Bendukidze became a multimillionaire, but he never became an oligarch. Why? “I blame Wall Street,” he told me—the film, not the Manhattan neighborhood. “We watched that movie in 1992 and we didn’t understand any of it. I thought to myself, If I can’t even understand as much finance as an ordinary American moviegoer understands, it would be crazy for me to start my own bank.” But at a moment of hyperinflation and slightly lower state interest rates, banking offered an opportunity to make the first big post-Soviet windfall. Even more important, the fortunes earned using state credits provided the future oligarchs with the capital and the connections to muscle their way into the real windfall, the 1995 loans-for-shares giveaway of Russia’s natural resources. Because of Gordon Gekko, Bendukidze missed out.
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Soros learned about revolutions the hard way. He compares 2008, with its cataclysmic events and his survival of them, with 1944, when as a Jewish fourteen-year-old in Nazi-occupied Budapest he and his family eluded the Holocaust. The Soroses and their circle of friends had lived comfortable, largely secular lives before the Germans arrived. Many in their community were unable to grasp that that life was over and they needed to flee at once. An exception was Tivadar, Soros’s beloved father, whose experience of the Russian Revolution as an Austro-Hungarian officer had taught him the necessity of responding to revolutionary change with equally radical behavior. Over the objections of his wife and mother-in-law, Tivadar immediately sent the family into hiding—a decision that saved all their lives. Now a fit, often tanned eighty-two-year-old who favors beautifully tailored suits and has a thick, graying head of hair as well as a hearing aid, George Soros thinks his father’s “formative” experience of revolutionary change helped him to anticipate and respond to the current crisis.
“I recognize that sometimes survival requires a positive effort. I think that is really a childhood experience, and it was partly taught and partly experienced. . . . I had his [my father’s] experience of where the normal rules don’t apply and that if you abide by the rules, you’re dead. So your survival depends on recognizing that the normal rules don’t apply. . . . Sometimes not acting is the most dangerous thing of all.”
That early life training shaped Soros’s investing style and his investing philosophy. “My theory of bubbles was a translation of this real-time experience. I became a kind of specialist in boom and bust.”
That is certainly the view of his son Jonathan, a triathlete, Harvard Law School grad, and married father of two—but also, as the child of American prosperity and stability, someone who, in his father’s opinion, is not a leader of radical change. Jonathan says of his father: “That experience has allowed him to see through artifice. He can see the things that look like they are very stable—things that look like marble are not marble, they are plaster—and the institutions that we have built are human institutions and aren’t necessarily permanent.”
Although many CEOs and regulators say the crash had been impossible to predict, among professional traders it was commonplace as early as 2005 to believe that inflated house prices and turbocharged derivatives were creating the next asset bubble.
“Whenever I read about people not seeing it coming, I get a kick out of it,” Keith Anderson, Soros’s former chief investment officer, told me. Tall, burly, and soft-spoken, with a modest office decorated largely with photos of his smiling children, Anderson has a friendly, unpretentious air—more Little League dad than Davos man—and a blue-chip money management CV. “Most every intelligent person—we all understood and knew that there was a housing bubble, that the CDOs and the derivatives were creating distortions.”
The difficulty was knowing when the bubble would burst. “What the problem was,” he said, was “that many of us had thought that for too long and were wrong. We knew it was occurring, but you wouldn’t want to be betting against it, because you weren’t getting satisfaction.
“There are multiple versions of history,” Anderson explained. “The common one, in the normal newspaper, is ‘What fools! No one saw it coming.’ Lots of people saw it coming. The question was: When was it going to stop? What was going to cause it to stop? How do you profit from it?”
In mid-2007, when Soros decided he needed to actively manage his money again, Quantum’s funds were mostly entrusted to outside managers. They, and the smaller number of inside managers, operated with “total discretion,” Soros recalled. “They have their own style and their own exposure and some of them have money for extended periods of time.”
