General Electric

Gates grew up in Seattle's Sand Point neighborhood, the only son of William Gates Sr., a prominent lawyer, and Mary Maxwell Gates, who sat on the boards of First Interstate BancSystem and United Way of America; his maternal grandfather, J. W. Maxwell, had been a national bank president. Known as Trey within the family, he was small for his age and bullied as a child, and his parents initially steered him toward the law. The household ran on competition, with a reward for winning and a penalty for losing in everything from card games to swimming to the dock. At thirteen he enrolled at Lakeside Prep, where the Mothers' Club spent rummage-sale proceeds on a Teletype terminal and time on a General Electric machine. Gates wrote his first program there, a tic-tac-toe game in BASIC, was excused from math classes to pursue computing, and became fascinated that the machine executed code perfectly every time.

During 1889 Thomas Edison held business interests in many electricity-related companies, General Electric's Wikipedia history records: the Edison Lamp Company, a lamp manufacturer in East Newark; the Edison Machine Works, a maker of dynamos and large electric motors in Schenectady; Bergmann and Company, a manufacturer of electric lighting devices; and the Edison Electric Light Company, which held the patents and financed Edison's lighting experiments with backing from J. P. Morgan and the Vanderbilt family. Henry Villard, a longtime Edison supporter and investor, proposed consolidating these interests, a proposal supported by Samuel Insull, who served as Edison's secretary and later became a financier. In 1889 Drexel, Morgan and Co., the firm founded by Morgan and Anthony Drexel, financed Edison's research and helped merge several of the separate companies under one corporation, forming the Edison General Electric Company, incorporated in New York on April 24, 1889, which also acquired the Sprague Electric Railway and Motor Company in the same year. Morgan's backing of Edison dated to 1878, when he financed the Edison Electric Illuminating Company.

John Pierpont Morgan Sr., whose life ran from April 17, 1837, to March 31, 1913, was the financier and investment banker who dominated Wall Street's corporate finance across the Gilded Age and the Progressive Era, according to his Wikipedia biography. Heading the banking house that eventually became JPMorgan Chase and Co., he drove a wave of industrial consolidations at the turn of the twentieth century, among them U.S. Steel, International Harvester, and General Electric. Controlling interests in Aetna, Western Union, the Pullman Car Company, and twenty-one railroads gave him and his partners enormous influence over the nation's capital markets. When the Panic of 1907 struck, the coalition of financiers he assembled saved the American monetary system from collapse. He died in Rome at seventy-five, leaving fortune and business to his son, J. P. Morgan Jr., with biographer Ron Chernow estimating his wealth at eighty million dollars, about 1.9 billion in 2024 terms.

General Electric took shape in the 1892 merger that fused the Edison General Electric Company with the Thomson-Houston Electric Company, a consolidation the company's Wikipedia history credits to the conception and orchestration of financier J. P. Morgan. Thomson-Houston, led by Charles Coffin, traced its origins to the American Electric Company of New Britain, Connecticut, formed in 1880. Incorporation took place in New York, the Schenectady works serving as headquarters long afterward, with both companies' original plants continuing under the GE banner. Steinmetz came aboard in 1893 through the purchase of a smaller New York company, a genius in mathematics and electronics who accumulated over two hundred patents and proved a major force in advancing the company. In 1896 General Electric was one of the original twelve companies listed on the newly formed Dow Jones Industrial Average, where it remained for 122 years, though not continuously. The merger became a template for Morgan's method: combine competing manufacturers, then capitalize the combination at a scale no rival could challenge.

