Folks often think they must first know technical aspects of finance or they can't succeed here. No! It's just as good to learn to sell first and learn finance later—maybe better. One counterintuitive rule I learned from watching others navigate this road is:

Start by learning to sell. There's time later to learn finance and investments. Learning selling is like skiing—the younger you start, the faster and better you learn. But learning to analyze investments is like learning to hire people well—years of real-world experience make discernment easier. Time helps.

Learn to Sell. The Rest Follows.

Often young people want to start as hotshot research and investment analysts or portfolio managers—certain they'll be the next Warren Buffett or Peter Lynch—often naively disdaining anything sales-related. They almost never get their desired outcome. My advice to the young: Start by learning telephone sales—even if not investment-related. Here your youthful appearance won't hurt you. Then, move to in-person sales, first with simple, then more complicated products or services. Sales competence comes fast when young. But the ease of learning to sell drops steadily with age. People in their 40s who've never sold can learn, but it's harder, takes longer, and feels unnatural (like skiing!).

Product knowledge is less critical—can be learned fast as needed. Thirty years ago Ken Koskella, who originally built sales and marketing at Franklin Resources (he retired rich and now does stand-up comedy for fun—the old business guy in a suit joking about how old business guys are funny), taught me if you really know how to sell, you could be dropped into America's most remote town and make a living by the end of the week. Maybe not the living you'd want later, but you could get by—without knowing anything else beforehand.

Many think they don't need to sell—they'll start a firm and hire salespeople. On this road you simply can't hire and manage sales people well if you can't sell yourself. Won't work. This isn't a book on how to sell or manage sales (I offer a list of those books later), but one reason to learn sales is so you can hire and manage a sales force—key to many roads. Fact: Firms need salespeople more than they need 23-year-old ambitious but skill-less know-it-alls. Young folks on this road should learn to sell—anything—in their 20s, then sell finance products. You'll learn some finance naturally en route. In your early 30s, reposture yourself to plumb finance's analytical and technical depths. By then your extra real-world experience aids in learning finance.

Find the Right Firm

Any firm is the right firm if they teach you to sell. Big firms hire in volume. It doesn't matter much if it's Merrill Lynch, JP Morgan, or New York Life. Visit, interview, talk, and decide which one doesn't make you want to jump out a window before you've learned to sell. Or go with a boutique firm—every major town has them. Neither is inherently better or worse. Big finance firms regularly hire folks straight from college or with no real experience—in volume with a "throw spaghetti at the wall" mentality. If newbies flame out fast, no skin off the firm's nose. (This won't be you if you focus only on learning to sell.) For a more touchy-feely start, try a boutique. But learning to sell is key. For that, buy or borrow these books and keep practicing what they teach repeatedly:

Then you must pass licensing tests before engaging clients. The tests are customized—based on what you'll sell. They aren't hard—if you study—and you don't need a degree to take them. But beware: At many firms, if you don't pass the first time—sayonara.

Then it's selling time. And if you don't sell you'll soon be shown the door. Most firms have periodic quotas—you must bring in maybe $500,000 or so in new client assets monthly. Fail to do so, and you're history. This isn't to discourage you but to emphasize the importance of learning to sell. You may be a super market forecaster, but if you can't get clients to hire you, take a different road. Your firm should help with lists of names to call, but then it's up to you.

Next, what type of OPMer will you be? Consider two camps—commission-based and fee-based—defined by how you charge fees and maybe what you sell.

Commission-based OPMers—like stock and insurance brokers—sell products (e.g., stocks, bonds, mutual funds, even insurance) for commissions. What you earn all hinges on the sale. A client has $1 million. You sell him stocks paying you a 1 percent commish. You make $10,000. Keep finding clients and selling products—income keeps coming. The basic commission-based business model is:

You make what you sell. Want a $250,000 salary? With a 1 percent commission you must sell $25 million of products. How? Find 100 clients with $250,000 each, or 50 with $500,000! Your call. The drawback? Unless you get them to sell what you sold them and buy something new, you need another slew of clients next year. Your time is spent hunting for clients. If you're a great hunter, no problem! That's commission-based.

