Children take the trade form of the road -- 15 have shares and no poor

by zuidie3261 on 2012-02-05 16:32:38

Children's Way of Trade m15: "No equity, no wealth" Old Zhi with dignity / Bai 2008 June 21 night "Chen Di, when you grow up, what do you want to be? People know that your goal is to become a millionaire by the age of twenty. But, which field would be most suitable for your success?"

Chen Di, "In the future, I thought about working in power and energy companies, but you said those professions are heavily regulated by the government, not easily allowing free entrepreneurship. However, I have always wanted to create children's comics, writing adorable comic books. Then, based on these comics, extend many products such as clothing, toys, household items, etc., just like Disney, extending into the entire related industry. Especially, these books, toys, and household items can not only be in English but also translated and adjusted into foreign languages, Japanese, Korean, etc. This way, wouldn't there be a lot of development space?"

"This is very good. It seems that this summer vacation, you can start designing and writing comic books. However, you might also consider starting a fund management company in the future, establishing an equity fund, accepting individual and institutional investors who entrust their money to you, helping them make money from their investments. This way, you could also become a billionaire."

Chen Di, "But, this profession doesn't seem very exciting, just doing equity investment?"

"In the past, there was a proverb in foreign countries saying, 'No commerce, no wealth.' This saying has its reasons, but traditional 'commerce' can only bring small wealth. For example, even if you engage in arbitrage trade, buying goods at a lower price in one place and transporting them to a higher-priced place to sell, just like Liu Bei making clothes in China and then selling them in the U.S., each piece of clothing can earn a gross profit of $10 or $20, but 100,000 pieces of clothing can only make $1 million or $2 million gross profit, and the cost is also high. Selling 100,000 pieces of clothing isn't easy either. After deducting costs, there won't be much left as net profit. Traditional catering industries are also the same. In other words, these traditional businesses that rely on selling goods and services can indeed make money, more than regular wage workers, but these traditional business practices can only make people moderately wealthy, not billionaires."

Chen Di, "Then, what you mean is, how can one become a billionaire?"

"Currently, the Chinese saying 'No commerce, no wealth' should be changed to 'No equity, no wealth,' at least without equity, it's hard to become 'very wealthy.' What's the difference? Traditional commerce is characterized by earning current money by selling products and services, so you have to earn and accumulate day by day. However, human life is limited, and no matter how much money you make each day, over the span of a lifetime, it's only so many days, plus there are illnesses and holidays. But after the emergence of equity trading markets, such as the stock market, the space for wealth growth has fundamentally changed because, under normal circumstances, equity prices reflect the total value of expected profits for many years in the future. That is, if a company succeeds and industrialized management is in place, then this company has the prospect of operating sustainably for many years. Owning the equity of this company is equivalent to owning the right to this stream of income for many years in the future. When you sell this equity, you're essentially selling the stream of profits for many years in the future. This is why making money through equity is faster and leads to larger wealth compared to making money through traditional commercial profits. Think about it, an individual accumulating profits day by day, maximizing personal wealth based on a finite lifespan, how can they compare with someone who, through equity transactions, can turn the profits of many years in the future into today's wealth? The latter's total profits are not constrained by individual lifespans."

Chen Di, "You mean, that's why Gates, Robin Li, and Jerry Yang became billionaires in their twenties or thirties?"

"Yes. However, founding companies with industrialized management, building the ability for companies to sustain operations for many years, and thereby making equity extremely valuable, is not the only way to achieve 'equity wealth.' Running investment fund companies and being a stock investor can also achieve this. For example, Fidelity Investments, the smallest securities fund management company in the U.S., manages nearly two trillion dollars in assets today, and because of its success, the Johnson family, its main founders, are now billionaires. Why has this company been so successful? What is the background?"

Fidelity Fund was established in 1930, but due to the subsequent Great Depression, securities funds had no prospects, making it difficult to raise money from individuals or institutional investors. By 1943, when Mr. Johnson took full responsibility for managing the fund, by 1946, the total amount of funds managed was only 13 million dollars, not very large. Under such circumstances, it was hard to say how bright the future of Fidelity Fund Company was, and the entire fund management industry’s prospects were also bleak because, up until then, people did not understand what securities investment funds were. Even if people had spare money, they would feel that investing in stocks themselves was enough, so why seek professional investors to manage their investments? The foothold of the entire investment fund industry had yet to be found."

Chen Di, "Then, how did the development happen later?"

"The biggest revolutionary event for Fidelity Fund Management Company was in 1952 when they hired Mr. Charley Wong. This was almost a legendary story. Mr. Wong was born in Shanghai in 1929, finished high school, and went to study in the U.S. alone in 1946. In 1952, while pursuing his MBA degree at Boston University, he decided to work as a junior analyst at Fidelity Company for a weekly salary of $50 before finishing his degree. In 1957, due to Mr. Wong's suggestion, Fidelity Fund Company decided to launch a fund called 'Fidelity Capital Fund,' with Mr. Wong serving as the fund's investment manager."

