobby Axelrod on Billions, and we all want to be billionaires. When thinking about investing, it's pretty natural to think, "I'll just do what they do." While it would be nice, that's not entirely in the realm of reality. Sometimes you're better off not investing like a billionaire, and sometimes you're not even capable. 

1. They can afford more risk

There's a big difference between a billionaire putting $100,000 into a start-up play like Lucid Motors' acquirer Churchill Capital (CCIV), and the typical investor trying it. For billionaires, the risk/reward of that gamble is more favorable. They can afford to lose that money, without losing their ability to build wealth.

On the other hand, common investors making big bets on speculative plays are risking far more. Losing big money on speculative trades hinders you big time in terms of building wealth over the long haul.

Couple taking picture in front of jet.

Image source: Getty Images.

Take a 25-year-old with $20,000, for example. Risking $2,000 on a SPAC like Churchill Capital could yield big gains, or do detrimental damage. Watching 10% of your portfolio take a heavy blow, as we witnessed with Churchill Capital IV after its meteoric rise, hurts that person's long-term prospects.

This is not to say that Churchill Capital IV itself is a bad long-term investment. Merging with Lucid Motors creates a new play in the ever-popular electric car space. But it's still very risky to invest significant portions of your portfolio into something like this.

And if you have a smaller portfolio, you usually do have to make positions a larger percentage of your portfolio if you want to see meaningful gains. The same could be said of cryptocurrencies, or the wild ride of GameStop (GME -7.26%).

In this aspect, the game is unbalanced toward the upper class. $2,000 is not a lot of money to a billionaire. $100,000 is not a lot of money to a billionaire. They're both significant sums to someone of a more typical net worth.

2. You're actually more nimble

This is a positive one. When you have $500 million in Ford (F -3.20%) stock, it's a lot more difficult to liquidate your position. Dependent on the trading volume of shares, it can take more time to sell off your position if you've invested a large sum, making it difficult to move capital all at one price.

For those working with smaller portfolios, it is easier to move in and out of positions. While a long-term approach is still the wisest way to invest, it's nice to know that if things begin to turn south, you can make a change! Having 10% of a $1.2 million portfolio in a security like Ford is a lot easier to sell than having 10% of a $1.2 billion portfolio in Ford.

For example, I own shares in Valneva SE (INRL.F -4.15%), a biopharmaceutical company that has been working on a vaccine for Lyme Disease. Average trading volume over a 10-day period is 23,300 shares. Clearly you can't buy too much of this one and plan to have a lot of short-term liquidity.

3. You don't have the resources for what billionaires do

A lot of billionaire investors are usually tied into large firms like BlackRock (BLK 1.12%) or hedge funds like Bridgewater Associates. What's important to understand is that these people make the bulk of their money by being the managers of pooled assets. Even Warren Buffett started out managing partnerships.

Most billionaire investors make their money by offering their talent to others. Hedge fund managers, investment firms, advisors -- they all charge fees to invest their investors' assets for them. In turn, they can make millions -- and billions -- in fees.

Once Warren Buffett had made enough from managing outside investor capital, he dissolved his partnership and went out on his own to start buying actual companies. Berkshire Hathaway (BRK.B -0.33%) was a textile mill, which he converted into an investment conglomerate by slowly using its cash flows to purchase positions in other businesses. It's all a lot more complicated than purchasing index funds for your portfolio.  

The common investor doesn't have the resources to go out and buy entire businesses. We all wish we owned GEICO, but that's just not the world we live in. We also don't have the ability to manage outside capital.

Furthermore, investors with billions usually have teams around them, aiding in research and management. Ray Dalio might be the face of Bridgewater Associates, but that firm has over 1,000 employees going over everything -- economic data, buyside analysis, sell-side analysis, you name it. It's tough for the average investor to have the time and resources to do things on that type of level.

Don't sweat it

So, you're not George Soros. Life goes on. The good news is that quality research sources are more readily available than ever before. Even better, you can obtain diversified portfolios that will hedge risk and get you returns through the use of exchange-traded funds managed by the big players. The Motley Fool even offers subscription services like "Stock Advisor" that have track records of beating the market. You might not be able to invest like a billionaire, but that doesn't mean you can't be a successful investor.

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Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
$89.15 (-7.26%) $-6.98
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$309.17 (-0.33%) $-1.03
BlackRock, Inc. Stock Quote
BlackRock, Inc.
$618.35 (1.12%) $6.84
Ford Motor Company Stock Quote
Ford Motor Company
$12.42 (-3.20%) $0.41
Valneva SE Stock Quote
Valneva SE
$12.25 (-4.15%) $0.53
Churchill Capital Corp IV Stock Quote
Churchill Capital Corp IV

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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