Fee-based OPMers—like investment advisers, money managers, or hedge funds—provide services for some percent of assets involved. Say you have 100 clients. Each invests $250,000 with you. You charge 1.25 percent per year (a typical fee for fee-based advisers). That's $312,500 in annual revenue as long as the clients remain. The more their assets grow, the more your fee does. If you keep your clients and the market helps out, you make even more next year! But you get paid less if their assets shrink. The basic fee-based business model is:

Your income depends on how much in client assets you gather, how well you do keeping clients, and what returns you (or your firm) makes for them.

Fee-based is where I started decades ago. It was simple and compelling. I knew if I could gain clients, net of terminations, at rate X percent, and grow their assets at rate Y percent, then my firm would grow at the rate of X percent + Y percent. So gain new net assets at 15 percent a year and grow assets at 15 percent a year—the firm grows 30 percent a year. That's hot. It's the Y in the X + Y formula that makes this OPM model so compelling. And my firm has grown at just above 30 percent a year for the last 25-plus years. If you can grow any business at 30 percent a year for 25 years without selling stock to outsiders, you end up very rich by anyone's standards.

Value the Business

So is it commission- or fee-based for you? To decide, think like a business owner. This is an exercise you can use many ways to figure what's worth what:

I've done this for you as an example. You can do it for any stock. Table 7.1 shows results for mutual funds—fee-based firms. Most fund families have ratios from four to nearly six. Legg Mason and T. Rowe Price are outliers. So the market says these kinds of firms are worth four to six times their annual sales.

Table 7.2 lists brokerage firms—commission-based. Note lower ratios—most under 2! Outliers are Charles Schwab and TD Ameritrade. (Schwab has a huge mutual fund business and is hybrid fee-based/commission-based.) The market values a buck of commissioned-based sales half as much as fee-based sales. The upside? Even medium-sized brokers are bigger than almost all money managers. The biggest brokers are almost 10 times bigger than the biggest money managers. There is vastly more business in the commission-based world, but it isn't as valuable. That's your tradeoff—more versus more valuable. (Note: Even before Bear Stearns imploded in 2008, it was still about as profitable as its peers.)

Ditto for insurance (Table 7.3)—even more commission-based than brokers. With lower ratios they're less valuable than brokers, but the potential business is huge. Smaller players in Table 7.3 have more total business than the biggest mutual fund families do.

Note: Huge insurers are older than most brokers and older still than money managers. So the trade-offs are size of opportunity versus value of revenue versus maturity. Think like an OPM founder-CEO. If a law dictated firms could have only up to $1 billion in revenue, no more, then hands down you'd want to be fee-based—the enterprise value would be so much higher. A small success in fee-based goes a long, long way.

This isn't to disparage insurance and brokerage—which have created lots of mega-wealth. Some see Warren Buffett (worth $52 billion)^[153] as an investor. He's really an insurance CEO. Berkshire Hathaway's profits come overwhelmingly from insurance. Buffett's unusual—the next-wealthiest insurance OPMer is Hank Greenberg, former CEO of AIG, net worth a big step down at $2.8 billion.^[154] Arthur Williams founded and sold an insurer to Primerica and is worth $1.8 billion.^[155] Ernest Stempel, a Hank Greenberg ride-along (Chapter 3), started AIG's life insurance division (worth $1.7 billion).^[156] Patrick Ryan ($1.4 billion) started a firm that became AON, America's largest re-insurance broker.^[157] But beyond Buffett, they don't compare to fee-based wealth—the top 15 listed below.

Beyond Charles Schwab, the only current Forbes 400 member coming from commission-based brokerage is Sandy Weill ($1.8 billion). But even he evolved out of it. Originally a straight-up brokerage firm CEO, and a dynamite one at that, Weill made his fortune parlaying that into Travelers, an insurer, which later merged with Citicorp to become Citigroup. His big wealth came at Citi on the CEO road (Chapter 2), not really from insurance or brokerage.

As a fee-based OPM founder-CEO, I'm not even successful enough to be among the 15 wealthiest fee-based OPMers. But worth $1.8 billion with my little firm, I'm just where Sandy Weill is and as high as anyone from insurance but Warren Buffett and Hank Greenberg. That's one attraction of fee-based OPM. You needn't be as big overall to be more wealthy.