"Mr. Wong's greatest breakthrough was changing Fidelity's previous conservative investment approach. Originally, Fidelity Fund mainly invested in blue-chip company stocks. In Mr. Wong's view, buying these stocks was like buying government bonds with fixed interest rates; throughout the year, the main source of profit was dividends, similar to government bonds and bank deposits, so the risk was low. However, with these stocks, you would never get rich. He felt that this kind of investment fund was competing with bank loans, which made no sense. He believed that the real value of equity investment lay in the stocks of companies with enormous growth potential. These were the companies where the essence of equity investment lay; otherwise, it would be better to keep the money in the bank! For these high-growth companies, their expected income over many years in the future would be virtually infinite, so the total value of their future income expectations would also be virtually infinite! Investing in such companies was the true path to wealth! Therefore, the equity capital fund he managed only invested in high-growth stocks he considered promising. As a result, his fund investment returns exceeded 50% annually, which was almost a miracle, quickly attracting a lot of individual investors' money. Within a few years, the fund's value increased to $1 billion, becoming the largest securities fund in the U.S. at the time. Consequently, Fidelity Company's image and brand became famous in the U.S., becoming the highest-reputed enterprise in the American fund management industry. Also, due to Mr. Wong's investment philosophy, the entire securities investment fund industry found its footing different from banks, which was not providing stable preservation-type interest income for investors but offering them the choice of 'getting rich through equity!' In this way, Fidelity Investment Fund Company secured its foundation for rapid development."

Chen Di, "However, isn't the dividend income from companies' dividends also good? Such dividends are visible and tangible, very safe, isn't that good?"

"That depends on your pursuit goals. If you want to preserve the money you haven't received yet and seek stability income, high-dividend companies are certainly good, maybe slightly better than putting money in the bank, but this is not the way of 'getting rich through equity!' For example, in 1926, if you had invested ten thousand dollars in U.S. government bonds and reinvested the annual interest into new government bonds, by now, that ten thousand dollars would have grown to 790,000 dollars, which is not a small number, right? But if you had invested that money annually since 1926 in high-growth small U.S. company stocks, then that ten thousand dollars would have appreciated to 150 million dollars today, making you a billionaire! This example is based on real data, you see, the ultimate wealth-building results differ greatly between investing in high-growth equities and steadily buying government bonds or keeping money in the bank. Thus, whenever you specifically choose companies with growth prospects, whether they have intangible assets or not, investing in stocks or managing stock investment funds can allow you to enjoy the benefits of 'having equity makes one rich' and 'getting rich through equity.' In comparison, if you invest in the equities of these high-dividend income companies, such equities are more like bank loans, walking slowly, not wealth-building type but preservation type. High-growth companies are where the meaning of getting rich through equity lies."

After explaining all these, there is a key question that hasn't been touched upon, which is, traditional Western countries also had shareholding partnership enterprises, whose shares, although without active trading markets, couldn't they still be traded? Why couldn't 'getting rich through equity' happen in the past? This involves the difference between modern and traditional societies, namely, the legal system required for property rights protection and contract enforcement (securities enforcement). First, can a company's management be sufficiently professionalized and depersonalized? This determines whether a company's lifespan can exceed the biological lifespan of its founder and continue to 'live indefinitely.' If a company's management cannot separate from the founder's or major shareholder's personality, if the company's interests and shareholders' cannot be separated, and if the company does not have an independent 'legal person' status, such a company does not have its own autonomous life. Mostly, it is set up by individuals for short-term trades, and the company's life is tied to the psychological lifespan of its founder.

Take the example of Yuxi Village in Fei Xiaotong and Chi Zhizai's book "Three Villages in Yunnan." In 1943, when Mr. Chi visited Yuxi Village for research, he found that the wealthy merchants of Yuxi were largely declining. He said, "After observing the decline of four wealthy merchant families in Yuxi, the deepest impression is that once people like Wen Wangxiang and Feng Xiang die, their businesses cease to operate due to the lack of successors." Because when they were alive, running businesses, their family members, including brothers and daughters, were mostly idling away their days, indulging in smoking and gambling, leading to none of the family members being competent. So, once the founder dies, the family lacks successors. Of course, the situation described by Mr. Fei and Mr. Chi has broader implications. Why didn't entrepreneurs like Wen Wangxiang and Feng Xiang cultivate 'successors' when they were alive? The management of the company clearly lacked professionalization and was personalized. Why couldn't they recruit professional managers beyond their relatives and close friends within a wider scope? From this perspective, Confucian culture based on bloodline and not transcending bloodline is a cultural institutional barrier to 'getting rich through equity.' --- This issue is indeed significant and will be discussed in another article.

Furthermore, even if a company can progress to professionalized management and live on indefinitely, meaning that profit streams can last infinitely long, the crucial question remains: Can the company's equity, as a perpetual property right, be protected? This is extremely important. If the owners of property rights (especially perpetual property rights) are not protected, then regardless of how long the company's life may be, its equity is unlikely to have a trading market, or at least, no one would be willing to pay a high price. Hence, there would be no pathway to 'getting rich through equity.'

Finally, the equity trading market must be extensive enough, with sufficiently low transaction costs and sufficient trading volume. Otherwise, equity lacks liquidity, and its value won't be too high, making it difficult to establish 'no equity, no great wealth.' Therefore, the rule of law and property rights protection system are fundamental to whether a society can simply transition from 'no commerce, no wealth' to 'having equity, not great wealth.'

These contents are somewhat challenging for Chen Di. However, through discussions of many past cases, she generally understands these differences. Only, to this day, she still doesn't think that setting up an equity investment fund company is a 'cool' career, feeling that it's not 'real' enough.

(This article was originally published on Chen Zhiwu's Sohu Blog. Reprint with permission noted: http://chenzhiwu.blog.sohu.com/)