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

Source: Blockworks; Compilation: Baishui, Golden Finance

"The first priority of the American people is doing business." - Calvin Coolidge

In 1968, Ross Perrow's "Computer Facilities Management" startup Electronic Data Systems (EDS), was listed on the stock exchange with an issue price of 118 times the price-to-earnings ratio.

This was a jaw-dropping valuation at the time—especially given the risks involved.

Shortly after EDS’s initial public offering, Fortune magazine pointed out that EDS is “in jeopardy.” “It has only a few customers, three of whom contributed 64% of revenue in fiscal 1968.”

But investors are keen to take such risks.

“As every female investment club knows,” Fortune magazine explained, “the public is very accepting of new stock issuances today, especially companies from the computer industry.”

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

But no matter how high the valuation is, they still want to bet on these companies.

Ken Langone promised Perro that he would get EDS on the market at "the highest price possible." He admits that the price is indeed very high.

Langone later wrote that at a price-to-earnings ratio of 118 times, the stock was “overvalued.”

“But it will only be overrated before growth and will not be overrated afterward.”

The ladies of the investment club—the brave pioneer of growth-oriented investment—agree with him.

EDS's first-day closing price was 40% higher than the "overvalued" IPO price.

Fortune magazine commented that Perot's move "maybe the most brilliant personal achievement in American business history."

The article says Ross Perro is "the fastest Texan ever to get rich", which is a great achievement in Texas, which is famous for getting rich overnight.

As EDS shares soared at the end of the year, Pero, 39, became the first tech billionaire in history.

This is a unique American story.

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No country can produce entrepreneurs like Ross Perro. He spoke in Texas dialect and went to the same barber shop in Dallas for 30 consecutive years to cut his hair short. He was a devout family man, but was also highly competitive in the business world – and won 18.9% of the popular vote in the 1992 presidential election.

But Perot's wealth is more American because no investor in other countries can do it.

EDS was one of the 368 companies listed on the U.S. Stock Exchange that year, and most of the funds in other developed countries were from bank loans.

On average, there are more than one IPO per day in the United States, while for example, Germany has less than one IPO per year.

After the EDS IPO, Fortune magazine speculated that “maybe no one else can make so much money so quickly”.

But the author also reminds that “most of Perot’s wealth can be attributed to the enthusiasm of investors.”

However, this adventurous enthusiasm not only made founders like Perot rich, but also made the United States rich.

Bu Srinivasan wrote in his American history of capitalism that the United States "has a public stock market that is willing to absorb risks earlier than European and Asian markets."

This gave the United States "the unique ability to finance creativity in its early stages" and later "the ecosystem of Silicon Valley that allowed startups to grow rapidly in emerging markets."

Some of these startups have grown into giants: Today, 21 of the world's 25 largest companies are in the United States.

Americans don’t always celebrate this incredible success.

Of course, supporters of the Occupy Wall Street movement feel deeply sorry for it—but even the U.S. Treasury Secretary seems to be in conflict.

"It's the ordinary people's turn," Minister Becent repeatedly said, as if the economy is a zero-sum game between ordinary people and Wall Street.

Not so.

One study found: “The growth in stock market capitalization and the number of listed companies are closely related to real GDP growth, which supports the view that capital markets play a key role in driving the U.S. prosperity.”

Another study elaborates on the reasons: “Of the 65 countries, countries with developed financial industries increased more investment in their growth industries and reduced more investment in their recession industries.”

Of course, this is not always the case.

Popularity such as meme stocks, zero-day maturity options and cryptocurrency “money companies” may make the stock market look like a huge resource mismatch—but not much bigger than a casino.

But the third study found “strong evidence that higher stock market liquidity measured by trading volume relative to market size is causal to long-term GDP growth.”

In other words, even intraday trading can be economical.

Is this possible with cryptocurrency trading?

Solana co-founder Anatoly Yakovenko believes this: “What’s great about the U.S. capital market is its depth, liquidity and wide range of players,” he said, adding that “the whole propaganda focus of Solana is to lower the barriers to entry into the capital market.”

I think it's a good publicity because opening the market to more traders makes the market better – and cryptocurrency markets are open to everyone.

The U.S. capital market is the best in the world because it always connects the best founders (such as Ross Perot) with the most passionate investors (such as women’s investment clubs).

Now, the cryptocurrency capital market—recently renamed “Internet Capital Market”—may become the next place for risky founders to meet risky investors.

It is hoped that this pleasant, permissionless meeting will create “net new assets” that can always be funded by cryptocurrency enthusiasts.

This optimism is easily overlooked because despite the extraordinary enthusiasm of cryptocurrency investors, the results so far have been disappointing: The concept of non-sovereign currencies is not yet perfect, stablecoins are not real cryptocurrencies, and other cryptocurrencies seem to be highly self-referential—just a new way to trade cryptocurrencies.

But trading is important – if cryptocurrencies end up being a platform for the new generation of enthusiastic traders to fund new assets, it’s worth a try.

History shows that enthusiastic American investors have created wealth not only for the founders, but also for the United States.