Still, brokerage is lucrative. Joseph Moglia, TD Ameritrade's CEO, earned $62.3 million in 2007 compensation. Richard Fuld of Lehman Brothers got $51.7 million. And Bear Stearns' James Cayne got $38.3 million (before it blew up in 2008). Even Morgan Stanley's John Mack's $7.5 million is nothing to sneeze at.^[158] For huge wealth, fee-based is best. But to accumulate $2 million to $50 million, any form of OPM is fine.

Do you like huge risks and returns? Are you a maverick? Fond of big fees? Start a hedge fund. Hedge funds are known as the 2 and 20 model because they charge 2 percent of managed assets annually (i.e., give them $1 million, they take $20,000 yearly)—but also get 20 percent of annual gains! If you're good, lucky, or both, that adds up quick.

Say you make one bet—some stock category will beat the market in the next five years—maybe big stocks, energy, or drugs. You bet big on that. You manage $100 million with a 2 and 20 contract. Assume your bet averages 20 percent per year for five years.

Over five years, you get nearly $42 million in total fees! That's just on the assets you started with. Generate high returns and you'll get more clients with more assets.

Now, suppose you're a regular fee-based manager making the same bet—the assets still grow 20 percent a year for five years, but you charge only 1.25 percent a year.

After five years, you've made $10.8 million in total fees—good, but far from $42 million. Of course your clients came out ahead because you took less of their money in fees. But a hedge fund manager thinks, "Why not bet big for extra return?" If you're right, that 20 percent "carried interest" is huge. If you're wrong, you still collect 2 percent of the assets, annually. Amazingly, if you bet wrong you don't pay back 20 percent of losses! Of course, if you're wrong, it's your clients who suffer. To get big reward as a hedge fund manager you must take big risk. Smaller risk means smaller reward.

Hedge funds aren't new—they're just newly popular! Before 1940, swindlers would create two funds. With one, they'd convince half their clients XYZ stock would rise and buy XYZ. In the other fund, they'd convince clients XYZ would fall and sell XYZ short (borrow it, sell it, hope it falls, then buy it back lower, pocketing the spread and repaying the borrowed stock). Neither client group knew about the other. As long as XYZ was volatile, the two funds got 10 percent of that volatility. Clients who lost fired the swindlers and disappeared. Clients who won didn't understand it was a swindle and would actually give the crooks more money for another bet. This con was put out of business by the combined Investment Company and Investment Advisers Acts of 1940.

But you can take one side of a big bet on blind luck and hit big or go home. If you're unlucky, you end up on a different road soon. If you're lucky, I promise: Few observers will think it's just luck. You won't either. The best hedge funders aren't just lucky—they're skilled. But few hedge funds hit big. Most go home. This arena is sprinkled with spectacular successes, yet most hedge funds flame out fast. Few survive two years before all their investors redeem and disappear. I've known dozens of folks who started hedge funds—only two survived over the long-term. It's treacherous. Taking monster bets your career rides on is nerve-racking. Jim Cramer quit for just that reason. I've seen folks get a run for a few years and then everything blows up on them in no time—ending with nothing.

Bet on Hedges

Hedge funds typically operate in specific categories like convertible arbitrage, distressed securities, long/short equity, market neutral, and more. Investors can buy them in multiple categories and diversify (although investors who do this invariably get poor returns because you can't diversify widely, pay huge fees, and still end up ahead—see Chapter 10 on this relative to being frugal).

Hedgers also have varied hiring practices. To go this route, just apply everywhere—shotgun style! You can find endless names by doing a Google search—thousands. Most don't hire. Most are one person, with maybe $10 million to $40 million, operating by him- or herself out of the bedroom. But if you keep looking you'll find those that hire—they'll invariably be the bigger ones.

There's no security—a fund can blow up fast. I'm not suggesting this for a long-term career unless as a founder-CEO or ride-along. But it's a great place to learn and launch. Work there a few years. Learn what they do. Get the lay of the land. Then you can start your own.

