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Learning from John D Rockefeller
We’ve all heard of today’s Titans; those business moguls that possess incredible net worth that rivals almost all others. Bezos, Musk, Gates, even Buffett and Munger. These are household names to both investors and businesspeople the world over. But there was one Titan that could rival them all, and indeed is regarded as the richest American to ever live. Who was it?
John D Rockefeller.
With an estimated net worth of $400b today, how did he earn that title? How did one man find himself literally crushed by money and yet was still able to retire in his mid 50’s?
He did it by owning a great business - which is key to long term investment success. The very best businesses aren’t just slightly better than their competition, they’re orders of magnitude better. Businesses which can grow their earnings and compound their investor’s capital can underwrite their share price performance for years to come - making them one of the safest and surefire ways to investment success.
At the foundation of history’s greatest businesses is usually a powerful business model. In the case of Rockefeller’s Standard Oil, it was ‘Owning the Choke-Point,’ the narrow part of an hour glass separating suppliers and consumers; the centre of the ecosystem. It’s an enduring business model that has delivered windfall profits to company shareholders for centuries.
“Rockefeller had an annual untaxed income of $58m in 1902 - or about a billion dollars in tax-free income per annum in today’s money.”
If the names Chevron, Conoco, Exxon, Mobil or Amoco ring a bell, you’re already familiar with the legacy of Rockefeller’s business, The Standard Oil Trust. An indomitable energy company whose activities spanned production, storage, transport, infrastructure, distribution and retailing that touched consumers and businesses the world over. Standard Oil has long been considered the greatest monopoly of all time.
There are a myriad of lessons for today’s investor in the history of John D Rockefeller and Standard Oil; owning the choke-point, keeping prices low, leveraging and sharing scale, embracing technology, continuously innovating, empowering employees, decentralising, aligning management, growing the market, spurning debt, encouraging internal competition and harnessing tailwinds are as relevant today as they were over a hundred years ago.
Standard Oil’s ability to consistently increase profitability and defy the notoriously boom-bust nature of its industry descended from its ownership of the choke-point; the point where oil supply was transformed into commercial products and distributed for sale.
Rockefeller started out in refining, recognising the benefits of scale, he amalgamated capacity to extract favourable terms from the railways. As refining competitors buckled, Rockefeller drove further consolidation; taking partial stakes, retaining management, and using scrip based funding ensured interests were aligned - creating emergent effects.
Rockefeller recognised the benefits in keeping prices low; the pool of potential buyers was expanded while new competition was deterred from entering the industry. Ever frugal, Rockefeller focused on costs and looked for ways to increase efficiencies; embracing new technologies, constantly innovating and leveraging economies of scale ensured competition was muted. By 1907, the Standard Oil leviathan refined 87% of the kerosene market and was more than twenty times the size of its most serious competitor.
Having come of age in an era of emerging corporate dominance and nascent regulatory oversight, Standard Oil’s anti-competitive tactics [there were many!] eventually attracted Government attention. In 1911, after forty-one years of existence, the Supreme Court ordered the Trust be dismembered into thirty-seven subsidiary companies [including those five companies mentioned above]. The post split performance of Standard Oil Trust might prove a useful guidepost given the regulatory concerns overhanging some of today’s tech titans.
By his mid-fifties, Rockefeller had retired, yet the enormous tailwind of the automotive generation would make him far richer in retirement than in his working life. An abiding self-belief that he was fulfilling God’s wish to earn and share wealth had created a predilection for charity from an early age. At the time of Rockefeller’s death, a few weeks short of his 98th birthday, his career would be defined as much by his philanthropic endeavours as it was by his business success.
Rockefeller’s incredible story has been told in the wonderful book, ‘Titan’, by Ron Chernow.
“Another book that I liked very much was ‘Titan’, the biography of the original John D. Rockefeller. That’s one of the best business biographies I have ever read. And it’s a very interesting family story, too. That was just a wonderful, wonderful book. And I don’t know anybody who’s read it who hasn’t enjoyed it. So I would certainly recommend that latest biography of John D. Rockefeller the first.” Charlie Munger
‘Titan’ is a fantastic journey into the highly complex and contradictory mind of one of the world’s shrewdest businessmen. While not an easy read (bring a dictionary!) it’s worth the effort. While barely scratching the surface of this epic biography, I’ve included some favourite extracts below.
Education and Smarts“‘I was not an easy student, and I had to apply myself diligently to prepare my lessons.’ said Rockefeller, who described himself accurately as ‘reliable’ but not ‘brilliant.’”
“[When playing childhood games] to ensure that he won, he submitted to games only where he could dictate the rules.”
“‘I was trained from the beginning to work and save,’ Rockefeller explained. ‘I have always regarded it as a religious duty to get all I could honourably and give all I could.’”
“Once Rockefeller spent three days helping a local farmer dig potatoes for 37 cents per day. This set up an instructive contrast for the frugal boy when, soon afterward, he loaned one farmer $50 at 7 percent interest and collected $3.50 at year’s end - without a stitch of work. He was thunderstruck by the happy math, which hit him with the force of a revelation. ‘The impression was gaining ground on me that it was a good thing to let the money be my slave and not make myself a slave to money.’”
