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Why “rich lists” should be just for fun

In brief

  • Rich lists are mainly subjective and entertaining, but lack any controls.
  • Accurately estimating an individual’s wealth involves numerous elusive variables. 
  • Most rich lists depend on publicly available “info”, which is often speculation rather than verified data. 
  • Some on the list may game these lists with their own cherry picked information, highlighting why these  rankings are of little value.

Entertainment, not evidence

Media is awash with “rich lists” that rank the wealthiest individuals globally, nationally, within an industry, etc. But, at their core, rich lists are similar to ranking the best songs or movies—subjective and mostly for entertainment. 

They invariably lack the rigorous methodology necessary for even a reasonable guess.

The complexity of accurate valuation

Wealth often involves numerous variables, including assets spread across several jurisdictions, debts that aren’t publicly disclosed, and fluctuating market conditions.

Accurately determining the  wealth of someone who is truly rich, say $100M plus, is often tedious and problematic, even with full cooperation from the individual. It  needs verified financial statements and qualified professionals. It could easily cost hundreds of thousands to assemble and verify the information. In extreme cases, for evidence that would be accepted by a court, it could be millions of dollars. 

Rich lists can’t possibly employ these rigorous methods. Most often, the figures presented in these lists are typically based on a combination of publicly available information (which is itself unconfirmed), estimates, and sometimes pure speculation. 

Perhaps a confidence level for each entry could provide more context but is rarely included. 

A wide range of plausible estimates

In some cases, valuators with all the information might agree within a narrow margin, say 10%. In other instances, estimates can be off by hundreds of percent. This discrepancy often arises from valuations of non-public companies or assets tied to volatile markets or possible commercial breakthroughs.

For example, a start-up touted as the next big thing might be valued in the billions of dollars based on future potential, but could also end up worthless if the technology fails. 

US start-up Theranos had a $10b USD valuation at its peak  around 2013, and this was based on supposedly sophisticated investors actually examining it. But it  collapsed to zero when it was discovered its breakthrough blood testing tech was just hype. 

Public companies can similarly see inflated share prices based on small trades, strange market circumstances or fraud, such that the share price becomes very disconnected with the underlying value. 

In early 2021, US video game retailer GameStop’s share price soared and fluctuated wildly due to it becoming a “meme-stock” among retail investors. This was lead by the now infamous Keith Gill (aka “Roaring Kitty”) trying to cause supposedly sophisticated institutional investors to lose on their short positions

Hollywood movies like The Big Short and Dumb Money well illustrate the issue.

The impact of debt and political risk

Debt plays a significant role in determining net worth. An individual with assets worth $500 million, but debts of the same amount, has the trappings of wealth but no net worth. These debts can include loans, lawsuits, tax claims, and other liabilities often hidden from public view.

Political risk further complicates valuations. For instance, a valuable business in Russia would have a risk discount even before Russia’s invasion of Ukraine.

Questionable valuations in the NZ Rich List

For an NZ example,  take the  Mowbray family (owners of Chinese toy manufacturers ZURU). Their wealth reportedly jumped more than fivefold in a year, to $20B, according to the National Business Review (NBR). 

This dramatic increase raises questions about how can last year and this year both be right? Such a discrepancy suggests a lot of this is based on belief about future prospects rather than solid current financial data.

The pros and cons of being in these Lists

Many wealthy individuals have no interest in appearing on these lists due to privacy concerns and the potential scrutiny from tax authorities and others. Conversely, some individuals seek inclusion for ego or to bolster their credibility which can help with things like vendors providing you terms.

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