LISTEN up! I will tell you how to do something that everyone assumes is impossible. You can make a lot of money with no risk.

TEXT/ILUUSTRATION: LARRY HAVERKAMP AND MAROO

How much? Potentially, all the money in the world.

It turns out that wealth is terribly concentrated. Of the six billion people on earth, the richest 2 per cent own 50 per cent of the world's wealth.

The bottom half - three billion people - have to scramble for only 1 per cent. Is that fair?

When running for office, US President Barack Obama tried convincing Joe the Plumber that he will benefit from a more equal distribution of wealth. He told Joe: 'When you spread the wealth around, it's good for you.'

Here are two ways to do it:

Governments do it right

US banks are now failing at the rate of two a week. The government assumes all or part ownership.

The US will take a 36 per cent stake in Citibank. It has acquired 80 per cent of insurer AIG. The UK owns 43 per cent of Lloyds and will boost its holdings in the Royal Bank of Scotland to 95 per cent.

Governments have two advantages in investing: First, their debt is risk-free which gives them an unlimited source of cheap financing, costing around 3 per cent per year.

Second, they have long lives and can hold investments for the long run, even hundreds of years.

Governments make risky investments with returns fluctuating from minus 50 to plus 50 per cent and averaging about 10 per cent.

Their holding power, however, permits them to ignore the yearly fluctuation noise and listen only to the 10 per cent long-run average.

It is a big advantage. It means the 10 per cent expected return comes with high risk in the short run. But it is zero risk for very long-run government investments.

In this way, governments unlock the mystery of how to get high returns with low risk.

To summarise: 3 per cent debt is used to buy a diversified portfolio earning 10 per cent. The 7 per cent difference eventually pays off the debt, after which it pays perpetual returns and becomes a money-making machine.

Another key benefit is that the owners are the country's citizens. Profits usually go to a handful of wealthy fat cats but when governments invest, profits go to all the people.

A few savvy countries have figured this out and set up sovereign funds to reap the benefits of government investing.

Our Government Investment Corporation and Temasek make up the world's third largest sovereign fund. First and second place belong to oil-rich Abu Dhabi and Norway.

ESOPs do it right

To use the strategy of sovereign funds takes a long-lived organisation that is also credit-worthy so it can get low-cost financing.

Employee stock option plans (ESOPs) meet the criteria. Through ESOPs, employees borrow money to buy shares in the company they work for.

Company dividends repay the debt, so the purchase pays for itself, like with sovereign funds.

Louis Kelso and Mortimer Adler pioneered ESOPs in 1958 with their book: The Capitalist Manifesto. It laid out a plan for redistributing ownership from absentee stockholders to the company's employees.

The first ESOP was in 1956 when workers acquired Peninsula Newspapers in Palo Alto, California. Since then, ESOPs have been used by hundreds of companies around the world, including Singapore.

Private capital fails

IN EARLY 2000, some Wall Street types decided they would take the sovereign fund model and put it on steroids for their personal benefit.

They borrowed at 5 per cent, invested at 8 per cent and earned a 3 per cent profit. Then they added leverage by using, say, $1 of their own money and $20 that was borrowed.

It magnified the 3 per cent profit by 20 times, giving a 60 per cent return on the $1 investment.

The trouble is it also worked the other way around. A small 5 per cent dip in returns would wipe out the $1 initial investment.

In this downturn, that is what happened to many leveraged hedge funds. It is one of the triggers of the financial collapse and recession we are experiencing now.  Back to Columnists