Optimism“[Rockefeller] was a confirmed exponent of positive thinking.”
“Like other Gilded Age moguls, Rockefeller was shaped by his faith in economic progress, the beneficial application of science to industry, and America’s destiny as an economic leader.”
“[After the 1929 market crash, Rockefeller was encouraged to make a calming statement] Rockefeller issued a press release, ‘These are days when many are discouraged. In the ninety years of my life, depressions have come and gone. Prosperity has always returned, and will again.’ In his peroration, he said, ‘Believing that the fundamental conditions of the country are sound, my son and I have been purchasing sound common stocks for some days.’”
Embrace Technology“The firm relied upon the railroad and the telegraph, the two technologies then revolutionising the American economy.”
“Standard Oil also profited immeasurably from the revolution in oil transport as barrels gave way to tank cars.”
“The railroads balked at investing in rolling stock that couldn’t also transport general freight, So Rockefeller stepped boldly into the breach… As the owner of almost all the Erie and NY Central tank cars, Standard Oil’s position grew unassailable.”
“Only belatedly did Rockefeller discern the full potential of pipelines… [Ultimately] gaining uncontested control of all major pipeline systems connecting oil wells to railroad trunk lines. ‘Practically not a barrel of oil could get to a railroad without Rockefeller’s consent… ‘Rockefeller’s firm had now advanced far beyond the railroads to more efficient pipelines.’”
Understand the Business“For Rockefeller, ledgers were sacred books that guided decisions and saved one from fallible emotion. They gauged performance, exposed fraud, and ferreted out hidden inefficiencies. In an imprecise world, they rooted things in solid empirical reality. As he chided slipshod rivals, ‘Many of the brightest kept their books in such a way that they did not actually know when they were making money on a certain operation and when they were losing.’”
Efficiency and Scale Advantages“The proliferation of railroads enabled Rockefeller to extract discounts from them by playing one off against the other.”
“Rockefeller’s ceaseless search for even minor improvements meant that within a year refining had overtaken produce as the most profitable side of the business. Despite the unceasing vicissitudes of the oil industry, prone to cataclysmic booms and busts, he would never experience a single year of loss.”
“His tight-fisted control of details and advocacy of unbridled expansion. Daring in design, cautious in execution - it was a formula he made his own throughout his career.”
“[Rockefeller] was a mastermind of many negotiations with the railroads.. Since oil was a relatively cheap, standardised commodity, transportation costs inevitably figured as a critical factor in the competitive struggle.”
“Rockefeller had built gigantic plants so he could drastically slash his unit costs. Even his first partner remembered that ‘the volume of trade was what he always regarded as of paramount importance.’ Early on, Rockefeller realised in the capital-intensive refining business, sheer size mattered greatly because it translated into economies of scale.”
“Once describing the ‘foundation principle’ of Standard Oil, Rockefeller said it was the ‘theory of the originators’ .. that the larger volume the better the opportunities for the economies, and consequently the better opportunities for giving the public a cheaper product without .. the dreadful competition of the late ‘60’s ruining the business. During his career, Rockefeller cut the unit costs of refined oil almost in half, and he never deviated from this gospel of industrial efficiency.”
Emerging Effects“Rockefeller activated a self-sustaining movement as his new allies agreed to consolidate business in their localities and supervise the purchase of remaining independent refiners. A massive chain reaction was thus set in motion that rippled through both refining centres, with local businessmen acting as Rockefeller’s agents.”
Owning the Choke-Point“The spot chosen for the new refinery tells much in miniature about Rockefeller’s approach to business… Able to ship by water or land, Rockefeller gained the critical leverage he needed to secure preferential rates on transportation - which was why he agonised over plant locations throughout his career.”
“[Rockefeller’s] overriding reason for his attachment to Cleveland: It was the hub of so many transportation networks that he had tremendous room to manoeuvre in freight negotiations.”
“Rockefeller’s first visit to Pennsylvania must have persuaded him that he had picked the right entry point to the business. Searching for oil was wildly unpredictable, whereas refining seemed safe and methodical by comparison. Before too long, he realised that refining was the critical point where he could exert maximum leverage over the industry.”
“Rampant speculation had so overbuilt the industry that total refining capacity in 1870 was triple the amount of crude oil being pumped. By then, Rockefeller estimated 90 percent of all refiners were operating in the red. Producers and refiners didn’t shut down operations in the expected numbers causing Rockefeller to doubt the workings of Adam Smith’s invisible hands: ‘So many wells were flowing that the price of oil kept falling, yet they went right on drilling.’ The industry was trapped in a full blown crisis of overproduction with no relief.’ Thus in 1869, Rockefeller feared his wealth might be snatched away from him. As someone who tended toward optimism, ‘seeing opportunity in every disaster’, he studied the situation exhaustively instead of bemoaning his luck. He saw that his individual success as a refiner was now menaced by industrywide failure and that it therefore demanded a systematic solution. This was a momentous insight, pregnant with consequence. Instead of just tending to his own business, he began to conceive of the industry as gigantic, interrelated mechanism and thought in terms of strategic alliances and long term planning. Rockefeller cited the years 1869 and 1870 as the start of his campaign to replace competition with cooperation in the industry. The culprit, he decided, was ‘the over-development of the refining industry,’ which had created ‘ruinous competition.’ If this fractious industry was to be made profitable and enduring, he would have to tame and discipline it. A trailblazer who improvised solutions without any guidance from economic texts, he began to envision a giant cartel that would reduce overcapacity, stabilise prices, and rationalise the industry.”
