The conservative should focus on diversified investing

But a risk-taker can focus on a concentrated portfolio, like an entrepreneur whose portfolio contains just one business: His own

A look at the Forbes lists of very rich people tells us very few reach the absolute top of the wealth ladder purely by investing, although the stock market usually plays a large part in the mega-rich success stories. Investment experts manage money. They can get very wealthy - names like Warren Buffett, Charles Munger, Rakesh Jhunjhunwala, George Soros and Jim Rogers come to mind.

But that is only one of many professions and businesses represented in the ranks of the really rich and there aren't as many pure investors as one would expect. The mega-rich consist of entrepreneurs who have built fortunes running some business or the other. The said business may vary widely. There are information technology mavens, pharma and biotech experts and others who have built science and tech research-oriented businesses. There are also fashion designers, jewellers, retail merchants, steel magnates, commodity miners, telecom operators, shipping barons, real estate developers and so on.

Despite the diversity, there is a common strand. The stories go something like the following: An individual had a bright idea, worked very hard to implement it, had a few strokes of luck and capitalised on those bits of good fortune. Once the business hit a certain size, it went public and the entrepreneur's stake multiplied in value. Or, the business generated enough excess cash flow for the entrepreneur to extend his or her interests into other businesses.

We have all read some of those stories and the stories can indeed be very inspiring and instructive.

But there is also a selection bias inherent to following only the lives of the highly successful, as everyone tends to do. These stories give the impression that mega-success is likely to come to somebody who has a good idea, works hard and follows through on it. This is simply not true.

There will be dozens, perhaps hundreds, of people who had very bright ideas and worked very hard but failed, or were only moderately successful. Even the most conservative and best managed of businesses can fail for reasons beyond anyone's control. Or, a business can be fairly successful, without going stratospheric. Every kid tinkering with computers in the garage does not become a Bill Gates or Steve Jobs. Every corner grocery shop-owner does not become Sam Walton.

Becoming mega-rich does involve a stroke or strokes of good luck somewhere along the line. It also involves being smart and committed enough to use luck, as and when it does come along. Those who receive that luck literally win the lottery. But becoming mega-rich is against the odds.

An investor is somebody who prefers to hold small stakes in multiple businesses. A sensible investor is, therefore, working with the odds. He or she assumes that some of the chosen portfolio will produce great returns, some of it will crash and some will chug along. On average, the returns will beat inflation by an acceptable margin. Add the power of compounding, and a stroke or two of luck, and the returns will multiply.

Another way of looking at this, therefore, is from the perspective of portfolio creation. An investor generally holds a diversified portfolio. An entrepreneur holds a highly concentrated portfolio containing only one business (his own). On balance, an investor with a diversified portfolio will usually do better than the one holding the single company. But there will be the outlying cases where the single business produces utterly spectacular returns and those outliers will beat the sensible investors.

That gives us an interesting and somewhat paradoxical template for success. If you are conservative and want to get wealthy without taking too many risks, you should focus on investing. Over time, a couple of multi-baggers will come along and boost your returns. But if you're a risk-taker and you want to get really mega-rich, focus on running your own business and get ambitious about it.