But they sure are nice numbers. Hoffman became a young millionaire by riding the two trends dominating the U.S. economy: the soaring stock market and the country’s continuing transformation into a postindustrial society based on knowledge and technology rather than on traditional wealthmakers like manufacturing. Companies like Microsoft, which dominate the computer operating-system and software businesses, have ridden both waves, prospering beyond anyone’s wildest dreams. The 100 Microsoft shares you could have bought for $2,100 at the company’s initial public stock offering in 1986 have become 3,600 shares worth half a million dollars at last Friday’s closing price of $138.50. The value of chairman Bill Gates’s piece of the company has risen to $37.8 billion from $234 million, despite his having realized about $2 billion of cash (by NEWSWEEK’S count) by selling stock since 1986. Look, even billionaires need walking-around money.
While there’s only one Gates, there are thousands of Dan Hoffmans in technology companies like Microsoft and Intel (computer chips) and Hewlett-Packard (computers and peripherals) and Cisco Systems (computer networking) who have optioned their way to millionairehood in the past dozen years. When Gateses make billions, plenty of people make millions.
Even without stock options or the foresight to buy Microsoft, lots of people have done enormously well in the market, especially in the past 30 months. The broad market averages have more than doubled since the start of 1995. This has created more than $4 trillion of new paper wealth for stockholders, according to Wilshire Associates. That’s $4 trillion, with a t. It’s equal to about half a year’s worth of output of goods and services for the entire United States. And while there are no precise numbers, more Americans than ever have their financial fate tied to the stock market. Some 25 million Americans - about a quarter of the work force - have 401(k) retirement accounts, according to Access Research, and an increasing number of 401(k) participants have money in stocks. In addition, the Dow’s 900 percent rise since August 1982 has lured millions of new investors into the market. Counting reinvested dividends, your money has multiplied almost 13-fold in those 15 years.
In fact, catering to investors has itself become a huge growth industry. Witness the fact that Mutual Shares’ Michael Price got more than $600 million last year for the fund-management company that he bought for less than $10 million in 1989. You can barely turn around without seeing or hearing stock-market advice from some print or broadcasting outlet. Not surprising, considering how many people are in the market - and how many of us media-elite types work for companies offering 401(k) plans, which heightens our personal interest in stocks.
The euphoria rolls on. The economy seems to be producing only good news. Unemployment is low, interest rates are down, the federal deficit is melting faster than ice cream on a Washington sidewalk in July. Just last week, even Alan Greenspan, chairman of the Federal Reserve Board and the chief public skeptic about stock prices, threw in the sponge. Greenspan, who warned of possible ““irrational exuberance’’ in the markets eight months (and 1600 Dow points) ago, failed to repeat the warning in his semiannual congressional appearance. Greenspan seemed to accept the new conventional wisdom - which some call the New Paradigm - that the economy is going great and will keep getting better because technology has made U.S. companies far more efficient. Emanations from the Fed indicate that Greenspan believes that higher-than-expected corporate profits and lower-than-expected inflation mean that productivity is growing faster than government statistics say it is. That, in turn, helps justify current stock prices, which are at stratospheric levels compared with dividends, corporate profits and other traditional valuation yardsticks. (You have to use words like ““seemed’’ and ““emanations’’ when you’re dealing with the Federal Reserve, whose denizens talk in opaque Fedspeech, not in simple English.)
The Fed’s role, as the old line goes on Wall Street, is to take the punch bowl away when things start to get rowdy. Greenspan tried to do that last December; now he’s spiking the punch. The chaperon has left the party, let the good times roll. Onward and upward. At least for the people who are part of the so-called New Economy and who have enough money to invest in stocks.
Greenspan’s conversion, an important psychological watershed, makes this a good time to look at what’s going on in our economy. Where the money is coming from. Why things seem to be moving faster than ever. And who’s getting rich, and who isn’t. For the sake of convenience, we’re calling the winners the New Rich, although sticklers might argue that’s a misnomer because the people we’re talking about here haven’t all become rich just in the last couple of years. Nor are they all twenty- or thirtysomething cybergeeks. But they’re people whose wealth is the product of the New Economy of ideas. For instance, showbiz folks have always been extremely well paid, but someone like Oprah Winfrey makes her real money from owning her show, a fairly recent development. Septuagenarian Sumner Redstone isn’t exactly a newcomer to wealth - but his company’s most valuable assets are MTV and Nickelodeon rather than the movie theaters it started with.
