America’s Greatest Wealth Creation Engine
John Mauldin's Outside the Box

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Those who know me well know that I am in incurable optimist. I think the world is going to be better in ten years than it is today. I thought that 20 years ago and 10 years ago and expect to think that 10 years from now. Part of that reasoning comes from the accelerating pace of change in the technology world. The next 10 years will see more change than the last 20-30 years combined!

And that means opportunity. Yes, with ups and downs and twists, but opportunity nonetheless.

This week’s Outside the Box is a short essay from my friend Alex Daley who writes the letter Casey’s Extraordinary Technology. I have had the pleasure of spending time and corresponding with Alex, and he is one of the smartest guys I have ever met. Alex had a VERY senior position at Microsoft and has a serious range of experience. In his varied career, he has worked as a senior research executive, a software developer, project manager, senior IT executive, and technology marketer. Aside from his technological prowess, Alex has been involved in numerous startups as an advisor to venture capital companies and a successful angel investor in his own right, with a long history of spectacular investment successes. Every month, he analyzes and recommends the best tech stocks to get in now – from biotech firms to cyber-security providers with innovative solutions.

You can get a free trial subscription to his letter, which I find very valuable in keeping me up to date on what is going on as well as providing some direction (his portfolio has done well!). Click on the link if you are interested. Read more here.

Your paying attention to tech analyst.

John Mauldin


America’s Greatest Wealth Creation Engine

by Alex Daley and Doug Hornig

To judge by the headlines, you might think we Americans have lost the ability to create wealth.

The stock market is floundering, even after flatlining for a decade. The overall economy is in the doldrums. Domestic heavy industry has all but disappeared. Real estate has crashed. The airlines, the automakers, the banks, all have gone to Washington, begging bowl in hand, demanding handouts from a government that, like the average citizen, is drowning in debt.

Bad news abounds, no doubt. Yet, amid all the doom and gloom, it’s easy to overlook the fact that the real engine of growth in the modern world is chugging right along.

Easy because many investors have turned their attention intently in the direction of interest rates and housing starts and the pontifications of Ben Bernanke, failing to notice that one of the markets they left behind is now leaving them behind.

Over the past decade, while the overall market was weakly limping along, these companies have been steadily growing revenues, adding jobs, and spewing profits. At the same time as brash startups were reinventing news, entertainment, communication, medicine, and virtually every other aspect of our work and home lives, promising to deliver still more growth even in this weak economy.

We’re talking about technology, of course.

Technological development is impersonal and implacable. It cares not who controls Congress or chairs the Fed. It has been the stuff of American life for a century – from the assembly line to the smartphone. Most importantly, it’s done what a successful segment of the economy is supposed to do, bring about prosperity by adding to the tangible wealth of the country.

And it did so the old-fashioned way, by creating things useful to society.

It made money for the innovators who were able to parlay their intellectual property into products that people wanted to buy. It made money for the people who worked for the innovators. It made money for companies, and their employees, that increased efficiency by integrating technological advances into their businesses. And it made money for investors who backed the leading lights in the field.

Tech, in short, has not only raised everyone’s standard of living, it has created wealth. Lots of wealth. And it continues to do so today, right through all of our economic turmoil.

One incredibly simple measure of the prosperity created is market capitalization, the sum total of the wealth held by investors.

Thirty years ago, in 1980, the entire stock market boasted only three mega-companies, i.e., those with market caps in excess of $40 billion (the equivalent of $100 billion today, in inflation-adjusted dollars): Exxon, IBM, AT&T.

Those three are still with us, and all still boast $100B+ caps. But they are joined by no fewer than 21 other U.S. companies. Taken together, the 24 have a collective market cap of $3.8 trillion.

Technology allowed this to happen.

Consider that in 1980, five of the top 24 – Apple (#2), Microsoft (3), Cisco (15), Google (19), and Oracle (23), tech companies all – either hadn’t gone public or didn’t even exist.

Intel (21) was around, but almost no one had noticed. IBM (7) was an industry leader then, but only as the primary maker of clunky mainframes. Hewlett-Packard (24) had yet to introduce either inkjet or laser printers. Walmart (4) was still dreaming of the ultra-efficient, automated distribution system that would transform its business.

The contrast between the old and the new could not be more stark.

From the 1980s to today, General Motors has slid steadily downward, racking up billions in losses that culminated in a painful bankruptcy/bailout. Over the same period, a handful of geeks from Seattle grew their dorm-room startup, Microsoft, into a global software empire with over $60 billion per year in revenue. Along the way, the company turned four employees into billionaires and an estimated 12,000 into millionaires, while amassing some $250 billion in equity for shareholders.