“Between February 17 and March 28 1972 - between the first rumours of the SIC [proposed agreement between Standard Oil and the railways] and the time it was scuttled - Rockefeller swallowed up twenty-two of his twenty-six Cleveland competitors… Another businessman might have started with small, vulnerable firms, building on easy victories, but Rockefeller started at the top, believing that if he could crack his strongest competitor first, it would have tremendous psychological impact.”
“In retrospect, it seems peculiar that Standard Oil - omnipotent in refining, transportation, and distribution - owned just four production properties in the early 1880’s… He had long profited from the juxtaposition of cooperation in refining and competition in production.”
“Rockefeller applied to iron ore [interests] lessons he had learned in oil, such as controlling an industry through transportation and demoralising competitors with prices too low for them to match.”
“The unity of Standard Oil partners was especially impressive given the organisation’s byzantine structure, a far-flung patchwork of firms, each nominally independent but in reality taking orders from 26 Broadway [Standard Oil head office].”
Innovation“Scarcely dreaming that oil would ever supersede their main [agricultural produce] commodity business, they [Rockefeller & partner] considered it ‘a little side issue.’”
“Rockefeller wasn’t stultified by precedent or tradition, which made it easier for him to innovate. He continued to value autonomy from outside suppliers. At first, he paid small coopers up to $2.50 for white oak barrels before he showed, in an early demonstration of scale, that he could manufacture dry, tight casks.. for less than a dollar a barrel. The Cleveland coopers bought and shipped green timber to their shops, whereas Rockefeller had the oak sawed in the woods and dried in kilns, reducing its weight and slicing transportation costs in half.”
“Regarding each plant as infinitely perfectible, Rockefeller created an atmosphere of ceaseless improvements.”
“Below the executive committee came a battery of specialised committees dedicated to transportation, pipelines, domestic trade, export trade, manufacturing, purchasing and so on. These committees standardised the quality of subsidiaries engaged in similar work, enabling managers to swap insights and align their operations… These were chosen experts who had daily sessions and study of the problems, new as well as old, constantly arising. The benefit of their research, their study, was available for each of the different concerns.”
“Rockefeller created the model for the vertically integrated oil giants that would straddle the globe in the twentieth century.. By 1891 Rockefeller had gained control of a quarter of American oil production.”
Tailwinds“The [civil] war had stimulated growth in the use of kerosene by cutting the supply of southern turpentine .. kerosene emerged as an economic staple and was primed for a furious postwar boom.”
“The [civil] war markedly accelerated the timetable of economic development, promoting the growth of factories, mills, and railroads. By stimulating technological innovation and standardised products, it ushered in a more regimented economy. The world of small farmers and businessmen began to fade, upstaged by a gargantuan new world of mass consumption and production.”
“Europe emerged rapidly as the foremost market for American kerosene, importing hundreds of thousands of barrels yearly during the civil war. Perhaps no other American industry had such an export outlook from its inception. By 1866, fully two-thirds of Cleveland kerosene was flowing overseas.”
Low Prices“Rockefeller’s goal was to forestall potential competitors through low prices and thus minimise risk and chance disruptions.”
“Standard Oil had not kept prices low out of altruism but to deter competition and ‘keep our profits on such a basis that others would not be stimulated to enter the field of competition with us.’ This belied Rockefeller’s frequent claim that his motive was to bequeath cheap oil to the working people.”
“Rockefeller was obsessed with high-volume, low cost production to maintain market share, even if he temporarily sacrificed profit margins. As he noted, ‘This fact the Standard Oil Company always kept in mind: that they must render the best service and be content with largely increasing volume of business, rather than increase the profit so as to tempt others to compete with them.’ When discussing prices with subordinates, he frequently reminded them, ‘We want to continue, in reason, that policy which will give us the largest percentage of business.’”
“In general, Standard Oil did an excellent job at providing kerosene at affordable prices. It boasted far lower unit costs than competitors and relentlessly drove down costs over the years.’ Between 1880 and 1885, its average cost of processing a gallon of crude oil went from 2.5 to 1.5 cents. [In the 20 years to 1890] the retail prices of kerosene had plunged from 23.5 cents to 7.5 cents per gallon.”
“But Standard Oil never sought a perfect monopoly because Rockefeller realised that it was politically prudent to allow some feeble competition.. A very smart monopolist, Rockefeller kept prices low enough to retain control of the market but not so low as to wipe out all lingering competition.”
“Rockefeller new that if he got greedy, other products could be substituted for kerosene, and this, too, curbed his appetite for excess profits.”
“Rockefeller keenly felt a need to freeze the industry’s size, stymie new entrants, and create an island of stability in which expansion and innovation could then occur unimpeded.”
John D Rockefeller’s NY Residence
Empowering People“Rockefeller wanted to be surrounded by trustworthy people who could inspire confidence in customers and bankers alike.”
“In the early days, Rockefeller knew the name and face of each employee.”