There are also lots more millionaires than there used to be, if only because anyone at Intel or Microsoft for five years who’s gotten modest stock options of 1,000 shares a year is ahead by more than $1 million. But the distribution of wealth, in which the top 10 percent of the population owns two thirds of the wealth, has stayed largely the same for years. It’s just that rich people today are a different crowd than they used to be. They may change U.S. society even more profoundly in the long run than they’re changing it now. People like Warren Buffett and Bill Gates and Bernie Marcus of Home Depot talk about leaving most of their wealth to foundations rather than to their heirs. If they do, these foundations will rival the government as sources of money. Think of how much impact the Ford Foundation has had on American society, then think of what a Buffett Foundation 10 times as big could do. Those huge pools of wealth would be part of the decentralization that’s another feature of the New Economy. When industrial assets were in vogue decades ago, wealth was concentrated in places like New York and Chicago. Now that intellectual assets are hot and long-distance communication is so easy, you can live anywhere and be anywhere. You can peddle sneakers from Oregon (Phil Knight of Nike), software from Seattle (Gates at Microsoft), mutual funds from Boston (Fidelity’s Johnson family).
Helping to drive this trend is the change in the way venture capitalists operate. They used to spend years nurturing companies before letting them sell stock to the public. No more. Now they cash out almost overnight. Profits? Who needs to show profits? It’s the idea that’s important. By current standards, Microsoft is an old-line company. It was in business 11 years before it went public in 1986, and had almost twice as much in profits ($31 million) in the 12 months before going public as Netscape had in revenues ($17 million) before going public in 1995.
The traditional road to big wealth has been owning a big piece of a company rather than working for one. The world has always been full of millionaires you’ve never heard of, like the family that owns three McDonald’s franchises or the guy who owns a tool-and-die business in suburban Detroit. In fact, the very richest stratum of Americans, the top half of 1 percent of households, own almost three times as much in private business assets ($2.4 trillion) as they do in stocks ($865 billion), according to the wealth mavens at the Federal Reserve Board.
Big slugs of stock options, though, give top managers a chance to be owners instead of high-priced wage slaves. The most notable examples: Roberto Goizueta of Coca-Cola and Michael Eisner of Disney, whose share grants and options have given them personal fortunes of more than $1 billion and $500 million, respectively. The rise of options has been spurred by an accounting loophole. If a company pays you a cash bonus of $1 million, it has to deduct that money from its reported profits. But if a company gives you options that it could have sold to an outside investor for $1 million, it doesn’t charge a penny to reported profits. And when you cash in your option, the company gets a tax deduction equal to the taxable income that you realize. Talk about a free lunch. A company gives part of itself away, doesn’t have to record the cost and gets cash from Uncle Sam. Pretty slick.
You don’t have to be an Eisner or a Goizueta to make a lot of money from stock options - not in this market. The obscene compensation numbers you see in the annual listings of chief executives’ pay consist largely of the money they made cashing in stock options rather than their salaries and bonuses. When salary and bonus were the primary source of CEO compensation, they made 30 or 40 times what the average employee made. But with massive stock options, which regular employees don’t get, the differential has grown enormously, to 150 or 200 times. (Yes, some companies like BankAmerica and Chase Manhattan are giving options to almost all their employees. Those grants are better than nothing - but are a thousandth of what the big guys get.)
But let’s leave CEO piggery aside.The real key to what’s happened is the rapid growth of the U.S. economy. A large part of our growth has been spurred by the rise of international business, which has allowed once stodgy companies like Coke and Wrigley and Gillette to become quick growers. You can sell only so much more sugar water or gum or razor blades in the United States when you already dominate the market. But with the world opening up, your horizons are limitless.
Even before the stock market’s megasurge the past few years, there was lots more money sloshing around the country than there used to be. One of the fascinating tables in a new book by Andrew Hacker (““Money: Who Has How Much and Why’’) shows how many U.S. households reported at least $1 million of income. Updated figures from the IRS show 69,935 such returns in 1994, up from 13,505 (adjusted for inflation) in 1979. This, of course, doesn’t count people who are sitting on stock-option profits, or who own businesses worth millions but pay themselves less than $1 million a year. Part of the increase in reported millionaires came because federal income-tax rates have dropped sharply since 1979, making folks more willing to declare income, and tax-code changes wiped out many tax shelters. But the bulk of the increase comes from rising incomes.
This wealth boom means it takes more money than ever to gain entree to the top stratum of richies. It took a mere $100 million to make the first Forbes 400 list of richest Americans in 1982. By last year, the price of admission had risen to $415 million, and the minimum for the 1997 list will probably approach half a billion dollars. Microsoft stock has more than doubled in the past 12 months, adding about $20 billion to Bill Gates’s net worth. Gates’s numbers are so amazing we just have to dwell on some of them. He owns 272,797,000 shares of Microsoft. Thus, a $4 move in the stock changes his net worth by $1.1 billion. And consider this. The stock that Gates has sold since 1986 for about $1.95 billion is currently worth about $17.5 billion. (That’s our analysis, based on data from CDA/Investnet.) Think of it. Just by itself, the $15.5 billion that Gates left on the table would be the third biggest fortune in the United States.