In 1990, Countrywide Credit emerged as the nation’s leading mortgage banker. That same year, networking company Cisco Systems went public at a split-adjusted $0.08 per share and helped to usher in the Internet age with its routers and switches. Countrywide disappeared into Bank of America in 2008, after its credit rating was slashed to “junk” by Standard & Poor’s; Cisco now employs over 65,000 people and has created over $120 billion in market value.

Over the past 10 years, the airlines posted loss after loss, received numerous government bailouts, and saw the XAL airline stock index fall from 175 to 35, erasing billions in shareholder value. Meanwhile, a little Silicon Valley firm with a rather silly name, Google, built a $25 billion a year advertising behemoth and rocketed its market cap to over $140 billion.

And the list goes on.

Dell computers are still widely known for their “Dude, you’re getting a Dell!” ad campaign, but it’s been more like, “Dude you’re getting $23 billion since your 1988 coming-out party!” Global electronic storage leader EMC has gone from a tiny outfit when it went public in 1986 to $37 billion today. And that’s not including its subsidiary VMware, spun off on its own and now valued at some $25 billion. Since 2000, biotechnology leader Celgene has added over $20 billion in wealth to its shareholders’ pockets.

It isn’t just the behemoths, either. Smaller companies across the industry, and straight through America’s supposed lost decade, have granted themselves licenses to print money. Since its 2002 IPO, for example, Netflix has built up a $5.6 billion market cap. Computer graphics chip maker NVIDIA has conjured $5.8 billion in new wealth since its 1999 public debut. Boating equipment supplier Garmin reinvented itself last decade through GPS navigation systems, to the tune of $5.8 billion.

Even today, as we struggle through what many have labeled the next great depression, technology keeps on creating fortunes. Founded in 2000 and IPO’d in 2009, restaurant software pioneer OpenTable has put on weight to the tune of nearly $1 billion in market cap and is still growing furiously. Network security outfit Fortinet, also founded in the doldrums of 2000 and taken public just last year, has secured some $1.1 billion for its shareholders and the fast-growing new market it created.

Sure, the easy-money days were 1980-2000, when the tech-heavy NASDAQ Index soared from around 160 to 4,700. That’s a stunning compound annual growth rate of 18.5% for 20 years. If you managed to ride the wave trough to peak, every dollar you threw at the NASDAQ turned into 30. And the beauty of it was, you didn’t have to know silicon from soy sauce. You could have put your investment cash into almost anything.

No longer. In 2000, the balloon popped. The dotcom bust slammed into the market, the economy went into recession, and the era of indiscriminate investing came to an abrupt and well-deserved end. The NASDAQ Index remains at just about half the high-water mark established ten years ago.

Small wonder so many have lost all faith in technology.

Which is too bad. Because technology is an unstoppable force. It doesn’t grind to a halt, or even slow down, just because it falls out of favor on Wall Street. Inventors continue to innovate, entrepreneurs continue to market the resultant products, and consumers continue to buy.

Moreover, although the train has been rolling right along, it’s far from too late to get on board. Savvy tech investors may have to put in the time and effort to sort the good companies from the bad this time around, thankfully. But there are more opportunities than ever to use the sector to build personal wealth.

Some look at technology and see only the downsides. The oil spills, the loss of privacy, the ugly machinery of war. But we recognize that technological advances have, for the most part, made our lives longer, better, healthier, more comfortable, and more fun. There’s no reason to believe that that trend won’t continue. In fact, the biotech and nanotech revolutions now just getting underway promise to usher in a renaissance of such magnitude that it will likely make all our previous techno-magic seem like simple card tricks. (Although we will need to refrain from blowing ourselves up in the interim.)

So the answer to the original question is: no, we haven’t lost our ability to create wealth. At least not in one critical area for the future. And with every conceivable measure showing the rate of technological change increasing exponentially, we have accelerated it.

Looking ahead, the eightfold increase in mega-caps since 1980 is likely to seem paltry thirty years from now. More foreigners will enter the ranks; many more, since China and India presently contribute fewer than two dozen to the world’s 500 largest companies. And it’s dead certain that the market leaders in 2040 will include many firms that today are no more than a gleam in a high schooler’s eye.

As an investor, cashing in on the tech boom of the past three decades has meant finding the most promising young companies at the beginning of their trip skyward. That will also be the case in the next three.

Only the names will change.


Disclaimer

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

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Posted 08-30-2010 5:08 PM by John Mauldin