“Rockefeller generally received excellent reviews from employees who regarded him as fair and benevolent, free of petty temper and dictatorial airs.”
“So highly did Rockefeller value personnel that during the first years of Standard Oil he personally attended to routine hiring matters.”
“‘The ability to deal with people is as purchasable a commodity as sugar or coffee,’ Rockefeller once said, ‘and I pay more for that ability than for any other under the sun.”
“Employees were invited to send complaints or suggestions directly to Rockefeller, and he always took an interest in their affairs. His correspondence is replete about sick or retired employees. Reasonably generous in wages, salaries, and pensions, he paid somewhat above the industry average.”
“His employees tended to revere Rockefeller and vied to please him. As one said, ‘I have never heard of his equal in getting together a lot of the very best men in one team and inspiring each man to do his best for the enterprise.”
“At first, Rockefeller tested employees exhaustively, yet once he trusted them, he bestowed enormous power upon them and didn’t intrude unless something radically misfired.”
“People who worked for Rockefeller usually found him a model of propriety and paternalistic concern.”
“Rockefeller’s decided the leading men [management co-owners] would receive no salary but would profit solely from the appreciation of their shares and rising dividends - which Rockefeller thought a more potent stimulus to work.”
“When it came to mergers, Rockefeller didn’t fight for the last dollar and tried to conclude matters cordially. Since he aimed to convert competitors into members of his cartel and often retained the original owners.”
“The creation of Standard Oil was often less a matter of stamping out competitors than of seducing them into co-operation. In general, Rockefeller was so eager to retain original management that he accumulated expensive deadwood on the payroll and, for the sake of intra-empire harmony, preferred to be conciliatory.”
“One of Rockefeller’s greatest talents was to manage and motivate his diverse associates. As he said, ‘It is chiefly to my confidence in men and my ability to inspire their confidence in me that I owe my success in life.”
“Free of an autocratic temperament, Rockefeller was quick to delegate authority and presided lightly, genially, over his empire, exerting his will in unseen ways.”
“The Trust’s formation created negotiable securities, and this profoundly affected the Standard Oil culture. Not only did Rockefeller urge underlings to take stock but made money abundantly available to do so. As such shareholding became widespread, it welded the organisation more tightly together, creating an esprit de corps that helped in steamrolling competitors and government investigators alike. With employees receiving huge capital gains and dividends, they converted Standard Oil into a holy crusade.”
“Rockefeller hoped the Trust would serve as a model for a new populist capitalism, marked by employee share ownership. ‘I would have every man a capitalist, every man, women and child,’ he said, ‘I would have everyone save his earnings, not squander it; own the industries, own the railroads, own the telegraph lines.”
“[Rockefeller’s] committee system was an ingenious adaption, integrating the policy of constituent companies without stripping them of all autonomy. We must remember that Standard Oil remained a co-federation and most of its subsidiaries were only partially owned. A top down hierarchical structure might have hampered local owners whom Rockefeller had promised a measure of autonomy in running their plants. The committee system galvanised their energies while providing them with general guidance. The committee encouraged rivalry among local units by circulating performance figures and encouraging them to compete for records and prizes. The point is vitally important, for monopolies spared the rod of competition, can easily lapse into sluggish giants.”
Walk The Floors“In the first years of Standard Oil, Rockefeller regularly toured his facilities and was extremely inquisitive and observant, soaking up information and assiduously quizzing plant superintendents. In his pocket, he carried a little red notebook in which he jotted suggestions for improvements and always followed up on them.”
Financial Strength“[Rockefeller] always moved into battle backed by abundant cash. Whether riding out downturns or coasting on booms, he kept plentiful reserves and won many bidding contests simply because his war chest was deeper.”
“Standard Oil weathered the six-year depression magnificently, a fact Rockefeller attributed to its conservative financial policy and unparalleled access to bank credit and investor cash.”
“The Standard Oil Trust’s resilience during the depression of the 1890’s, its tested immunity from market fluctuations, cheered Rockefeller, who attributed this to Standard’s large cash reserves and conservative dividend policy.”
“Since the early 1880’s, Standard Oil had been self-financing, very liquid at all times, and free from the thrall of Wall Street bankers.”
Grow the Market“To inflate demand, Rockefeller sold hundred of thousands of cheap lamps and wicks and sometimes distributed them gratis with the first kerosene purchase.”
“Rockefeller also sold, almost at cost, heaters, stoves, lamps, and lanterns to widen the market. In the manner of a modern corporation, Standard Oil created demand as well as satisfied it.”
“Rockefeller continually extended the market for petroleum by-products, selling benzine and paraffin, and petroleum jelly in addition to kerosene.”
Fanaticism & Obliquity“Rockefeller derived a glandular pleasure from work and never found it cheerless drudgery. In fact, the business world entranced him as a fount of inexhaustible wonders. ‘It is by no means from money alone that these active-minded men labor - they are engaged in a fascinating occupation.’ he wrote in his memoirs. ‘The zest of the work is maintained by something better than mere accumulation of money.”
“Rockefeller seemed destined to succeed as much from his fastidious work habits as from innate intelligence.”