Before we succumb completely to irrational exuberance of our own, we should look at a difficult issue: the fact that the New Economy is leaving lots of Americans behind. Despite what many people call the democratization of wealth via the stock market and stock-based retirement plans, wealth distribution has remained largely stable. Despite heartwarming success stories like the millionaire secretaries created at Home Depot, the top 1 percent of the population continues to own about a third of the nation’s wealth, the next 9 percent own a third and the remaining 90 percent have to make do with a third. (If you counted the value of future Social Security retirement benefits, the numbers would be less skewed toward the upper classes, but there would still be far more wealth concentration than in other industrialized countries.) While many jobs are well paying - Andrew Hacker says that despite its massive cutbacks, IBM currently has more $100,000-plus employees than ever - a good part of the population is missing the boom because it lacks the skills and the capital to play the game. This isn’t bleeding-heart stuff - it’s just a fact.
Someone has to be the spoilsport here, so it might as well be us. The economy is going great, and the job market has finally gotten so tight that some companies are raising wages of lower-paid people and hiring workers whom they would have shunned in a weaker economy. But nothing lasts forever - and this boom won’t last forever, either. When you have a company based on ideas and stock options instead of tangible assets, new fortunes can disappear as quickly as they appeared. Your sneakers go out of fashion, your movies flop, your software becomes obsolete and suddenly you go from being top dog to being dog food. A company like Microsoft pays relatively low wages, assuming that stock-option profits will more than cover the shortfall. But what happens in a company like that if the stock falls instead of rises? Take Wal-Mart, whose stock (and employee morale) was in the dumper for years before recovering in 1997. Someday, even Microsoft stock will go down and stay down for a good long while, because everything does, sooner or later.
Some experts claim the laws of financial gravity have been repealed, and we don’t have to worry about recessions or falling stock prices anymore. And that Alan Greenspan’s conversion means the boom will go on forever. Don’t believe it. No tree has ever grown to the sky, or ever will. Those of us with a sense of history worry that when almost everyone agrees about something, it’s almost always wrong. What an irony if Alan Greenspan’s belated conversion to the bullish dogma turned out to mark a market peak.
It’s lots of fun to look at other people’s money-not as much fun as having your own, but we all have to take what we can get. These charts will give you an idea of who’s got the Biggest Money in the United States (srprise: Bill Gates tops the list), how many of us have just plain big money and how there’s lots more dough sloshing around in the United States than there used to be.
When Forbes published its first rich List in 1918, heavy industry dominated. Now three of the top 10 richies are Microsofties.
1918 Figures adjusted for inflation 1918 Name Source Billions John D. Rockefeller Oil 12.8 H.C. Frick Steel 2.4 George F. Baker Banking 1.6 William Rockefeller Oil 1.6 Edward Harkness Oil 1.3 J. Ogden Armour Meatpacking 1.3 Henry Ford Autos 1.1 William K. Vanderbilt Railroads 1.1 Edward H.R. Green Inheritance 1.1 1997 William Gates III Computers 36.4 Walton Family Inheritance 27.6 Warren Buffett Investment 23.2 Paul Allen Computers 14.1 Haas Family Retailing 12.3 Mars Family Candy, pet food 12.0 Samuel Newhouse Jr. & Donald Newhouse Media 9.0 Cargill Family Grain 8.8 Steven Ballmer Computers 7.5 John Kluge Media 7.2
Most people’s biggest asset is their house. But upper-crust types are into income producers: business and investments.
Share of total household assets Richest 0.5% Others Residence 7% 39% Stocks and bonds 24 13 Business 41 9 Automobiles 0.5 6 Source: Federal Reserve 1995 Survey of consumer Finance
Gates’ wealth, if liquidated, could buy every man, woman and child In the U.S. a pair of in-line skates.
Or, if he focused on homes, he could get every household in the United States a new 27-inch color television.
If he targeted his home state, he could buy every Washington resident 13 nights in a deluxe suite at Versailles, France.
Or he could put a new 1997 Honda Accord LX in the garage of each Washington-state household.
More people than ever are getting a taste of wealth through 401(k) accounts, stock options and plain old seven-figure incomes. A look at America’s rising fortunes:
The sources and sites of America’s big furtunes have changed dramatically since Frobes magazine elevated finanical voyeurism to a high art by publishing its annual list of the richest Americans in 1982.
Number of Forbes 400 by source 1982 1996 Inheritance 85 39 Mining, oil or gas 40 15 Communications or media 37 45 Software or computers 4 26 Manufacturing 5 8 Source: Forbes Graphic by Dixon Rohr, Research by Dante Chinni-Newsweek