Hedge funds are lightly regulated, so they're very easy entry. A law firm like San Francisco's Shartsis Friese with a hedge fund specialty can get you set up legally and take you through the rules like they're spitting out popcorn. (Follow this URL for more law firm hedge fund practices: http://www.hedgeworld.com/sp_direc-tory/search.cgi?category_name=3)

Then—and you may hate this—it's all about selling to get clients for your fund. The tactics of running a hedge fund are pretty generic. Pay attention to your law firm's do-and-don't rules and then find something you believe the heck out of in terms of doing well looking forward and bet the house on it.

Often people find one big anchor investor before they start their fund. Say you've been a Merrill Lynch broker with a client list totaling $100 million in assets. Among them you've got one big $40 million elephant you've served well and put tons of time into. People often decide they can make as much off the elephant in a hedge fund as everything else otherwise. So you quit, start your hedge fund with the one client as an anchor, and then try to build from there.

This whole process isn't much more complicated than:

Maybe the most successful recent young hedge fund manager has been Ken Griffin. Only 38, worth $3 billion,^[159] he started Citadel Investment Group in 1990 in a classic hedge fund format. Today he has teams in multiple categories taking big bets on tiny profit potentials, which he leverages heavily for big returns. He's a phenomenon because most who try what he's done don't just fail—they splat.

Even if you succeed, your future is uncertain. I've known Alex Brockman through his father since he was a boy—one of the nicest guys you could ever meet and very smart. Alex trades Latin American sovereign debt for Ken Griffin and gets paid super well for succeeding. But Alex knows he lives and dies by the sword. He made monster money in 2007—what he did worked—and Griffin happily paid for that. Alex knows he might not be there at all in 2009 if 2008 fares badly. The guy who introduced Alex to Griffin, Alex's original Citadel boss, is now gone—died by the sword.

My first example assumed no skill—just blind luck. Ken Griffin obviously has skill. Look back at the list of fee-based OPMers—this is how famous hedge fund managers (Soros, Cohen, Kovner, Jones, Simons, Shaw) made it—by and large taking big risk for giant fees. This requires toughness, as Eddie Lampert knows better than anyone. Lampert's currently worth only $4.5 billion, but he's young and could become worth much more. Known for his keen-value eye, he bought K-Mart—America's third-largest discounter—in a 2002 fire sale that most thought was doomed to disaster. But K-Mart turned around, generating huge returns for Lampert's ESL fund.^[160] (Again: One huge risk that worked.)

He almost didn't get the chance. One evening, just before then, Lampert left work. Heading to his car he was grabbed by four armed men, blindfolded, bound, and thrown into an SUV. He spent two days bound in a dingy motel bathtub. Lampert believed they would kill him, but remained calm. He noted they were disorganized. First they claimed they'd been hired to kill him for $5 million.^[161] No, they were to hold him for $1 million ransom.^[162] They were armed and terrifying—but also young and scared. Turns out there was no elaborate plan—the four thugs had merely Googled for local wealthy people and found Lampert.^[163]

Lampert tried negotiating, offering to beat whatever they'd been offered. He claimed they should let him go—that only he could sign for a big ransom check. But his chance came when he overheard them ordering pizza—with Lampert's credit card! He pointed out the police would be alerted to his credit card being used—hadn't they thought of that? The only way to avoid prison was to let him go—now—and run. Lampert reminded them he couldn't ID them—he'd wisely averted his eyes when they removed his blindfold for the one meal they offered him.^[164] Sunday morning they dropped Lampert off on a highway a few miles from his home. Until they left he still feared they might kill him. Lampert walked to a Greenwich, CT police station. They caught the thugs days later.^[165] Lampert could have panicked or given up. But he remained cool and attentive, thinking creatively of ways to extricate himself. Tough, cool, and collected! Like you must be to succeed in the hedge fund world! Are you that tough?

Akin to hedge funds is private equity—also with a 2 and 20 fee scheme. They take over troubled publicly traded firms and fix them to later sell at a profit. These are often called leveraged buyouts. You do the takeover, maybe bring in new management, lop off losing divisions, fund winning ones, and maybe go public again later at higher prices. Done right, it's super profitable. Part of this is knowing how to borrow well. Another part is the skill to spot troubled firms that can be bought cheaply, because no one sees potential, but can be fixed and profits boosted to fat levels compared to interest costs incurred with the buyout.