“Even in as a young man, Rockefeller was extremely composed in crisis. In this respect, he was a natural leader; The more agitated others became, the calmer he grew.”
“The passion for excellence originated with Rockefeller and radiated throughout the organisation. The ethos of Standard Oil’s operations around the world was John D Rockefeller’s personality writ large.”
“Rockefeller inspired subordinates with his fanatic perfectionism.”
Humility“Aside from the occasional courtesy call from other moguls, he hobnobbed with the same family members, old friends, and Baptist clergy who had always formed his social circle.”
“When someone expressed surprise to Rockefeller that he had not gotten a big head, he replied, ‘Only fools get swelled up over money.’ Comfortable with himself, he needed no outward validation of what he had accomplished.”
“Rockefeller preferred outspoken colleagues to weak-kneed sycophants and welcomed differences of opinion so long as they weren’t personalised.”
Frugality“From his mother he learned economy, order, thrift, and other bourgeois virtues that figured so largely in his success at Standard Oil.’”
“Rockefeller engaged in strenuous rituals of austerity, and grimly sought to simplify his life and reduce his wants. He liked to say that ‘a man’s wealth must be determined by the relation of his desires and expenditures to his income. If he feels rich on ten dollars, and has everything else he desires, he really is rich.’”
“Rockefeller spent a ridiculous amount of time protesting bills both large and small.”
“[Rockefeller would say,] save when you can and not when you have to.”
“The world’s richest man never lost the thrifty boyhood habits that had made him the nonpareil of American business.”
Secrets“Rockefeller trained himself to reveal as little as possible.”
“He learnt to cultivate a secretive style and a defiant attitude toward strangers.”
“Rockefeller never allowed his office decor to flaunt the prosperity of his business, lest it arouse unwanted curiosity.”
“Rockefeller was concerned that if he advertised his own wealth through fancy houses, he might attract investors into the refining business and only worsen the excess capacity problem.”
“Ever alert against industrial espionage, Rockefeller never wanted people to know more than was required and warned one colleague, “I would be very careful about putting someone into a position where he could learn about our business, and be troublesome to us.”
“Rockefeller equated silence with strength. Weak men had loose tongues and blabbed to reporters, while prudent businessmen kept their own counsel.”
Anti-Competitive Tactics“Since the rules of the game had not yet been encoded into law, Rockefeller and his fellow industrialists had forged them in the heat of combat. With his customary thoroughness, Rockefeller had devised an encyclopaedic stock of anti-competitive weapons. Since he had figured out every conceivable way to restrain trade, rig markets, and suppress competition, all reform-minded legislators had to do was study his career to draw up a comprehensive antitrust agenda.”
“Rockefeller perfected a monopoly that indisputably demonstrated the efficiency of large scale-business.”
Post Split“During the ten years after Standard Oil’s 1911 dismantling, the assets of its constituent companies quintupled in value.”
“Those who had seen the Standard Oil dissolution as a condign punishment for Rockefeller were in for a sad surprise: It proved to be the luckiest stroke of his career. Precisely because he lost the antitrust suit, Rockefeller was converted from a mere millionaire, with an estimated net worth of $300 million in 1911, into something just short of history’s first billionaire.”
“What quickly grew apparent, however, was that Rockefeller had been extremely conservative in capitalising Standard Oil and that the split-off companies were chock full of hidden assets. Two other factors encouraged a veritable feeding frenzy in the stocks. For years, the shares of Standard Oil of New Jersey had been depressed by the antitrust litigation, but with the litigation ended, they bounced back to more normal levels. And the explosion of the automobile industry created euphoria about the endless growth prospects of the petroleum industry.”
“Many of the newly independent companies were powerful enough to inspire fear as freestanding entities. Standard Oil of New Jersey remained the world’s largest oil company, second only to US Steel in size among American enterprises and retaining 43% of the value of the old trust.”
Philanthropy“During his first year on the job, the young [Rockefeller] donated about 6 percent of his wages to charity, some weeks much more. ‘I have my earliest ledger and when I was only making a dollar a day I was giving five, ten, or twenty-five cents.”
“Even as a teenager, he took palpable pleasure in distributing money for charitable purposes, and he insisted that from an early date he discerned the intimate spiritual link between earning and dispensing money.”
“Since his adolescence, charity had been interwoven with the fabric of his life.”
“Rockefeller argued that the rich should donate large sums to worthy causes during their lifetimes, less their money be frittered away by idle heirs.”
“Rockefeller regarded his fortune as a public trust, not as a private indulgence, and pressure to dispose of it grew imperative in the 1900’s as his Standard Oil stock and other investments appreciated fantastically.”
“Rockefeller believed that certain universal principles of businesslike efficiency should apply to non-profit ventures no less than to profit-making ones.”
“Never before had a rich benefactor spent his money in this area.. ‘It marked the first large public recognition of medical education and research as a rewarding subject of philanthropy.’”
“Rockefeller Foundation played an integral part in the rise of American medicine to the pinnacle of world leadership.”
“Rockefeller’s philanthropy was more orientated toward the creation of knowledge, and if it seemed more impersonal, it was also far more pervasive in its effect.”
“The fiercest robber baron had turned out to be the foremost philanthropist.”
