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How to Succeed in Business

Soros on Soros: Staying Ahead of the Curve

by George Soros, by Byron Wien, by Krisztina Koenen
John Wiley, 326 pp., $19.95 (paper)

Soros: The Life, Times, and Trading Secrets of the World’s Greatest Investor

by Robert Slater
Irwin, 269 pp., $25.00

Citizen Turner: The Wild Rise of an American Tycoon

by Robert Goldberg, by Gerald Jay Goldberg
Harcourt Brace, 525 pp., $27.00

It Ain’t As Easy As It Looks (out of print)

by Porter Bibb
Crown, 468 pp.

During the past fifteen or twenty years, after several decades in which the distance between America’s rich and poor was relatively narrow, the distribution of wealth has again skewed dramatically in favor of the rich. One percent of Americans today account for some 40 percent of the nation’s personal wealth, about the same proportion as at the end of the Roaring Twenties. (In the early 1970s, the top 1 percent had only half that share.) Wealth in the US is now the most unevenly distributed in the advanced world.1 When Forbes magazine first published its list of the 400 richest Americans in 1982, one needed a mere $100 million to qualify. Last year, the poorest of the 400 was worth more than $340 million. Consumer prices on average rose by only about 60 percent over this period, so inflation has accounted for only a small portion of this increase in individual wealth.

Unlike earlier periods of great wealth accumulation, however, these years saw the American economy grow unusually slowly. The moguls of the 1970s and 1980s became extraordinarily rich while productivity, or output per hour of work, which is the foundation of economic growth, rose at less than half the rate it had risen on average since 1870. Revised data show that it will have risen in the 1990s only marginally faster than it did in the 1970s and 1980s. Productivity has never risen so slowly over a twenty-year period since the Civil War. In addition, average real wages paid to American workers (discounted for inflation) have stagnated since the early 1970s and have fallen sharply by some measures, especially for those workers with only high-school educations. In the past, average real wages for all US workers had always risen during times of great wealth accumulation, if not so fast as the incomes of the wealthiest.

Before the 1970s, America’s greatest fortunes were rarely made by investing in financial markets. J.P. Morgan, who was not only an investor but built a large bank as well, accumulated a net worth of less than $1 billion in today’s dollars. Andrew Carnegie reportedly said on Morgan’s death that he hadn’t known Morgan wasn’t a rich man. 2 Instead, America’s richest people typically drew their wealth from owning natural resources or real estate, or from having started companies that eventually became giants. These tycoons made autos, steel, paper, food products, cigarettes, machinery, and, later, computers, and created the great oil companies, department-store chains, banks and insurance companies, railroads, airlines, and the print and electronic media. They typically hired thousands of workers, and their companies or property holdings long survived most of them.

Many of America’s greatest fortunes over the last two decades of exceptionally slow economic growth have been made not by builders of companies but, for the first time on such a scale, by professional investors. Rarely have these men and women created a new company. They could close down the businesses that made them their fortunes and few would ever notice. They do not have to be able to mobilize a huge work force or influence the nation’s way of life. A modern-day financial tycoon can remain a private person, taking advantage of recent electronic technology in the solitude of his office, and make an enormous fortune without having to hire or fire more than a handful of workers or convince one American consumer to buy his product or service.

The richest of these men (there are no self-made women high on this list) are Warren Buffett and George Soros, who are widely regarded as perhaps the most canny investors of the post-World War I era. If one had placed $1,000 with Buffett thirty years ago, it would have been worth $1.13 million at the end of 1994, an average annual rate of return of nearly 27 percent a year compared to 9 to 10 percent for stocks in general. An investor who placed $1,000 in Soros’s Quantum Fund when it was started in 1969 would have $2.15 million, an annual compound rate of return of nearly 35 percent a year. Only a few other professional investors would claim to match their performance. According to Forbes’s estimate of last autumn, Buffett’s shares in his main investment vehicle, Berkshire Hathaway Inc., are worth more than $12 billion, making him the nation’s second richest person, behind Microsoft’s William Gates, whose stock is worth more than $15 billion. Forbes reports that Soros is worth more than $1 billion, ranking his with America’s sixty-five or so largest fortunes, but the figure is probably substantially understated. Barron‘s has recently called him a billionaire several times over, and in 1993 alone he made a pre-tax profit of $1 billion.

Regardless of the particular talents of Buffett and Soros, the times have been especially favorable for making money in the financial markets. This is largely, in my view, a result of the unforeseen consequences of inflation in the late 1970s and early 1980s, and the dramatic, turbulent expansion of international markets for capital over the past twenty years. The quadrupling of oil prices by OPEC in 1973 and 1974 set off several rounds of inflation that pushed up interest rates to unusually high levels. In such a risky period, investors were not about to buy a company’s equities when they could buy its debt at interest rates of 12 to 14 percent a year or more. The prices of stocks fell dramatically, often well below the cost of rebuilding the company from scratch, and created exceptional opportunities for those who believed that the US economy would eventually return to normal. The hostile corporate takeover movement got started in those years, and leveraged buyouts soon followed, earning takeover buccaneers, investment bankers, LBO specialists, and risk arbitrageurs unprecedentedly high incomes, high enough to place several of them among the Forbes 400.