Recent years have seen record buyout activity—making private equity firm partners huge bucks. Kravis, Kohlberg, and Roberts (KKR) had a busy 2007—offering to buy TXU Energy for $45 billion. Co-founder Jerome Kohlberg ($1.5 billion) is no longer with the firm, but both Henry Kravis and George Roberts are, with matching $5.5 billion net worths. Another group taking advantage of the times has been Carlyle Group founders— William Conway Jr. ($2.5 billion), Daniel D'Aniello ($2.5 billion), and David Rubenstein ($2.5 billion).^[166]

Corporate Raiders Lead to a Better World

The media paints these OPMers as greedy scumbags, but why? The stock can get a nice price bump when deals are announced. This is capitalism's Darwinism. We all benefit from improved efficiency, productivity, and innovation. We don't always get a better company after these deals. Things can go wrong, but the acquirer better make a good go of it or they'll be history too. And CEOs of lackluster public companies not wanting to be acquired (and unemployed) know they'd best improve or be history too, adding incentive for corporate productivity, which benefits employees, shareholders, customers—everyone.

It's fashionable to skewer these OPMers for their super-sized incomes. (If the media's hot over some group's pay, you know you've found a righteous road to riches.) Mr. Kravis unexpectedly found himself starring in a mockumentary—The War on Greed, Starring the Homes of Henry Kravis—supposedly a "light-hearted" look at the "excesses" of private equity. It juxtaposes Mr. Kravis's homes against the modest abodes of "Average Joes" while detailing Kravis's earnings.

Mr. Kravis is mega-wealthy—no crime there. (If you see wealth as a crime, you need a different book. Try Free to Choose by Milton Friedman.) Robert Greenwald, the film's director, said "I saw the numbers of what the guys make, I truly did not believe it. I thought they were a mistake. I'm a New Yorker and this sort of egalitarianism is built into many of us."^[167] Folks like Greenwald who object see big earnings as "unfair." If Mr. Greenwald wants "fair," he should check out Cuba or Venezuela to see how "fairness" really works. Just working at these firms isn't a bad career. There are lots of Alex Brockman equivalents—and lots of rich ride-alongs (Chapter 3)—and those just making fat salaries who take the Road More Traveled (Chapter 10).

With OPM it's crucial to get that you never break the law. OPMers sometimes forget. Cheaters may get rich, but they don't stay rich. Some OPMers may get wealthy legitimately, then cheat. Some cheat to get rich. Either way, they won't stay wealthy. It's not just illegal and immoral; it's also bad business.

Those stretching morality come in various flavors. Dick Strong comes to mind: former CEO of Strong Capital Management, a once thriving mutual fund firm started in 1973, now history. By 2003 he was number 318 on the Forbes 400, with an estimated $800 million net worth. By 2004 he was toast. Regulators honed in on Strong, who had been short-term trading his own funds for his own account—not explicitly illegal. But a mutual fund CEO doing it on a non-disclosed basis at the expense of fund holders would irritate regulators. It moves to dead wrong when based on inside information—as Strong allegedly did.^[168]

When the scandal broke, Strong stepped down—too late. The firm couldn't survive—Wells Fargo bought it at a huge discount and dropped the Strong name. Was his "stretching" worth it? Never is. His trading scheme netted him a reported $600,000.^[169] This "gain" was probably the most costly gain in recent public record. Between the fines and decimated value of his firm when sold, Strong retained only a fraction of his prior wealth. And he was banned for life from the industry. Decimated, banished, name ruined, and a fraction of his worth. Ugh!

Then came Alberto Vilar, a villain who seemingly set out to cheat. He was capable but also twisted. I'd see him around in the early days when we were both first building our firms and would be in the same venues, seminars, conferences, competitions, etc. We'd chat. Something about him bristled. Too haughty, rigid, and regal! The women he dated were too young and pretty—showed too much skin. At least my wife thought so—said he gave her the "creeps."