“Rockefeller established the promotion of knowledge, especially scientific knowledge, as a task no less important than giving alms to the poor or building schools, hospitals, and museums.”
SummaryStudying history’s great businesses and managers can enlighten us to factors that characterise success and help shed light on new investment opportunities. While technologies change and economies evolve, the business models that define these great companies can endure for decades, even centuries.
Since the days of Standard Oil, many businesses have achieved effective ownership of the choke-point. Even the Mafia recognised the significant benefits accruing to such a position when they controlled New York’s concrete industry in the 1980’s. Collecting a tax of 1-2 percent on every new skyscraper - if you wanted to build you had to talk to the Mob.
More recently we’ve witnessed a multitude of companies monopolising industry choke-points. The capital-light nature of some of these technology businesses with their first mover advantages, network effects, increasing returns and winner-take-all dynamics may mean even longer life cycles.
Businesses which can compound capital for decades are the holy grail of investing. Charlie Munger likes to remind us, "There are certain fundamental models out there that do not take the kind of ability that quantum mechanics requires. You just have to know a few simple things and really know them.” The choke-point is one of them.
“There was only one John D Rockefeller,” concludes Chernow’s epic biography. Indeed, there was.
Reference:
‘Titan - The Life of John D Rockefeller, Sr,’ Ron Chernow, 1998, Random House.
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In addition to all of the U.S. risk which is being assiduously ignored by investors, there is the risk out of China which is slowing even faster than the U.S. Recently, the PBOC has been very actively increasing liquidity and cutting its bank reserve ratios which of course is weakening the Yuan. Meaning, the U.S. is about to tighten monetary policy at the same time as China is easing monetary policy, which is 2015 deja vu. Emerging Market disaster. But as we've already seen twice in the past six years, U.S. investors are firmly in the ignoring risk mode of operation.
Most people don't understand or believe in social mood. They don't acknowledge the extent to which herd thinking guides their own thoughts and actions. They are both beholden to competitive conformity and ignorant of it at the same time. They believe that THEY are fully in charge of their own actions, and it's everyone else who are the blind sheeple. Never before has this widely shared blind spot been more massive and lethal than now. It's clear from this dire set of adverse circumstances that the human mind is only capable of accepting a certain degree of bad news before it enters the mental fetal position which is where this society is hiding right now.
It's clear that the Fed left their foot on the gas too long and now this robo rally in risk assets is out of control. Likewise, they've bailed out corruption so many times that now the record lies are as out of control as this market.
"FOX Business' Stuart Varney, during his latest "My Take" on "Varney & Co.," argued the markets keep climbing despite "pretty grim" news and argues everyone benefits from the surge in wealth creation"
STUART VARNEY: I've been covering the market since 1975. I've seen crashes and rallies, but I’ve never seen a stock price surge like the one we're in right now. It’s a stunner"
Technically it's true. In a Ponzi scheme, the morons who buy grim news with both hands are the sole reason for the record highs.
Below are the "record highs" Reg Varney is referring to:
The U.S. Dow, Global Dow, small caps, and cyclicals have yet to confirm the S&P 500's latest all time high.
Bond yields are at critical support:
Option skew is tracing out a familiar form. Twenty nine out of the top thirty highest skew readings are ALL in 2021 (since 1990), a staggering statistic.
2021 is officially the year in which the smart money secretly made massive bets on a market meltdown while at the same time telling the public this will all end happily ever after.
As of yesterday's close, semiconductors were up 8 days in a row - the longest streak since the COVID rally began. This pattern is reminiscent of the February high which happened to be a bull trap:
"Peter Boockvar, chief investment officer at Bleakley Advisory group, said prices are rising at “a really out of control pace that is unsustainable and unhealthy.”
For now, it's fun and exciting.
In summary, blatant market manipulation by central banks, Wall Street momentum algos, and Reddit chat rooms has concealed the tremendous risks that lie under the surface of this market. Which has led investors to become massively complacent in the face of lethal risk. Just because market manipulation is now fully legal doesn't make it a great idea.
A lesson this Idiocracy is going to learn the hardest way possible.
Zoom Stocks Pushes Higher As Hedge Fund Buy More
Zoom Video Communications, Inc. (ZM) saw exceptional performance over the past year, significantly outperforming the S&P 500 and rising by approximately 400.9% compared to the S&P’s gain of about 39.6% since the start of 2020. The positivity continued as hedge funds and institutions actively bought the stock in the second quarter, aligning with the company’s rise on the WhaleWisdom Heatmap to 2 from 25.
Zoom is a technology company known for its communications platform and video collaboration services. The Zoom platform enables video meetings, webinars, online chats, and calls to facilitate communication and collaboration. Also, while based in the United States, Zoom offers the opportunity for international video conference calls. The company provides a basic level of access for free and a subscription service with a greater array of resources and tools. Subscription fees serve as a significant revenue stream that expanded considerably during the coronavirus pandemic when many businesses and educational institutions were forced to transition to remote work and virtual methods of communication. The trend of telework is likely to continue even as the pandemic concludes, as employers that realized the telework cost-savings and morale benefits now embrace a more permanent hybrid work model.
