Bad fortune: What makes the ultra-wealthy's biggest losers?

Dov Charney, founder of the now-bankrupt retailer American Apparel, and Sam Wyly, who has bought and sold a dozen companies over the decades, from computer companies to steak houses, were both larger-than-life characters with chequebooks to match.

But the two self-made men have something else in common. In less than 18 months, their individual net worth fell by more than 50 per cent, according to research conducted for The New York Times by Wealth-X, which provides data and insights on the world's wealthiest individuals.

They were not alone. Wealth-X found that from July 2014 to July 2015, 45 per cent of the ultrawealthy in the United States lost some part of their wealth; 11 per cent lost more than half of it. (During that same period, 12 per cent lost 25 to 50 per cent of their net worth; 22 per cent saw declines of up to 25 per cent.)

Dov Charney built a worldwide empire of 280 clothing stores, personifying the racy, risk-taking aesthetics of his business, but investors became skittish over his controversial persona. Photo: Keith Bedford

The reasons for the drop in wealth differed. But why so many ultra-wealthy people - defined as those with more than $US30 million - lost so much of their wealth so quickly offers lessons in financial management, no matter how much money you have.

Sure, this group still has a lot of money. But those who lost a lot of money made similar mistakes: Too much of their money was tied up in one investment and too little of their money was in cash or some other liquid investment. And too often, they didn't think enough about the likelihood that something could go wrong.

To put this loss of wealth into dollars and cents, the 11 per cent who were superlosers lost a total of $US760 billion in the 12-month period examined by Wealth-X, an amount that is more than the gross domestic product of Switzerland.

Facebook founder Mark Zuckerberg. Photo: Jeff Chiu

The average individual net worth of members of this group dropped to $US34 million per person, from $US133 million. The most common sources of wealth for these people who lost so much were finance and oil and gas.

These drops serve as a reminder that what goes up doesn't always stay up. And in an age when technology moguls are lauded for striking it rich quick - think Mark Zuckerberg - it's easy to forget that there are others from previous booms who are still rich but not as rich as they once were, like Steve Case of AOL and Craig McCaw, who sold AT&T, the company that became AT&T Wireless. There are still others whose wealth, big as it once was, is gone.

"A lot of people have this view that wealth is inherited," said Mykolas Rambus, chief executive of Wealth-X. "That's very much not the case." Most are successful entrepreneurs who built fortunes, he said. "Most of their money is in privately held companies, not your Googles and Facebooks."

Rapper 50 Cent has lost about $190 million in wealth since 2014. Photo: Jeremy Deputat

He said 75 per cent of the world's wealth, when real estate is included, was privately held.

In the period examined by Wealth-X, over-concentration and illiquidity were big factors when someone lost a fortune.

Curtis James Jackson III, better known as the rapper 50 Cent, was worth $US240 million in May 2014 and about $US50 million last month, according to Wealth-X. The precipitous drop in his wealth was caused almost entirely by the falling values of four of his companies, with interests ranging from clothing to film production. They declined to $US7.2 million from $US150 million in 12 months, according to Wealth-X's research.

The same could be said for Charney, who was ousted from his company American Apparel, which later filed for bankruptcy protection. His share of the company was estimated at over $US65 million in May 2014 and is now virtually worthless. At American Apparel's height, in 2007, Forbes put Charney's stake at $US550 million.

"Every financial adviser in the United States says you've got to diversify," Rambus said. "There is a lesson here about volatility and concentration. Rewind to the dot-com crash. There were plenty of folks who were seriously overexposed to tech and lost their shirts."

But there's a paradox here. Generally, it was over-concentration in one, illiquid company - whose value rose exponentially - that made people ultrawealthy in the first place.

In this, Zuckerberg may be a model. According to Wealth-X, he has a net worth of $US46.2 billion from his stake in Facebook, but $US1.1 billion of that is in cash and another $US108.5 million is in real estate - his home in Palo Alto, California, and land in Hawaii. With a rainy-day fund like that, Facebook could go the way of Myspace and he would still live well.

Market cycles were another cause of precipitous drops in wealth. William Herbert Hunt made his first fortune when he and his brother Nelson Bunker Hunt amassed 15 per cent of the world's silver in the 1970s - worth $US9.6 billion, according to Wealth-X. The brothers subsequently went bankrupt in 1980 when the price of silver fell 80 per cent and they were inundated with lawsuits.

Hunt went on to make another fortune, this time in oil. In January 2014, his net worth was $US4 billion; it was $US1.7 billion last month, because of the fall in global oil prices.

Joyce Chen, content marketing director at Wealth-X, pointed out that this time around, Hunt had far more money set aside, including some $US960 million in cash as of last month. He also transferred ownership of his Dallas home to his wife earlier this year.

On the positive side, some of the reasons that a person's wealth drops can be chalked up to the kind of estate planning everyone should undertake.

Pamela Diane Wright, an heiress to the Mars candy fortune, had a net worth of $US16.6 billion at the start of 2014. It fell more than 85 per cent to $US1.9 billion last month, according to Wealth-X.

Chen said the decline came from a decrease in Wright's ownership stake in Mars to 2.5 per cent, from 30 per cent, that was probably part of a strategy to shift her ownership to a younger generation. The Mars family was collectively still worth $US76 billion last month, which shows the power of properly structured trusts to hold on to wealth.

This same could be said for Gayle Karch Cook, who founded a medical device company, the Cook Group, with her husband in 1963. After her husband's death in 2011, she owned 80 per cent of the company. Her net worth was $US4.8 billion in October 2013 and fell to $US760 million in May.

In doing this transfer in her lifetime, Cook, 81, made sure that she had more than enough money to live out her days while getting her ownership interest in the company out of her estate, where it could appreciate and possibly lower her estate's eventual tax bill.

On the other side, those very wealthy people who maintained or increased their wealth this last year exhibited a series of traits common to any mindful investor: They were well diversified across real estate, cash and publicly traded securities, which insulated them from any volatility in the business that created their wealth.

As for Wyly, 81, his drop in wealth is a combination of selling out of businesses and running afoul of the Securities and Exchange Commission and the Internal Revenue Service. His net worth fell to $US470 million from $US970 million at this point last year.

But he is also under court order to pay $US198.1 million to the SEC as a penalty for hiding money in offshore entities and engaging in securities fraud. Perhaps the greatest risk to his remaining wealth is the IRS, which said in April that he owes $US2.03 billion in back taxes from his offshore entities. (Wyly responded by saying he had paid $US160 million in taxes over the last 22 years and that was enough.)

Chances are the IRS and Wyly will reach a settlement, but there will not be as much money to leave to his heirs.

"If you're looking for people in the gutter, this isn't exactly it," Chen said. Most, she added, are still quite wealthy.

The New York Times