At the same time, financial markets became more complex. International currencies had been set free to fluctuate according to market demands; new financial instruments deriving from the Bretton Woods agreements on exchange rates had been created to contain risk and volatility, and markets had become global. According to one estimate, 90 percent of all international financial transactions were once related to actual trade or long-term investment compared to only 10 percent in today’s explosively growing markets, which are dominated by short-term investments in currencies, futures, “derivatives,” and other investments.3 In the 1960s, twelve million shares traded hands on the New York Stock Exchange on an active day; by the 1980s, hundreds of millions of shares might be exchanged on an average day. The new complexity, breadth, and global nature of trading created opportunities for those who understood how to exploit them.

When inflation at last began to subside after the deep 1982 recession, and interest rates started to fall, financial markets were the great beneficiaries. Stocks especially began to make up lost ground, rising much faster than corporate profits, even though those profits were in part fattened by overseas subsidiaries located in countries whose economy and productivity grew faster than those in the US. Profit margins were also aided by the ability of corporations to keep wages down through union-breaking and other streamlining efforts. Still, corporate profits have about tripled since their lowest levels in the 1982 recession, while stock prices, measured by the Dow Jones industrials, have risen by more than six times.4

There are, of course, many other factors that might also have contributed to rising stock prices. Growing confidence in the stock market encouraged more investing, for example. Pension funds and investors in mutual funds poured billions into the financial markets. Some contend that lower inflation and interest rates led to more sustainable economic expansions. But for most of these years, the stock market didn’t merely reflect the state of the American economy, or even the renewed health of the increasingly international corporate sector; it was also recovering from the inflation and the high interest rates that had left it far behind in the 1970s.

Because falling inflation and interest rates benefit stocks, a strong bias among Wall Street professionals has developed in favor of economic policies that foster only slow economic growth. (The recent fall in the market at the news of rising employment figures for February 1996 is a case in point.) Faster growth might improve profits still more; but if it also risks higher inflation, and therefore higher interest rates, stock prices might suffer. Slow growth also keeps downward pressures on wages, and this improves profit margins. In such a slow-growth environment, the wages of the lowest paid are often the last to rise when an economy expands, and may not rise at all if the economy does not expand sufficiently rapidly.

The times may well have been right for Warren Buffett and George Soros, but these two men were also unusually capable of taking advantage of the times, not merely because of their talents and ambition but also because of their personal idiosyncrasies and their obdurate confidence in their own convictions.

Roger Lowenstein’s diligently researched, well-told biography partly traces Buffett’s obsession with accumulating money to the difficulties suffered by his father’s brokerage firm in Omaha, Nebraska, early in the Great Depression, when Buffett was a child. His father’s business survived, but its near-failure seems to have impressed the young Buffett with a need to earn and save as much money as possible. This cannot be the whole explanation, but Lowenstein does not explore the formation of Buffett’s character much further. Buffett was selling Coca-Cola to his friends for a profit by the time he was six. He bought his first shares of stock—three of them, at $38 each, in a company called Cities Service—by the age of eleven. As a student he was exceptionally gifted in mathematics, which may, I think, partly account for his considerable confidence. He was always figuring the odds as a boy, and even devised a horse-betting scheme with a friend. He entered the University of Pennsylvania’s Wharton School, but left to attend the University of Nebraska. After graduate school in New York, Buffet again returned to Omaha, where he apparently found the sort of down-home comfort he needed. There he has lived in a middle-class house until this day, spending little money on himself or his children; any expense today, he figures, is forgone investment profits in the future. The penuriousness has not abated even as his fortune has risen into the billions. Lowenstein points out how little Buffett has given to charity compared to the size of his fortune. Though he has said he will leave practically all his money to charity after he and his wife die, one can only speculate how much good that money could do today to ameliorate the problems, such as the population explosion, that particularly concern him.

While at the University of Nebraska, Buffett started several businesses which eventually produced an investment stake of $10,000. After graduation, he enrolled in Columbia Business School and encountered the most important influence of his professional life, the legendary finance professor Benjamin Graham. Graham believed in only buying a stock when it was considerably undervalued compared to the company’s earnings, dividends, and assets. His best-known work, Security Analysis, written with David Dodd and first published in 1934, was designed, Lowenstein writes, as a criticism of the excessive speculation that led to the Great Crash. Buffett found Graham’s bargain-basement investment strategy especially congenial, and received the only A+ the professor ever gave a student.

  1. 1

    Edward Wolff, Top Heavy (Twentieth Century Fund, 1995).

  2. 2

    Vincent P. Carosso, The Morgans: Private International Bankers 1854–1913 (Harvard University Press, 1987), p. 644. On early American wealth, see Henry H. Klein, Dynastic America and Those Who Own It (self published, New York, 1921).

  3. 3

    John Eatwell, Global Unemployment (M.E. Sharpe, 1996).

  4. 4

    An analyst at Goldman, Sachs found that the rise in earnings per share of the companies that make up the Standard & Poor’s 500 index accounted for only 25 percent of the 227 percent rise of stock prices between 1979 and 1989. See Barrie A. Wigmore, “How Can We Explain the Growth of the S&P 500 in the 1980s?” (Goldman, Sachs & Co., 1991).

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