Everybody leaned forward, in anticipation, which I though faintly amusing. There used to be a commercial by one of the big investment companies, where a broker would say something like, "What we think...", and immediately the entire room, restaurant, theater, or whatever, would go silent and lean in his direction. "I know it's hard to believe, but we are on the verge of the biggest market bull run in history. I know it sucks now, and it will probably get worse, but in a few months, the market is going to take off like a rocket! We need to be prepared. Missy, you're going to be handling the stock transactions, as well as anything else related to Wall Street, and you two guys are going to have to make sure I don't lose my shirt on taxes and costs."
The others stared at me. "You're kidding me, right? The market sucks right now.", said Missy, with the others nodding in agreement. "I mean, I know my job is to sit around and blow smoke up your butt, but that's the truth, and you're smart enough to know it."
I grinned at that. I was probably the only guy at the table who knew where that particular expression came from. "Regardless, it is about to happen. I know this like I heard it on the news. We are about to enter a prolonged period of time when the market is going to go straight up. Oh, I'm sure there will be a few burps and bumps along the way, but the long term forecast is for significant growth."
"What could possibly be the cause of this?", asked Jake Number One, the older Jake, my accountant.
"Computers.", I replied.
"What about them? We've had computers for years?"
"No, not like this. I'm not talking about the mainframe computers I did all my programming on back in college. I mean the little ones you can buy from IBM."
"I've seen them,", countered Jake, "but they're practically toys. They break constantly, and you need to have a degree in computers just to run one."
"Carl, I bought one myself, from IBM. They work, but you need to program them yourself. I'm a smart guy, but it's a real pain. Most people won't even bother.", added Jake Junior.
"Yeah, I know, and they don't have much memory and they are expensive and cantankerous. I know all this. Let me ask you this question - what use is a baby? They are expensive and cantankerous and break constantly and so forth and so on. Sooner or later they grow up, though, and get real useful!"
"So, you're saying they get more useful in the future?", said John.
"Precisely! It's all about Moore's Law."
"Moore's Law? Who's Moore?", asked Missy.
"He's the head of Intel, one of the companies I own stock in. Anyway, he discovered, a number of years ago, that the number of circuits on a chip doubles every two years."
"I'm not following you.", said John.
I pulled out my calculator. "Okay, here's a typical calculator. Actually it's more than that, it's a scientific calculator. It cost me about $50. It has a chip inside with transistors and circuits. In two years, according to Moore's Law, that chip will have twice as many components." The others were still looking blank, so I pressed on. "In two years, this calculator will be twice as powerful. Or maybe half the price. Or maybe half the size! Two years after that, one quarter. It's an exponential relationship. In ten years time, the size of the components will be a fraction of their current size, the price will be lower than now, even after inflation, and the power will be immensely larger."
"So, you want to invest in computer companies?", asked Jake Junior.
"No, absolutely not! That's the totally wrong conclusion. In ten years time, computers and components will be as cheap as dirt. It will be a commodity business. No, I want to invest in the companies that write the programming for the computers, the software!"
That stunned them. They just looked at me like I was crazy. I pushed forward. "Let me tell you a story. You know how IBM introduced the Personal Computer a year ago. What you may not know is that IBM only made the magic box. The program that runs the whole thing is called DOS, and it was written by an outside company called Microsoft. They bought the program, called an operating system, from this Microsoft. Without it, nothing can happen with their computer, it just is an expensive paperweight." The others were nodding, they knew about the IBM PC, even if they didn't own one.
"So, anyway, IBM screwed up. They thought like you guys do, that the money is in the box. That box will be a commodity in a few years, and IBM will lose its shirt. They make money selling programming and services, not commodity black boxes. Instead, they let Microsoft keep all the sales rights to DOS, the operating system. Microsoft can sell it to anybody who makes a computer. It's like cars. IBM makes cars, but Microsoft makes the gas. Anybody can build a car, but wouldn't you rather be in the gas business?"
John caught on first. "Which would you rather do? Sell razors or sell razor blades?!"
"You got it!", I said.
Around me, the others were staring at me and each other, like I had just explained quantum mechanics to them. "Ten years from now, history will look at this decision by IBM as one of the classic screwups in business history. What I want to do is invest with the guy who runs Microsoft."
"Who's that?", asked Missy.
"I looked him up. He's a fellow in Redmond, Washington, named Bill Gates. Microsoft isn't on the market yet, but when he does an IPO, I want to grab a chunk. If you can look into it, see if he wants to do a private placement now. I would definitely cough up a million or two now."
"What else comes to mind?"
I shrugged. "It's almost endless. Sometimes I see a name in the Journal or the news about a company and it makes sense. Sometimes I see one that sounds great and it makes no sense. It's as important to know who to avoid as it is to know who to buy. Here's a name for you, Autodesk. You all know I'm building a house. It is going to take an engineer or architect at least two weeks to draw my blueprints by hand. Suppose you can get a computer to do it and then print it out. How long would that take you? How much does it cost to pay for an architect for two weeks? I know the company is working on a new product for this."
"And this has an effect on the country? The economy?", asked Jake Senior.
I nodded. "Imagine it's a hundred years ago, and this fellow named Edison has just come up with this product called electricity. How many fortunes were made from that? What happened to the American economy? What if you could invest with Bell and his telephones, or Morse and the telegraph? That's where we are today. Right now I've got a chip in my calculator. Look at cell phones, what will happen to them."
"You mean those gigantic bricks? Nobody will want one of them.", protested John.
I nodded. At least he knew about them. "It's a brick now, but apply Moore's Law. In two years time it will be half the size, two years later, half again. In ten years, it will be the size of my calculator and fit in my pocket." John's mouth snapped shut as he started to think about things.