In 1932, Ben Graham asked a tough question: “Is American Business Worth More Dead than Alive?”. At the time US and the World were struggling through the depths of the Great Depression. The 1929 and 1930 stock market crashes left anyone with a sense of reality discouraged with stock exchange.
But Ben Graham, then a small investor with a brilliant mind, noticed something interesting. The stock market crashes left companies deeply undervalued. The companies were worth more taken apart than sold as a whole. They struggled with banks that not loaning them money and investors far too prudent.
30% of all listed companies had a larger value disassembled than sold as a whole. Their net quick assets (cash, marketable securities, and accounts receivable minus current liabilities) were worth more than the value investors were willing to pay for. Mr. Graham basically said: it’s now safe to invest again.
It’s 2014 and now we wonder how technology companies are evaluated. We strive to understand how something so seemingly small and useless as messaging app, a social network and an electronic market can be so highly valued. If Ben Graham would look at Amazon, would he decide to buy? Well I don’t know about the messaging app or the social network but if it were for the electronic markets, I bet mr. Graham would say: it’s now safe to invest again. Below you’ll find out why.
The Prodigal Student
Ben Graham lived until 1976. Although definitely not a poor man, he didn’t die a very wealthy one either. He had no problem ensuring his wealth increased steadily but he was more fond of reading Proust in French and Plato in Latin than gathering fortunes.
It was one of his disciples that reminded the world about Mr. Graham. It was this disciple, the worlds richest man for a very long time, that made Ben Graham famous, repeating his mentor’s name every chance he got.
Warren Buffet made his first investment when he was just nine. He ran his own business by the age of 14. He was a millionaire by the age of 32. He tried to get Ben Graham to hire him for years until the mentor finally accepted he was ready to join his company.
He than evolved continuously. Using Graham’s method he increased his fortune by the year. There were of course setbacks but he managed his money and his partners’ like no other.
But there was something Warren was not fond of: technology. He refused to be one of the early investors in Intel because he just didn’t understand technology. He was more focused on long term companies that he understood. Amid the Dot Com Bubble, when everyone was rushing in to buy tech stocks he said:
“Technology is just something we don’t understand, so we don’t invest in it.”
They laughed and they lost. The Oracle of Omaha, as mr. Buffet is often called in media, was right again. He left the bubble unwounded. An than he bought tech stocks.
Warren Buffet invested in IBM and Intel. These companies fit his principles. They were strong companies, that he could expect to own indefinitely. They survived the hype and escaped stronger.
Fairness and the money
Fairness is a concept that sometimes eludes our understanding. At least most of us. Warren Buffet is not like most of us. He was able to see beyond the hype when tech stocks were overvalued and he was able to see beyond the public opinion when important matters were disputed.
He and his wife were one of the few anti – segregation militants in Omaha, back when rasial differences were the norm. He fought strongly anti – semitism in his hometown. He pledged $31 billion to charity and now he is one of the strongest advocates of increased taxation on the rich.
“So let’s forget about the rich and ultra rich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased,” he said. “The ultra rich, including me, will forever pursue investment opportunities.” Warren Buffet
Warren Buffet was never an elitist. He believed everyone should have equal opportunities at pursuing his interests and he stands even today as the living proof fair opportunities make up for very successful people.
But for the recorded human history, wealth has been unequally spread. From the dawn of man kind, through the Roman Empire, the Middle Ages, the Industrial Revolution, one thing was constant: wealth is not distributed equally. For a very long period of time also wealth (especially inherited) also mean life opportunities.
Here’s how we perceive wealth disparity right now:
The long story short:
- wealth is not distributed equally
- not only is wealth not distributed equally, but it is actually in the hands of those that don’t deserve it
- the distance between the lowest paid and the highest paid earners is absurd
Wealth Distribution 1983 – 2010. Source: Professor G. William Domhoff, University of California.
Wealth disparity may indeed be a problem. If it meant the poor stay poor and the rich stay rich forever.
But it’s not really that way. At least not anymore.
In the past 20 years the top 1 percent increased their share of total net worth from 33.8% to 35.4%, with a peak of 38.5% in 1995. The next 19 percent increased their share of total wealth from 47.5% to 53.5% and all of these at the expense of the bottom 80%, who lost a 7.6% share of total net worth.
The rich 1% didn’t get much richer. The rich 20% got richer on the expense of the poor. It’s not the rich that take away from the poor. Nor is the middle class disappearing . The middle class is getting a lot richer.
There is a rich 1%. It’s just not who you think it is.
Think about it for a second. Are these categories fixed? Are people in the bottom 80% destined to remain there? Are the top 1% staying there forever?
The previous two examples, Warren Buffet and Ben Graham, although not dirt poor, did not come from rich families. Sure, they were not starving (well except Ben Graham, at an earlier point in his life), but they were definitely not rich.
Yes, Warren Buffet’s father was congressmen for 4 terms, but he did struggle at length in his youth to keep the family finances afloat. Through extensive work he managed to provide a decent lifestyle for him and his family, and thus young Warren was provided an opportunity to put his outstanding mind at work.