Soros “didn’t interfere in the running of their accounts, because that’s not the way we operate,” so he set up an account to counterbalance their positions, which he ran himself. “Basically, it involved a large amount of hedging. It was neutralizing market exposure [of his external and internal managers] and then taking market exposure on the negative side.” Soros was not only unfamiliar with fancy new derivatives; by his own admission, he didn’t know much about individual stocks anymore, either. So one of the world’s great investors set about protecting himself from the coming crash with tools so simple your average booyah Jim Cramer watcher would scorn to use them: S&P futures and other exchange-traded funds. He made simple bets, too: “Basically, I went short—the stock market and the dollar.”
Soros didn’t get it exactly right. “In a time like this, where the uncertainty is so big and the volatility is so big, you must not bet on a large scale,” Soros told me at the end of 2008. “One of the mistakes I made is that actually I bet too much this year, too large positions, and therefore I had to move in and out to limit the risk. I would have actually done better had I taken my basic positions on a smaller scale and not allowed the market to scare me out of those positions. I would have done much better.”
That’s because Soros’s radar for revolution is a way of thinking about the world, not a foolproof algorithm. “That’s what makes this macro investing difficult,” Anderson told me. “People like George can see the disequilibrium, but there is always the question of what catalyst is going to cause the change.”
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The biggest disequilibrium of the twentieth century was the economic gap between the developed Western economies and everywhere else. And the single biggest catalyst for change was the collapse of Soviet communism. But the opportunities created by that monumental revolution weren’t limited to Russia. Across the Warsaw Pact as well as in Asia and in Latin America, a global wave of economic liberalization opened up huge opportunities for the people who figured out how to respond to revolution. As in the former Soviet Union, this wasn’t something you could teach in business school—talent and an appetite for risk were essential, but most of all you needed to be in the right place at the right time.
Azim Premji is the chairman of Wipro, the pioneering Bangalore-based IT company. The first revolution in Premji’s life was personal. He was studying engineering at Stanford University in 1966 when his father died suddenly. The twenty-one-year-old had to drop out of college and return from Palo Alto to Bangalore to run the family vegetable oil company. Premji turned out to be an energetic, talented, and omnivorous businessman. A decade after he took over, Wipro was still producing vegetable oil, but it also made lightbulbs in a partnership with GE, as well as shampoo, soap, and hydraulic cylinders. The really big break came in 1978, when IBM was forced out of India. Premji saw the opportunity to return to his first passion—computer science, whose pioneers he had met as a student at Stanford. By 1991, when Manmohan Singh’s liberalization opened up India to the world economy, Premji and Wipro were perfectly poised to seize the opportunity—and the Indian outsourcing revolution was born.
“I was very lucky,” Premji, today a dignified patriarch with a quiff of white hair, told me when I asked him how he did it. “I had the right education, at the right moment, in the right country.”
“India is growing at 8 percent per annum,” explained Ashutosh Varshney, the Brown professor who spends half his time in his hometown of Bangalore. “But the main poi
nt was that when an economy grows at 7 to 8 percent, then some sectors grow at 18 to 20 percent—8 percent is an average.”
If you are good at responding to revolution, you figure that out and start a business in one of the 18 to 20 percent sectors: “It is the possibility of multimillionaires overnight.”
You hear the same story in China. Lai Changxing was born and raised in a small village outside Xiamen, on China’s southeast coast, less than two hundred miles from Taiwan.
When in the early 1980s Deng Xiaoping told the brutalized Chinese people it was okay to make money, Xiamen was one of the first provinces where the market experiment was launched, and Lai responded to that revolutionary opportunity. Starting with an auto parts company, by the middle of the next decade he had diversified into everything from umbrellas to textiles to electronics—and he had become a billionaire.
“You could start a business in the morning and make money by the evening,” he told a journalist. “Everything was so free and open back then that everyone had lot of businesses. You would be stupid not to.”
