118 times the price-to-earnings ratio: How the capital market made the United States rich

Source: Blockworks; Compiled by: Baishui, Golden Finance

"The first business of the American people is to do business." - Calvin Coolidge

In 1968, Ross Perot's "computer facility management" startup Electronic Data Systems (EDS) went public on the stock exchange at a price-to-earnings ratio of 118 times.

This was an eye-popping valuation at the time - especially considering the risks involved.

Shortly after EDS's IPO, Fortune magazine pointed out that EDS was "in a precarious position." "It had only a few customers, three of which contributed 64% of its revenues in fiscal 1968."

But investors are keen to take these kinds of risks.

"As every women's investment club knows," Fortune explained, "the public is very receptive to new stock offerings today, especially from companies in the computer industry."

Many of these women may have never seen a computer, let alone used one.

But they were still eager to bet on these companies, no matter how high the valuations.

Ken Langone had promised Perot that he would take EDS public at the “highest price possible.” The price, he admitted, was high.

At 118 times earnings, Langone later wrote, the stock was “overvalued.”

“But it’s only overvalued until it grows, and never again.”

The ladies at the Investment Club—the pioneers of intrepid growth investing—agreed with him.

EDS closed 40% above its “overvalued” IPO price on its first day.

Fortune magazine said that with this move, Perot had “perhaps the greatest personal achievement in American business history.”

The article called Ross Perot “the fastest-getting-rich-quickest Texan ever,” no small feat in a state known for getting rich overnight.

As EDS shares soared at the end of the year, Perot, 39, became history’s first tech billionaire.

It was a uniquely American story.

No other country could have produced an entrepreneur like Ross Perot. He spoke with a Texas brogue, had his hair cut short at the same Dallas barbershop every week for 30 years, was a devoted family man but also fiercely competitive in business—and won 18.9% of the popular vote in the 1992 presidential election.

But what made Perot’s fortune all the more American was that no other country’s investors could do it.

EDS was one of 368 companies that went public on U.S. stock exchanges that year, at a time when companies in other developed countries were mostly financed with bank loans.

The U.S. averages more than one IPO a day, while Germany, for example, averages less than one a year.

After the EDS IPO, Fortune speculated that “perhaps no other person has made so much money so quickly.”

But the author also cautioned that “much of Perot’s wealth can be attributed to investor enthusiasm.”

However, this enthusiasm for risk-taking didn’t just make founders like Perot rich; it made America rich, too.

In his history of American capitalism, Bhu Srinivasan writes that the United States “had a public stock market that was willing to absorb risk much earlier than markets in Europe and Asia.”

This gave the United States “a unique ability to finance ideas at an early stage” and, later, “the Silicon Valley ecosystem that enabled startups in emerging markets to grow rapidly.”

Some of these start-ups have grown into giants: Today, 21 of the world’s 25 largest companies are in the United States.

Americans haven’t always celebrated this incredible success.

Occupy Wall Street supporters lamented this, of course—but even the U.S. Treasury secretary seemed ambivalent about it.

“It’s Main Street’s turn,” Secretary Bessant kept saying, as if the economy were a zero-sum game between Main Street and Wall Street.

It’s not.

One study found that: “Growth in stock market value and the number of listed companies is strongly correlated with real GDP growth, supporting the view that capital markets play a key role in driving American prosperity.”

Another study elaborated on why: “Across 65 countries, countries with strong financial sectors increased investment more in their growth sectors and reduced investment more in their declining sectors.”

Of course, this wasn’t always the case.

The popularity of things like meme stocks, zero-day options, and crypto “funding firms” can make the stock market look like a giant misallocation of resources—only not much bigger than a casino.

But a third study found “strong evidence that higher stock market liquidity, measured by trading volume relative to market size, is causally associated with long-term GDP growth.”

In other words, even day trading can be economically beneficial.

Could the same be true for crypto trading?

Solana co-founder Anatoly Yakovenko thinks so:“The great thing about U.S. capital markets is their depth, liquidity, and broad range of participants,” he said, adding, “The whole pitch for Solana is to lower the barriers to entry.”

I think that’s great pitch because opening markets to more traders makes them better—and crypto markets are open to everyone.

The U.S. capital markets are the best in the world because they consistently connect the best founders (like Ross Perot) with the most passionate investors (like the Women’s Investment Club).

Now, perhaps the crypto capital markets — newly renamed “internet capital markets” — will be the next place where adventurous founders meet adventurous investors.

The hope is that this joyful, permissionless meeting will create “net new assets” that can only ever be funded by crypto enthusiasts.

This optimism is easy to discount because, despite the extraordinary enthusiasm of crypto investors, the results so far have been disappointing: the concept of non-sovereign money is half-baked, stablecoins are not really cryptocurrencies, and other cryptocurrencies seem highly self-referential — just new ways to trade cryptocurrencies.

But trading is important — if crypto ends up being a platform for a new generation of passionate traders to fund new types of assets, then it’s worth a try.

History shows that America’s passionate investors have created wealth not only for founders, but also for America.