To make matters worse (from the standpoint of most investors), the passive, invisible hand of the market is putting to shame the returns earned by the active investment professionals who don’t “buy the market” (or so they say), but “buy stocks.” (They allege “it’s not a stock market; but a market of stocks,” as silly a statement as one could possibly imagine.) For example, while our passive Standard & Poor’s 500 Index fund is up 104% in 2 1/2 years, the average actively-managed mutual fund is up but 76%. (Given our global focus today, I should note that the average international fund is up just 37%). As an aside, given the stiff competition of the index funds, the average fund manager is, I think, making it even stiffer, by vigorously buying the giant index stocks in which mutual funds are underinvested. Mutual funds, which own nearly 20% of all stocks, own “only” 3% of Coca-Cola, 6% of Procter and Gamble, 7% of GE, 7% of Microsoft, and 8% of Merck, five of the very largest firms in the S&P 500 Index. These stocks are up 40% on average this year, far above the 25% gain in the index. (It’s not, it seems, that index funds are the problem, but that envious non-index funds, anxious less they fall still further back, are the problem.) In all, similarities with 1929 abound, and I don’t hesitate to haul up the warning flag. The worrisome signs include not only the high valuations I have described, but the similarity of the words we read today with those of that now-forgotten era.

earnings had more than doubled to 31 percent. That can’t surprise you. Nearly all large U.S. firms can be characterized as “global” in their reach. Think Coca-Cola, IBM, Microsoft, GE, General Motors, and Citigroup, and you’ll get the idea. And, in this “one world” of interconnection and competition, global stock markets continue to produce similar long-term returns. For example (this may surprise you), since 1980 the annual return on the S&P 500 has averaged 13.0 percent compared with the return of 11.6 percent for the non-U.S. EAFE Index (the Morgan Stanley Capital International Europe, Australia, and Far East Index). A percentage point of that return, in fairness, has resulted from the moderate weakness of the dollar over that long span; the EAFE annual return, measured in local currencies, was 10.6 percent. That is not to deny that there can be extended waves of superiority in one segment or the other. During the 1980s, international (i.e., non-U.S.) stocks substantially outpaced U.S. stocks (22 percent per year vs. 17 percent) and then fell far behind in the 1990s (U.S.per

, “S&P technology stocks, 14% of the value of the index, 21% of my portfolio; GE, 3.0% of the S&P, 1.2% of my portfolio,” and so on. All with this implicit question: “Is my ‘bet’ (as it is usually described) the right one? Or should I align my portfolio more closely to the index?” There’s a lot of casino capitalism by managers and clients alike going on in investing today, and I suppose “betting”— even betting not to lose—is as good as any word to characterize this over-reliance on the composition of an unmanaged and relatively unchanging market index. In recent years, it seems to me, this strategy has become almost tacitly accepted. Indeed, there is considerable anecdotal evidence that we have gone beyond mere measurement to action, as in “I think Coca-Cola is grotesquely overvalued.to

0% 5% 10% 15% 20% 25% 30% Telecom. Materials Utilities Cons. Staples Cons. Disc. Health Care Industrials Info. Tech. Energy Financial Share of the S&P 500’s 2006 Earnings, by Sector 3. corporations that compose the Standard & Poor’s 500 Stock Index. (Chart 2) Fifteen years ago, the financial sector share had risen to 10 percent. In recent years, financial sector profits have soared even higher, to an all-time peak of 27 percent. If we add the earnings of the financial affiliates of our giant manufacturers (think General Electric Capital, for example, or the auto financing arms of General Motors and Ford) to this total, financial earnings now likely exceed 33 percent of the earnings of the S&P 500. The finance sector is now by far our nation’s largest generator of corporate profits, larger even than the combined profits of our huge energy and health care sectors, and almost three times as much as either manufacturing or information technology.5 (Chart 3) We’re moving, or so it seems, toward becoming a country where we’re no longer making anything. We’re merely trading pieces of paper, swapping stocks and bonds back and forth with one another, and paying our financial croupiers a veritable fortune. We’re also adding even more costs by creating ever more complex financial derivatives in which huge and unfathomable risks are being built into our financial system.