So did Ben Graham. His mother inherited a decent fortune from his father but lost it all in 1907, when he was just 11 years old. What he did receive was a brilliant mind and before 25 he already had a $500 000 small fortune.
It’s not inherited wealth. Graham and Buffet improved their financial status with as a result from their innate intelligence and hard work. They did not receive a fortune. They received a fair chance at earning their fortune.
They’re not the only ones. Forbes top 10 richest people are similar cases:
- Warren Buffet was born in a middle class american family, earned his wealth through heavy saving and intelligent investments. Worth $60.3 billion.
- Carlos Slim was born to immigrant parents. Slim was early to invest (bought first share at 12). His story is a lot similar to Buffets, although he came from a much poorer background and in a poorer country. Worth $72 billion.
- Amancio Ortega, founder of the Zara brand and – was the youngest of four children. His father – a railway worker. His first job, at 14 – shop hand for a local shirtmaker called Gala. Worth $65.3 billion.
- Ingvar Kamprad – founder of IKEA – was raised on a farm. He started business as a little boy selling matches to locals. Worth $52.8 billion.
- Larry Ellison – founder of Oracle – son of an unwed mother and an italian pilot. He was given for adoption at the age of 9 months. Worth $43.3 billion.
- Sheldon Adelson – business magnate – his father was a taxi driver and his mother ran a knitting shop. Worth $37.5 billion.
And they’re not the only ones. Have a look at Forbes top 400 richest people and you’ll notice the self made billionaire is not the exception. Out of 400 richest people, 386 were self made. That’s an astonishing number. 96.5% of the richest 400 are self made.
So it is not inheritance that builds fortune. It’s sometimes the opposite. As numbers would have it wealth is a result of fair opportunities, a brilliant mind, drive and hard work.
Well … at least if you’re lucky enough to be born in the US.
The opportunity disparity in the world
In the past, before the airplane, the radio, the telephone and eventually the internet chances looked pretty grim for those born outside rich countries. Capital was scarce, life was hard but most of all education was a real problem.
Starting with the industrial revolution, unless you were born in the Western Europe or the Western Offshoots (United States, Canada, Australia and New Zealand) your chances of getting a decent lifestyle were slim to none. Getting an education – even worse.
So if you are reading this from a computer in the western world and you are complaining about the 1% stealing your wealth know this: 96.5% of Forbes 400 are self made. You have an equal opportunity at getting rich.
Those born outside don’t have this opportunity. Or do they?
Technology made Western World rich
As the world moved from the pre-industrial to post-industrial era some won and some lost. Income grew and grew, helped by the magical vector of technology. Human workforce was replaced by exponentially growing human ingenuity.
The working hand was replaced by the steam-powered machine. Carriages were replaced by cars, trains and railways. Houses were replaced by steel and concrete behemoths. In the western world people were no longer working the fields but rather in factories and offices. Capitalism fought and (relatively) quickly replaced all other economic ideologies.
Marketing and advertising were born to help sell excess production. The stock markets were fueled and exploded. Multinational companies roamed the world to sell the products the West could make better, faster and cheaper.
Technology patents piled up until masses of workers became nothing but managers, lawyers, tradesmen, pencil-pushers. Those brilliant enough to harness the power of technology and improve their peers’ lives were rewarded with vast fortunes.
The temple of the mighty dollar discovered and pushed new concepts and new ways of doing things, growing faster and faster apart from the rest of the world. Until it built the personal computers and the Internet.
The Internet leveled the playing field
When the Internet came online it was a military application. It quickly evolved into an academic research network that spread throughout the world. There weren’t too many people willing to bet big on its economic impact yet the internet economy is now expected to reach 4.2 trillion by 2016.
Robert Lucas, Nobel Laureate
Nobel Laureate Robert Lucas stated that economies that are at the forefront of economic and technological development will grow by approximately 2% per year. Those below them are usually kept below by what he called “technology frontiers”. Advances in genetics, IT, robotics and others that help labor and capital be more productive, are technology frontiers. Once technology frontiers disappear, lower economies will grow 2% + an additional growth rate determined by the income gap between itself and the richest country. So – the later the technology frontiers disappear, the bigger the income gap. The bigger the income gap, the faster the growth. The world tends to balance inequality.
Countries that are later to develop can adopt new technologies easier and the main factor that helps emerging markets evolve is technology and education.They can freely adopt and integrate these, without having to go through the research and developed the countries at the top of the food chain had to.
Even though countries may start development later, they tend to reach the same point in terms of income.
Internet made everything easily accessible. It quickly became the gateway for anyone willing to access the sum of all human knowledge. Western colleges now post courses online free of charge. Online academies help students become specialists in any desired field, ranging from business, to communication to computer sciences.
In a simulation of Lucas’s model (on the left) you can see how countries that are later to break through technology frontiers are also those with the fastest growth. For most countries the bulldozer that broke through the technology frontiers was the Internet.