He bragged of all the super-successful start-ups he helped fund—like Intel. It was unclear what was true versus not—it just sounded too much. He boasted of growing up privileged in pre-Castro Cuba, then being impoverished when Castro seized his family's assets. But his closest friends later recounted that as fiction—he grew up in New Jersey.^[170]

His investing stories were stunning too, as were his late 1990s tech returns. In 2004 he ranked 327 on the Forbes 400, with an estimated $950 million net worth.^[171] But his firm wasn't that big. At its peak in 2000, it managed only $7 billion. By 2004 it imploded to under $1 billion. Use the tables earlier in this chapter—at the peak you don't get near $950 million. He convinced folks (including Forbes) he owned lots of securities outside his firm—worth much more than his firm. Some people are. But an insider's rule about the Forbes 400 is the Forbes folks are skeptical of those trying to get on the list. They know they're usually worth less than they say—maybe lots less. That was Vilar. Still, he was convincing.

Vilar was a huge opera patron. Over the years, it's estimated he gave beyond $300 million to the arts.^[172] (However, some, if not much of it, may not have been his to give.) When Vilar's tech-heavy funds lost over 80 percent during the tech crash, he delayed millions in pledged donations to the Metropolitan Opera House. (They'd already put his name on the building!) Investigators came looking. He was charged with mail fraud in 2005. He, who claimed to be mega-rich from investments outside his firm, couldn't make $10 million bail.^[173] In my opinion, much of his net worth, like his background, was fiction—what he hadn't fabricated he'd given away to the opera.

And in a still-pending lawsuit, it's alleged Alberto embezzled those opera pledges from clients! It's hard to see that suit getting far since Vilar is penniless. No money to win. His performance may not have been up to opera standards, but for a long time it gave him a grand lifestyle. My wife of 38 years still wonders what his hot young women with excess skin showing think now. There are more Vilars. Don't be one.

True Villains

The occasional Vilar-like villain may hit the Forbes 400 briefly before blowing up, but most evildoers get caught long before then. Frank Gruttadauria was. He's doing time for copping maybe $300 million in client funds, plus perjury, obstruction, bribery, and racketeering—even an escape charge!

As a Lehman Brothers branch manager in Cleveland, Gruttadauria basically ran a Ponzi scheme, targeting mostly elderly clients. Clients deposited money that he transferred to accounts under fictitious names—for 15 years! Clients never knew because Frank doctored fake statements, inflating account values. Who complains when statements show huge growth and no losses? When clients wanted withdrawals, Frank wrote checks from other clients' accounts. Meanwhile, Frank enjoyed country clubs, a ski condo, a private jet, and a mistress.^[174]

The Internet Age did Frank in. He told elderly clients Lehman had no online access. One relatively Web-savvy grandma wondered why her account wasn't being impacted by the tech crash.^[175] She led clients in an online charge and they found their accounts empty—despite monthly statements showing, in some cases, millions. Because Frank had faked documents for so long it was hard to know how much he stole—investigators estimate at least $40 million from 50 different clients. But because of the doctored returns, clients believed they lost much more.^[176] He's now serving seven years.^[177] Orange ain't beautiful.

Warning: This road can make you unpopular. Sensational stories like Vilar and Gruttadauria are fortunately exceptions—but their existence is a reason this road's big bucks make it a hot Hollywood target, proliferating the bad-guy image in our culture. Movie villains are often rich Wall Streeters, cruelly enriching themselves off the poor proletariat. OPMers aren't movie heroes. Hollywood and pop fiction are littered with villainous OPMers: Boiler Room, American Psycho, Bonfire of the Vanities, Rogue Trader, Ghost, and the granddaddy, Wall Street—all movies featuring Wall Street villains. Even Trading Places, an otherwise hilarious movie, implies rich OPMers are crooked. Precious few are.

If you succeed on this road, you subject yourself to being degraded by social stereotypes. Some folks may not like you. But successful OPMers don't place high value on social acceptance. They place high value on capitalism. They operate close to the heart of the capital markets pricing mechanism and live and die by competitive forces. This is a great road to mega-wealth. I know. I've lived it all my life. It's a wonderful world where you get rich by helping others get richer. It's a world you can be proud of. It's also a world where many will assume you shouldn't be proud. If you're tough like Eddie Lampert, but won't become a villain like Alberto Vilar, and you want to be rich pretty easily—or put yourself where most of the richest are—OPM is, in my view, as fine a road as you can choose.