The surest path to success is Other People’s Money


First published in the Sunday Times on 31st January 2016.

MOST of those who become very rich share a particular secret about the accumulation of wealth: they use OPM. This stands for Other People’s Money, of course, and is a far more important tool than brilliant inventiveness, or hard work, or almost any of the other attributes that entrepreneurs are expected to possess.

In 1914, the US Supreme Court justice Louis Brandeis wrote in his book Other People’s Money and How the Bankers Use It that OPM is even better than having a goose that lays golden eggs, because it amounts to “taking the golden eggs laid by somebody else’s goose”.

There are certain lines of business that are built on OPM. Property is perhaps the most obvious, and is still responsible for generating more fortunes than any other trade. It all boils down to the ability to borrow large amounts of OPM — mainly bank debt — secured against land and buildings. In property, it is more important to know how to coax money out of lenders than to understand how to find sites, or design structures, or obtain planning permission, or construct buildings. It is all about leverage. As Archimedes said: “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”

Of course, banks are entirely composed of OPM — their customers’ deposits. There are basically no physical, productive assets in a bank, just deposits and loans. I sat on the board of a bank for a few years, and at heart the business is fantastically simple. But the industry suffers from having too many clever people working in it who get bored — and so they make it complicated, self-enriching and sometimes dangerous. Consequently, the regulators have added many layers of additional complexity to prevent impropriety and discourage excessive risk.

Meanwhile, many bankers still do pretty well out of the OPM they control. For example, Jamie Dimon, the chief executive and chairman of JP Morgan Chase, was paid $27m (£19m) last year — for being an employee.

Underwriting insurance is another financial service entirely dependent on OPM. Insurers receive premiums upfront and pay claims later; this means they sit on a float that, as Warren Buffett puts it, “allows us to enjoy the use of free money”. His company Berkshire Hathaway sits atop a float of at least $75bn, which he invests in all sorts of assets. As Buffett writes: “In effect, they give us the benefit of debt — an ability to have more assets working for us — but saddle us with none of its drawbacks.” No wonder he is one of the richest men on earth.

OPM drives the returns in all highly geared sectors. Shipping is one — most vessels are heavily funded by borrowings, and wily shipowners learn when to bet big using outside capital. As Aristotle Onassis, the most famous shipping magnate of all, said about his purchase of a series of ships: “Five tankers — and the only time I had to put my hand in my pocket was to scratch my balls.” Now is quite possibly a wonderful time to invest in bulk carriers, since they are at valuations last seen in the 1980s. But finding a source of OPM to complete the transaction might be tough, given the slump in demand for such vessels.

Another ingenious way of using OPM is to franchise or license one’s brand. Sir Richard Branson does this prolifically and very profitably with Virgin. Many of the businesses that appear to be his are in fact mostly owned by others — Virgin Active, Virgin Mobile, Virgin Australia and Virgin Money, for example. Branson charges fees for lending them the Virgin name.

In the restaurant sector many companies, from Subway to McDonald’s to Pizza Hut, are substantially franchised — using the OPM of franchisees and extracting lucrative royalties for the business format and name.

However, OPM does not just provide you with more liquid resources — you can take bigger risks too. Human nature means people are less careful with money belonging to someone else than they are with their own. In 1776, the economist Adam Smith warned in his book The Wealth of Nations that in a limited liability company the directors were “the managers of other people’s money”, and that they would never steward it with the “anxious vigilance” they would with personal cash. Negligence “must always prevail”, he wrote.

Ultimately, it’s a case of heads you win and tails the other people lose with OPM. And the greater the access you have to it, the more you can make such one-way bets. Sadly I have never been good enough at borrowing money. By contrast, many in the field of private equity excel at this special art. Unfortunately, their highly leveraged speculations can sometimes turn bad, but the really sharp ones then buy out their lenders for pennies in the pound – before turning the business round. I recommend trainee tycoons cultivate their ability to use OPM — it is the surest path to financial success.