Hedge Funds Are Buying
Zoom had a favorable second quarter, with hedge funds and institutions adding shares to their portfolios. The aggregate 13F shares held by hedge funds increased to about 45.3 million from 40.3 million, a change of about 12.2%. Of the hedge funds, 30 created new positions, 77 added to an existing stake, 27 exited, and 63 reduced their holdings. Institutions increased their aggregate holdings by about 10.9% to approximately 138.0 million from 124.5 million. The 13F metrics between 2019 and 2021 reflect Zoom’s rising stock price and WhaleWisdom high Heatmap ranking of two.
Positive Multi-year Estimates
Analysts expect to see revenue rise over the next three years, with year-over-year growth ranging from 50.9% to 19% between January 2022 and January 2024. These estimates could bring revenue to $5.7 billion by 2024. Analysts also anticipate a rise in earnings that would bring earnings per share to $4.66 by 2022, $4.74 by 2023, and $5.02 by 2024.
Analysts Upgrade
Analysts are predominantly bullish on the stock. Many have likely noted Zoom’s recent August announcement to acquire cloud contact center Five9, Inc. Analyst Steve Enders of KeyBanc Capital Markets upgraded Zoom to overweight and gave it a price target of $428. Enders shared his thoughts that video and cloud communications will be long-term priorities for enterprise information technology to support hybrid work. Morgan Stanley upgraded Zoom’s shares to overweight from an equal weight rating and raised its price target to $400 per share from $360.
Favorable Outlook
Zoom’s history of growth is noteworthy, and the company appears well-positioned to meet the strong demand for its technology. A multi-year outlook for growth brings an additional element for confidence in future performance for this tech company, which should be encouraging for investors.
Letters to the editor
Hillman Value Fund
Bought: DISCA
Added to: MRK AMZN T CMP SPG KHC INTC
Investing Insights: Tips for Late Savers and QCDs
Mason Hawkins - Longleaf Partners
Added to: CKHUY GE
The Point Of No Return
Ironically, the confab planned for Jackson Hole Wyoming has been virtualized due to the delta variant. The same Fed that predicted this variant would have no effect on the economy just canceled their own in-person convention, but of course they kept their economic outlook the same. Why? Because they only trust data that's at least three months old.
Fittingly, we also learned that Jackson Hole Wyoming is the wealthiest enclave in the United States. The only place more ironic to discuss inequality being Davos Switzerland, site of the annual World Economic Forum for the rich and famous. With a massive fiscal cliff in unemployment benefits looming just over a week away, these JHole virtual attendees will discuss how they can solve the problem they intentionally created aka. the fake wealth effect.
"The wealth effect is a behavioral economic theory suggesting that people spend more as the value of their assets rise. The idea is that consumers feel more financially secure and confident about their wealth when their homes or investment portfolios increase in value. They are made to feel richer, even if their income and fixed costs are the same as before"
Any blind man can see below that monetary policy is no longer working. It's now having a negative effect on the economy as over-leveraged consumers realize their liabilities are going UP in lockstep with the super asset bubble. Those who have any assets at all.
In other words, the virtualization of prosperity is not as good as it sounds.
Heading into this meeting, risk asset markets are celebrating a massive short covering inequality rally attended by chasmic divergences not just in U.S. markets but in global markets as well.
After all, you never know what the Wizards of Oz will say about their money printing plans.
This weekly chart of Nasdaq highs-lows indicates that market participation is now going in the OPPOSITE direction of the index. In the lower pane I calculated the number of new weekly lows attending an all time high in the index. This is by far the largest number in the life of the dataset (1986).
Also as we see, this week gamblers are pushing the index even higher into the point of no return of investment:
From a cyclical standpoint, the divergences are equally dire. Here we see last week's NYSE new highs going in the opposite direction from the S&P 500:
The Dow has yet to confirm this week's S&P high, and Transports have yet to confirm last week's Dow high.
Which is a major violation of Dow Theory which posits that Industrials and Transports must confirm the rally or it will fail.
On the weekly view, here we see banks are three wave corrective ahead of the Jackson Hole symposium due to massive short covering ahead of the meeting:
Zooming out to the global perspective, we see that Nasdaq Highs-Lows are now tracking Chinese stocks 1:1.
We also see that Chinese stocks (black line) are tracing out a pattern very similar to the pattern in 2015/2016 ahead of the global crash. This time around however, global central banks are already ALL IN monetary dopium so they will be shooting blanks in this global crash.
The impending infrastructure bill which is now stuck in Congress due to the debt limit is putting some bid back in cyclicals this week, however oil is trading like a brick.
Oil's crash in 2015/2016 seemed like a big deal at the time until last year's meltdown. Here we see inflation expectations are trading 1:1 with crude oil. Which is why inflation pundits are ALWAYS wrong.
In summary, in two weeks pandemic unemployment benefits are ending for 7.5 million people, with payrolls stuck at 2017 levels.
The pandemic is officially over and everything is back to normal.
With the virtual economy at their back, gamblers are ALL IN virtual prosperity.
The term tempting fate comes to mind.
Unfortunately, amid all of these massive divergences, bulls are ignoring the fact that recession stocks are now leading this rally.
Why that's good, is not for me to say.
