Where the Money is.

Really big money is not made in the stock market by outside investors. That may come as a shock to you. You may not even care, since by " really big" I am talking about multiples millions rather than just, say, one lousy million. It is certainly possible to make ten or twenty time your money as an outside investor in the stock market given enough time, enough intelligence, enough emotional detachment, enough time, enough luck, and somebody smart on the other side of the phone. It is possible because a lot of people have done it.
Who makes the really big money? The inside stockholders of a company do, when the market capitalizes the earnings of that company. Let me tell you a little story as an example, ans for once, I am not changing the names and numbers of the players because it is such a nice story.
Once upon a time there was a little boy who lived in Chicago named Max Palevsky. His father had come to this country because the streets were paved with gold, but they weren't, and so to support his family he became a painter. Houses, not canvas. Max grew up and went to the university of Chicago and studied philosophy. His father said, " Philosophy? Max, how can anyone make a dime from philosophy?" Max didn't know, but he wanted to study philosophy, and so he went right on studying philosophy. In graduate school he was still studying philosophy, notably logic. After eleventy-seven years in graduate school, he got a bit fatigued with the academic environment, and so one day he went to work for bendix as a logician. Bendix was trying its hands at computers and Max was there to tell the computer how to think, since the computer didn't know what as logical.
One day, Max moved on to Packard-Bell, which was also trying its hand at computers, and one day after that Max decided to start his own company. IBM dominates the computer field, but even IBM cannot do absolutely everything well all the time, and Max thought there was a niche in the computer field that IBM wasn't covering, in the area of small computers. So Max got together with Art Rock, who had moved to San Francisco and formed a firm, Davis and Rock, to invest in venture capital in the ideas such as Max's. Max put up $ 80,000 and Art Rock's people put up $920,000, and from a sheet of yellow paper Scientific Data System was born.
The idea was right and the people were able and scientific Data Systems began to make money on its small computers. A group of underwriters sold some stock to the public and the market on the first day capitalized.-i.e., decided-that the earnings of SDS were worth a paper value of $ 50 million. That made Max's piece worth a a little less than $ 10 million. Currently, after some notable triumphs, the market says SDS is worth about $ 688 million, and that makes Max's piece worth about $ 64 million.
You can't do that in the stock market unless you start with a well lot in the first place.
The nice part of the story is still to come. One spring evening I was sitting in Max's hotel room on Central park South and we were watching the lights go on in the Central Park and I asked him what difference the $ 64 million made. Max thought for a minute and then he said it hadn't made any difference. He still lived in the same house and had the same friends. He did have a problem, because every once in a while his children would read in the paper that their father had roughly $ 64 million and he didn't want them to grow up with any false values. And of course, he did have the fun and the satisfaction of creating a company and beating IBM. Then he added one footnote.
" It has made one difference," he said. " It made my father happy. My father said, ' I did the right thing. I was right after all.'
And Max said, " Right about what?"
And his father said, " I was right what I thought before I came, about the streets, and the gold."


So if we are talking about real big money, forget the stock market!






 Adam Smith, " The Money Game" Page 85-87, " where the money is"