A 118-fold price-to-earnings ratio: How the Capital Market has enriched America

Source: Blockworks; Compiled by: Baishui, Golden Finance

"The primary concern of the American people is business." — Calvin Coolidge

In 1968, Ross Perot's startup Electronic Data Systems (EDS) for "computer facility management" went public on the stock exchange with an issue price of 118 times its earnings.

This was a staggering valuation at the time—especially considering the risks involved.

Fortune magazine pointed out shortly after EDS's initial public offering that EDS was "in a precarious position." "It has only a handful of clients, three of which contributed 64% of its revenue in fiscal year 1968."

But investors are keen to take on such risks.

"As every women's investment club knows," explained Fortune magazine, "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 no matter how high the valuation, they still yearn to bet on these companies.

Ken Langone had promised Perot that he would take EDS public at "the highest price possible." He admitted that the price was indeed very high.

Langni later wrote that, based on a price-to-earnings ratio of 118, the stock "is overvalued."

"But it will only be overvalued before growth, and after that, it will no longer be overvalued."

The ladies of the investment club - brave pioneers of growth investing - agreed with his viewpoint.

The closing price on the first day of EDS is 40% higher than the "overvalued" IPO price.

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

The article claims that Ross Perot is "the fastest person to get rich in Texas history," which is quite an achievement in Texas, known for its overnight wealth.

With EDS stock soaring at the end of the year, 39-year-old Perot became the first tech billionaire in history.

This is a unique American story.

No other country has produced an entrepreneur like Ross Perrault. He spoke the Texas dialect, went to the same barbershop in Dallas every week for 30 years to cut his hair short, was a devout family man, but was also extremely competitive in business — and won 18.9 percent of the popular vote in the 1992 presidential election.

But the wealth of Pero is more characteristic of the United States because no other country's investors can achieve this.

EDS was one of the 368 companies listed on the American Stock Exchange that year, while most of the funding for companies in other developed countries came from bank loans.

The United States has more than one IPO on average every day, while, for example, Germany has less than one IPO on average per year.

After the EDS IPO, Fortune magazine speculated, "Perhaps no one else could make so much money so quickly."

But the author also reminds us that "a large part of Pero's wealth can be attributed to the enthusiasm of investors."

However, this daring spirit of adventure not only made founders like Perot wealthy but also enriched America.

B. Srinivasan wrote in his work on the history of American capitalism that the U.S. "has a public stock market that is more willing to absorb risks earlier than the markets in Europe and Asia."

This gives the United States a "unique ability to provide funding for creativity in the early stages," as well as the later "Silicon Valley ecosystem that allows startups in emerging markets to grow rapidly."

Some of these startups have developed into giants: today, 21 of the 25 largest companies in the world are in the United States.

Americans do not always celebrate this incredible success.

Of course, supporters of the "Occupy Wall Street" movement are deeply regretful about this — but even the U.S. Treasury Secretary seems to feel conflicted about it.

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

Not at all.

A study found: "The growth of stock market capitalization and the number of listed companies is closely related to real GDP growth, which supports the view that capital markets play a key role in driving American prosperity."

Another study elaborated on the reasons: "In 65 countries, financially developed countries increase investments more in their growth industries and reduce investments more in their declining industries."

Of course, the situation is not always like this.

The popularity of meme stocks, zero-day options, and cryptocurrency "funding companies" may make the stock market seem like a massive resource misallocation—hardly any bigger than a casino.

But the third study found that "strong evidence indicates that higher stock market liquidity, measured by trading volume relative to market size, has a causal relationship with long-term GDP growth."

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

Could cryptocurrency trading be the same?

Solana co-founder Anatoly Yakovenko believes this: "The greatness of the U.S. capital markets lies in their depth, liquidity, and the wide range of participants," he said, adding, "The entire focus of Solana's promotion is to lower the barriers to entry into the capital markets."

I believe this is a great promotion because opening the market to more traders will make the market better—and the cryptocurrency market is open to everyone.

The U.S. capital markets are the best in the world because they consistently connect 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 as the "Internet capital market"—might become the next place where daring founders meet daring investors.

People hope that this enjoyable and permissionless meeting can create "net new assets" that can only ever be funded by cryptocurrency enthusiasts.

This optimism is easily overlooked because, despite the extraordinary enthusiasm shown by cryptocurrency investors, the results so far have been disappointing: the concept of non-sovereign currency is still not fully developed, stablecoins are not true cryptocurrencies, and other cryptocurrencies seem to be highly self-referential—merely a new way of trading cryptocurrencies.

But trading is important—if cryptocurrencies ultimately become a platform for the next generation of enthusiastic traders to fund new types of assets, then it is worth a try.

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