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Roku’s Stock Rockets To The Top of WhaleWisdom Heatmap
Roku Inc (ROKU) experienced positive growth over the past six months, outperforming the S&P 500 and rocketing up the WhaleWisdom Heatmap to the number one ranking in the second quarter from 38 in the first quarter. Roku’s stock rose by approximately 162.3% by August 20, 2021, compared to the S&P’s gain of about 36.4% since the beginning of 2020.
Roku manufactures various digital media players for streaming videos and accessing content such as games and movies. The company has a television model in the United States. It makes additional money through hardware sales, Roku Channel advertising, and branded content. Roku also benefitted considerably from a consumer shift to streaming entertainment during the coronavirus pandemic.
Hedge Funds Are Buying
Roku experienced a positive second quarter, with hedge funds and institutions adding shares to their portfolios. The aggregate 13F shares held by hedge funds increased to about 23.1 million from 21.9 million, a change of about 5.3%. Of the hedge funds, 34 created new positions, 77 added to an existing stake, 29 exited, and 55 reduced their holdings. Institutions increased their aggregate holdings by about 3.2% to approximately 82.8 million from 80.2 million. The 13F metrics between 2016 and 2021 reflected Roku’s rising stock price.
Encouraging Two-year Estimates
Analysts expect to see earnings rise over the next two years, with increases in growth from 2021 to 2022, bringing earnings per share to $1.55 by December 2022, up from $1.19 for 2021. Revenue forecasts are estimated at approximately $2.8 billion by 2021 and $3.8 billion by 2022.
Analysts’ Ratings Vary
While Roku’s stock growth has been robust, many investment firms are trimming target prices. Wells Fargo & Co. and Stephens & Co. held an overweight rating on the stock while cutting price targets on Roku’s shares. Wells Fargo lowered its price target to $488 from $519, while Stephens & Co. reduced it to $475. Citigroup analyst Jason Bazinet lowered its price target on Roku to $410 from $450, based upon predictions of lower account growth. However, while account growth was disappointing, platform revenue was encouraging, so Bazinet maintained a buy rating.
Favorable Outlook
Roku’s year-to-date growth is encouraging. The company continues to be a leader in digital media and streaming devices, with optimistic two-year revenue estimates. While some analysts have conservatively lowered price targets, investment potential remains on an upward trend.
Bitcoin’s Energy Usage Isn’t a Problem. Here’s Why.
Letters to the editor
Edson Gould’s Shanghai Composite Upside Resistance Targets
Edson Gould’s Shanghai Composite Upside Resistance Targets
Edson Gould’s $TCEHY Downside Targets
Edson Gould’s $TCEHY Downside Targets
Fool Me All The Time, Shame On Me
Mid-week the Fed minutes monkey hammered markets when it was "revealed" the Fed plans to taper their asset purchases starting this year. Deja vu of the retail sales "shocker" earlier in the week, this "news" should have come as no surprise to markets and yet it did. Why? Because there is nothing priced into these markets except for fantasy, delusion, denial, and misallocated capital on a biblical scale.
Even before the Fed actually tapers, this shift in policy means that U.S. monetary policy is now out of synch with the rest of the world. This is putting a strong bid under the U.S. dollar to the detriment of Emerging Markets which were already weak in the first place.
Here we see the Hang Seng has ended this week in a very precarious position, which is highly reminiscent of late August 2015. The combination of ever-increasing restrictions placed on Chinese companies by Chinese authorities and the U.S. restrictions on Chinese companies is shellacking Sino-Asian markets.
And, as we see, the contagion is spreading:
On the tapering news, U.S. bond yields collapsed as inflation expectations fell in anticipation of tighter monetary policy. This decline in T-bond yields is the opposite of what most pundits expected since they assume the Fed is the only one buying Treasury bonds. In other words they STILL don't understand the bond market.
Then there is the issue of the impending fiscal cliff which will further monkey hammer already collapsing consumer sentiment when Federal unemployment benefits end on Labor Day of all occasions.
You can't make this shit up.
Here we see a death cross of the 50/200 dma on the Thirty Year Yield:
Oil was crushed on the week and oil stocks rolled over into third wave down. A very good indicator of where we stand on this economic delusion.
While the Nasdaq aka. Microsoft, continues to retain its bid, I noted yesterday that the divergence of stocks BELOW their 50 day moving average with the index ABOVE the 50 day average is at a 20 year high (life of dataset), only eclipsed by the breakout last April. Meaning that record breadth divergence now bookends this entire central bank fabricated rally.
Here we see a weekly view of Nasdaq breadth which is at the lowest levels since March 2020:
In summary, the risks and divergences coalescing at the end of this summer far exceed those we witnessed one year ago when the market tanked in late August/early September.
Next week is the Fed's annual symposium in Jackson Hole Wyoming. A chance for the Wizards of Oz to communicate their money printing plans for the future.
Ironically, the topic of this year's annual symposium is how to address the income inequality that is the intended outcome of monetary policy. We know one thing, there will be no "solutions" offered at this year's symposium, which means it will be left to markets to "fix" inequality.
The same way that financial stability was "fixed" in August 2008:
The hard way.
"It’s a risk that many investors appear to be overlooking ahead of the annual conference for central bankers
“Markets abhor equality to the extent that it stands in the way of rapid earnings and dividend growth”