If you have the right skills and the right connections and the right appetite for risk, surfing the wave of emerging market revolution is thrilling—and even feels easy.
David Neeleman is a serial entrepreneur. He has founded two U.S. airlines and a touch-screen airline reservation system that was acquired by HP. When Neeleman was eased out of the CEO’s chair at JetBlue, his most successful creation, it was less than a year before he announced the launch of a third big entrepreneurial venture. That was no surprise—starting companies is simply what Neeleman does. And it made sense that it was an airline, the business Neeleman knows. But for his third big play, Neeleman left the United States for Brazil.
“Well, the U.S., like I said, it’s kind of tapped out,” Neeleman told me in the fall of 2010. “We’re growing [in Brazil], us and our competitors, 25 percent a year. That’s three times GDP growth, which in the first half of last year was almost 9 percent. And we’re growing traffic 27 percent. So that’s exciting. You know, if I was here in the U.S., we would be still trying to fight it out with other established carriers, whereas down there, I’m flying routes that had never had nonstop flights. We will be serving cities that haven’t had airline service for years.”
That’s the real secret of the emerging markets. If you aren’t scared of uncertainty or of leaving home, making money in these frontier economies is a lot simpler than battling for 1 percent more market share in the developed world.
“The next ten years is going to be the most exciting time in our lives! The Indian economy will double! You will only see that once in a lifetime! It will be incredible!” Tejpreet Singh Chopra, then a forty-year-old Indian businessman, told me in the spring of 2010. A few weeks before we met, he had taken the bold decision to jump from the managerial aristocracy to try to become one of the entrepreneurs who have figured out how to respond to the emerging market revolution.
Chopra had just the right inside/outside CV. Born and educated in Chennai, India, he landed his first two jobs working for Lucas Diesel Systems in the UK and France. He got his MBA in the United States, from Cornell University, and spent the next decade at GE in Stamford, Connecticut, and Hong Kong, before moving back to India. Chopra met his wife, a fellow Indian, while he was working in the United States; she has a law degree from NYU and worked as an M&A lawyer for white-shoe Wall Street firm Weil, Gotshal and Manges.
In 2007, when he was just thirty-seven, Chopra was chosen as the first Indian to run GE’s Indian business. That job put Chopra at the center of the globalization and technology revolutions, which are transforming our world as dramatically as the industrial revolution did two centuries ago.
Consider the Mac 400, a portable electrocardiograph made and designed in India in 2008, which Chopra touts as one of the flagship achievements of his tenure in the GE India job. The Mac 400 is a cheaper, cruder, and lighter version of its American parent—it weighs less than three pounds, rather than fifteen; sells for around $800 (already barely half of the $1,500 it cost when it hit the market), rather than $10,000; and costs $500,000 to develop, rather than $5.4 million. Eight of the nine engineers who created it were based at GE’s Bangalore research lab.
Selling Western technology and brands into emerging markets is an old story. So is selling cheap emerging market labor—in the form of manufactured goods, electronics, or commodity white-collar services like call centers—into developed markets.
The Mac 400 is an example of the next stage—emerging market engineers, employed by a Western company, creating a product inspired by a Western prototype, and redesigned for emerging market consumers.
The world’s smartest megacorporations—GE, Google, Goldman Sachs—are finding ways to profit from the great economic shift of our times. The biggest winners, though, are individuals, not institutions; globalization and technology have dramatically lowered barriers to entry, and the beneficiaries are the people smart enough and lucky enough to make it on their own.
Chopra was aware of the perks of working for a highly respected global behemoth like GE—“If you are the CEO of GE, anyone anywhere in the world will take a meeting with you,” he said—but he couldn’t resist the lure of responding to revolution.