With the widespread adoption of the Internet, global opportunities shifted quickly. Countries that were previously kept in the dark by economic conditions, lack of education and poor access to information now had a fighting chance. They were no longer tied to menial jobs and export of raw materials. Giant leaps were made in the past twenty years in terms of global access to information and decreasing the opportunity gap between the Western Countries / Western Offshoots and the World.
Jan Koum’s rags to riches story is deeply iconic on how much the field was leveled in the past years. He grew up in a village near Kiev, Ukraine. He lived through poor conditions until he put his skills to use in the US. Just as his country was being torn apart by an anti-government revolution he sold his company, WhatsApp, becoming a billionaire at just 38.
And it’s not just software, code and people. Goods are quickly moving from country to country, continent to continent. All due to the new electronic markets, enabling global access for small to medium producers and retailers.
Companies such as Amazon, Ebay, AliBaba.com are connecting the world and taking out the middle man. With less losses on the way to the end consumer, products are cheaper and competition is itself leveled. Everyone gets an equal opportunity and a decent start.
The electronic markets are changing commerce for the first time in human history
Take China for example. It was pretty late to the party in terms of economic development. When it did start to grow, it took the world by storm.
As for electronic markets, China hadn’t had to invent or discover the internet. It just adopted it. It made a great leap forward in terms of manufacturing. It made an even bigger leap forward when it comes to e-tailing and electronic markets:
China’s compound Growth rate, 2003-2011 – 120% . China grew 7 times faster than the US.
If you look carefully at the China’s e-tailing market growth, the growth rate it’s pretty similar to Robert Lucas’economic growth theoretical modeling. China’s quick adoption of ecommerce as a means to get a larger retailing coverage was a breakthrough in a very important technology frontier: electronic markets.
AliBaba.com compared to Amazon and Ebay
It is estimated China’s internal ecommerce market will reach $655 billion by 2020. The figure, as astonishing as it may seem, is dwarfed by AliBaba.com’s sales figures.
AliBaba.com, China’s main ecommerce company, is focused on B2B / C2C transactions between Chinese manufacturers and the rest of the world and it reported gross sales of $170 billion in 2012. That figure has only been ever reported by two companies: Walmart and AliBaba. It was founded in 1999 by 18 people and an initial investment of 22 million dollars. Now it is the largest ecommerce company in the world and quickly becoming an unbeatable force in retail as a whole.
The company is a prime example of how a previously complicated international supply chain can turn into a click of the button. AliBaba is responsible for developments in key areas of China’s economy:
- increasing exports by connecting manufacturers and retailers (B2B)
- improving retail coverage for the internal and external customer (C2C)
- improving Chinese suppliers reliability and accountability through its certification programs
Companies such as AliBaba, Amazon , Ebay are supplying the world with something it badly needs: equal opportunities. With electronic markets easily available and growing fast, people all over the world are starting to have, for the first time in history, equal chances at attaining success.
It’s not Equality, but Meritocracy is as good as it gets
By empowering individuals to access the same wealth of possibilities, the new tech companies are changing the way we think of human development.
Our history has been sadly occupied by mostly dynastic forms of leadership. Aristocracy, brute force ruling, totalitarian states have one thing in common – unequal opportunities for those that deserve them.
Marxism brought a fake yet inciting concept: that all man are equal. Indeed we are all created equal. We should have equal opportunities. But perfect equality is neither attainable nor fair. Even among equally gifted individuals, drive and hard work can shift the balance more than we care to admit.
Equal access to opportunities is needed and desirable. We have to make it possible that even if the future cancer – curing Nobel Laureate is born in a poor village in Africa, he has the chance to rise. Even if the physicist that will invent faster than light travel will be born in a poor family, he has the chance to reach his full potential.
Our electronic markets are so far the only way we can ensure equal opportunities to all mankind. What made Warren Buffet rich was a brief period of time when stocks were great to buy, his innate intelligence, his access to the best information he can get, a close relationship to an intelligent mentor. And hard work.
Beside innate abilities that turn out to be not so important, everything else above is now available or shortly be available to each citizen of the world.
Companies that are building electronic markets are not overvalued. They are a new breed of companies that work for the betterment of mankind. Knowingly or not. That’s why we need to look at them not from the previous brick and mortar, asset only point of view, but a new one. We need a perspective where we look at a company and choose to invest in it based on a simple question: “Does this company get us closer to an equal opportunity world?”
It’s not all good …
However – be sure equal opportunities do not mean equality. Man was not born a machine. He is a creative force of nature and as long as it will use his creativity and intellect, opportunities will be used.
Unfortunately a dark veil has been pulled over, at the dawn of our productive society. Many of us still act as if we depend on simple, repetitive jobs to make a living. Whether it is our instincts fighting the technology we hardly understand or a self perpetuating fallacy we must stop trying to act as machines.
The world is potentially free. We must leave all repetitive tasks to technology and become the creators we are able to become. Those that fail at this will be the 80% struggling tomorrow.