How to make big money

By A. Gary Shilling

updated 2:01 p.m. ET March 29, 2007

An unprecedented number of Americans have received unprecedented incomes and accumulated unprecedented net worth in recent years. Sure, the gains are tempered by the reality that while the top tier is gaining, the income shares of the rest are falling. Many Americans have seen no purchasing power gains in decades, and they've only recently advanced because of the big fall in energy prices.

But lack of income didn't deter spending. In aggregate terms, spending has risen a half percentage point per year faster than after-tax incomes for 25 years, pushing the saving rate from 12 percent in the early 1980s to -1 percent today. Many financed their excess spending growth by tapping stock appreciation during the long 1982 to 2000 rally and, more recently, their house appreciation.

While Washington politicians and even Fed Chairman Ben Bernanke wring their hands over income polarization, we’re more interested in how the rich get rich. There are many strategies. A number are far from new, but have been pursued much more vigorously and with much more spectacular results in an era when extraordinary liquidity is readily available due to low volatility and low perceived risks. We've identified 11 different strategies that have stood the test of time.

Before examining each, however, we must point out that luck is often paramount, regardless of how sound or flawed the game plan. Being in the right place at the right time has made fortunes for idiots. Think of the dot-com speculator who only sold out in late 1999 because he was buying a McMansion for his new wife, and that house then doubled in value over the next five years.

Conversely, "the best laid schemes o' Mice an' Men, Gang aft agley, An’ lea’e us nought but grief an’ pain, For promis’d joy!" as Robert Burns put it. Bad luck can turn a surefire strategy into a disaster. Elisha Gray had the misfortune to arrive at the U.S. Patent Office to patent the telephone a mere hour after Alexander Graham Bell.

Furthermore, none of these strategies are surefire. As we’ll discuss, all of them have pitfalls, sometimes because they are so successful that they invite their own demise.

1. Government subsidies
Perhaps the most time-honored and surest way to make big money is the old fashioned way — skill, brains, luck, clairvoyance, hard work — and so much government support you can’t miss. Benefiting directly from direct government spending is obvious. What’s more subtle and therefore more interesting are the vast government subsidies.

MORE FROM FORBES Click the links below for slide show. Eight estate planning tools Eight dirt-cheap discount brokers Ten ways to improve your credit Top ten fidelity funds Ten most-popular discount brokers

Again, this is nothing new. The Homestead Act in 1862 gave free Western land to homesteaders both to relieve crowded Eastern cities and to populate the continent before European powers encroached on the U.S. The building of the transcontinental railroads in the late 1800s was subsidized by free land in one-square-mile pieces on alternate sides of the right of way in checkerboard fashion.

Ethanol is subsidized with a $0.51 per gallon tax credit, an import duty of $0.54 per gallon and the elimination of ethanol’s main oxygenate competitor, methyl tertiary butyl ether (MTBE). Some want more. The new 25-by-25 Renewable Energy Alliance of farm groups, hunters and fishermen and environmentalists calls for $64.5 billion in new federal subsidies to achieve its goal of producing 25 percent of the nation's energy from farm, ranch and forest products by 2025. The Department of Energy plans to provide $385 million in subsidies to six companies to produce biofuel alternatives to ethanol that will cost $1 per gallon.

But despite the current zeal for ethanol, it cannot be shipped by pipeline due to its corrosiveness, and the needed trains, tracks, storage tanks and loading and unloading facilities will be expensive. Add in the current high price of ethanol’s main feedstock, corn, at $4 per bushel, and the natural gas needed to convert corn into ethanol, and this fuel could not compete with gasoline profitably without huge government support.

Today, ethanol costs about $1.60 per gallon to produce. It normally sells at $0.51 per gallon more than gasoline, reflecting the subsidy, but now the spread is $0.45. And at $2.06 per gallon, ethanol ex the subsidies fetches $1.55, or $0.05 per gallon below costs.

2. Inheritance
You can always make big money by picking rich parents who die young, or wealthy and feeble uncles with no other heirs. For most, however, inheritance is not the route to riches. The fact is, parents are living longer and incurring more medical expenses before they die. A 65-year-old man can expect to reach 81 and a similarly aged woman is likely to live to 84. That’s almost two decades beyond normal retirement, and in that time high and soaring health care costs may well dissipate wealth substantially.

About 40 percent of those 65 and older will probably spend some time in a nursing home, and costs there can run over $100,000 per year. So most Americans will need to look at strategies beyond inheritance to make big money.

3. Little equity, lots of debt
You can make lots of money by investing with little equity and huge borrowing — as long as you’re right on the investment’s price direction. Real estate is obviously in this arena. Earlier, 20 percent down payments on houses were the norm, but they’ve shrunk to zero or even negative numbers with "piggyback" loans, second mortgages on top of the usual 80 percent first mortgages, which can take the total loan to more than 100 percent of a house’s value.

Example: If a house buyer puts down 20 percent and the price rises 10 percent, he makes 50 percent on his investment — excluding, of course, brokerage commissions and other closing costs, taxes, maintenance, utilities, mortgage interest, interest foregone on his down payment, etc. But with 3 percent down and the same 10 percent appreciation, the gain on his investment is 333 percent.

4. Leverage
Our third strategy, little equity with lots of debt, amounts to huge financial leverage. But leverage as a way to make big money extends well beyond the use of debt.

Example: Think about movies vs. stage productions. A play can only reach an audience of several hundred and must be repeated night after night by the same actors to generate much revenue. But movies are presented to unlimited audiences worldwide and, if they have legs, for decades to come. The same leverage and opportunity for big money exists for entertainment transmitted via CDs, DVDs, radio, TV and the Internet.

MORE FROM FORBES

Forbes Section Front

Christmas prices come early to Wal-Mart Some billionaires losing big in economic crisis Seven better uses for the bailout’s $700 billion Gates once again tops list of America’s richest Where home prices may actually ... rise? The world’s most powerful women Billionaires for the next generation The best U.S. cities for earning a living The biggest losers in the Beijing Games The least-expensive cars to drive Forbes Section Front