Following the model of Nucor, which revolutionized the U.S. steel business by building mini-mills, Chopra is working to create an Indian power company based on small, twenty- to forty-megawatt plants using environmentally friendly sources of energy. With Bharat Light and Power, his new firm, Chopra is hoping to surf at least three revolutionary transformations at once. The first is the shift from big factories to small ones. Nucor—one of Professor Christensen’s case studies of the impact of disruptive technologies on legacy competitors—is the textbook example of this transition in the steel business. By building mini-mills, which can be constructed at less than a tenth the cost of large, integrated steel mills and operated more efficiently, Nucor outflanked North America’s steel giants. Chopra hopes to apply the same approach to power generation. The second revolutionary wave he hopes to surf is the shift to renewable sources of energy. And finally, he hopes to take advantage of the liberalization of the Indian economy and the country’s consequent burst of economic growth. An example of Chopra’s approach is Bharat’s decision in 2012 to invest in a rooftop solar power project in Gandhinagar, the capital city of Gujarat, in western India, constructed after World War II. This pilot plan lets power companies rent roof space for solar panels from the buildings’ owners—a way of getting around the shortage of space and the logistical and bureaucratic difficulties of new construction in India.
“I’ve helped so many entrepreneurs when they were just a piece of paper, and I thought, ‘I could do that,’” Chopra said. “When you work in a corporation, when you retire, you only look back. As an entrepreneur, you are always looking forward. I wouldn’t be happy in my life if I was always looking back.”
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Wherever you go in the emerging markets—or the fast-growing markets, as their boosters are trying to rebrand them—you hear a variation on this theme.
Stephen Jennings grew up in New Zealand’s Taranaki territory, where the sheep really do outnumber the people. When New Zealand flirted with an antipodean version of the liberal economic reforms being championed by Thatcher and Reagan in the 1980s, Jennings, with his freshly minted degree in economics, was a young member of the team that enacted them. That took him to Credit Suisse First Boston, first in Auckland, then London, and then, as Russia plunged into its own radical reforms, Moscow, in 1992.
Jennings was one of the Westerners who most adeptly surfed the waves of Russia’s revolution. By the beginning of the next century, the investment bank he cofounded, Renaissance Capital, had expanded aggressively into Eastern Europe and Africa and had ambitions of becoming the first global emerging market bank. In April 2009, while most of the world was still in a deep recession set off by the financial crisis, Jennings went home to New Zealand to deliver hi
s country’s most prestigious annual economic lecture. The theme he chose, naturally, was the rise of the emerging markets, and he urged his countrymen to dive in and take part in what he described as the most important and fastest economic transformation in human history.
“Yes, you need to be bold and extremely committed, but you can participate fully in an historically unique opportunity for value creation,” Jennings told the gathering of New Zealand’s top businesspeople. “And it is a lot more fun than watching others do it on CNN!”
But to thrive in revolutionary environments, Jennings warned his audience, you need different skills and a different attitude from those who work in slower-growing societies.
“In economies growing at 2 to 3 percent a year, industrial change is relatively gradual,” Jennings explained. “In these countries, explosive change is usually associated with rapid technological change, such as with the information technology industry in the 1980s and ’90s. In fast-growing emerging markets all industries are like IT. Market growth and changes in competitive dynamics are explosive. For Russian retailers or Nigerian banks, 100 percent–plus growth in revenues or profits is totally normal. Small businesses can become multibillion-dollar enterprises in just a few years. Losers rapidly disappear without a trace. Needless to say, with these stakes, the winners tend to be highly organized and extremely aggressive in their business style and strategies.”
This chaotic, messy, high-risk, high-reward world is anathema to many of the managerial aristocrats of the developed world. Jennings recalled how “Credit Suisse First Boston’s elite European bankers had a nickname for our tiny group camped out in borrowed office space in Moscow. We were called the ‘smellies,’ a reference to sanitary conditions in Eastern Europe at the time.”
The “smellies” had the last laugh. “By the beginning of 1999, you could not mention Russian finance in polite company, but you could buy shares in Gazprom for five cents. Six months ago, the stock was trading at US$10.”
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