and when earnings flag, the CEO often acts to reduce costs in order to maintain projected profits by limiting employees’ compensation, laying-off experienced and loyal workers, and slashing capital expenditures. But it seems all too likely that these near-term “efficiencies” and these failures to invest adequately for future growth will eventually erode the company’s prospects for the long-term.2 The central issue posed is the harm done when a culture of short-term speculation focused on the price of the stock overwhelms a culture of long-term investment focused on the intrinsic value of the corporation. The GE Story In addition, aggressive accounting is often required to meet aggressive earnings goals. There are few better examples of this “numbers game” environment than General Electric Co. Way back in 1998, when GE had reported earnings that were within 2% of its “guidance” for 20 consecutive quarters, Grant’s Interest Rate Observer calculated the odds of that happening in the real world as 1 in 50 billion. In 2009, GE settled a complaint from the SEC charging the firm, in Grant’s words, with “book cooking and earnings manipulation,” and paid a $50 million fine. Editor James Grant added: “the crimes to which GE allegedly stooped reveal a management besotted with its own share price.

” Chairman Jack Welch ran GE from 1981 to 2001, and left a legacy of accounting mumbo-jumbo to his successor Jeffrey Immelt, who divested large parts of the GE Capital subsidiary (a primary source of GE’s earnings management) and added several new lines of business. These moves have not yet proved successful. The outcome of the GE story of earnings engineering and management decisions is not a happy one. Consider the change in the value of the firm in the stock market: after growing from $170 billion in 1997 to a high of $580 billion in 2000, its market cap tumbled to $230 billion by 2003. After a few years of stability, GE stock took another tumble in the 2007-2009 bear market, and another tumble of $160 billion in the autumn of 2017. The market cap of what was once the 2 I was a CEO for more than 30 years, and I can assure you first-hand that a committed, well-compensated, and well-trained work force has been a priceless asset throughout my entire career.

Forbes' 2009 retrospective on Lynch's Magellan tenure catalogued more than a hundred 'ten-baggers' — stocks that had multiplied ten-fold from initial purchase — across his thirteen-year record. The list included Fannie Mae, Ford, Philip Morris, General Electric, and a long roster of consumer and industrial names whose underlying businesses compounded earnings at double-digit rates for years while their multiples expanded. Lynch's point in the article was that the ten-bagger is not a lottery ticket; it is the predictable result of owning a business whose earnings grow at twenty percent a year for fifteen years while the market slowly re-rates the multiple upward. The arithmetic of the ten-bagger is unromantic. A company that grows earnings at twenty percent a year for thirteen years has grown earnings by a factor of eleven. If the market eventually assigns a similar multiple to eleven-times-the-original earnings, the share price has gone up ten-fold. Lynch's edge was not in forecasting which company would be the next ten-bagger; it was in identifying companies with the durable growth runway to compound earnings at twenty percent for over a decade. The multiple expansion is the bonus; the earnings compounding is the engine. Lynch's honesty in the article about the misses alongside the hits is the part most retellings omit. For every ten-bagger in the Magellan record there were several zero-baggers — stocks that went to zero or close to it. The portfolio outperformed not because Lynch was right more often than the index, but because his winners were much larger than his losers. The asymmetric structure of equity returns — losses capped at one times the cost, gains uncapped — is what makes the ten-bagger discipline work. The investor who lets the winners run and cuts the losers short will, over a portfolio of fifty picks, produce a Magellan-like record even with a hit rate below fifty percent.

When we add up all those hedge fund fees, all those mutual fund management fees and operating expenses; all those commissions to brokerage firms and fees to financial advisors; investment banking and legal fees for all those mergers and IPOs; and the enormous marketing and advertising expenses entailed in the distribution of financial products, we’re talking about some $500 billion dollars per year. That sum, extracted from whatever returns the stock and bond markets are generous enough to deliver to investors, is surely enough, if you will, to seriously undermine the odds in favor of success for our citizens who are accumulating savings for retirement. Yet the fact is that the finance sector has become by far our nation’s largest generator of corporate profits, larger even than the combined profits of our huge energy and health care sectors, and almost three times as much as either manufacturing or information technology.1 Twenty–five years ago, financials accounted for only about 6 percent of the earnings of the 500 giant corporations that compose the Standard & Poor’s 500 Stock Index. Ten years ago, the financial sector share had risen to 20 percent. And last year, the financial sector profits had soared to an all-time high of 27 percent. If we add the earnings of the financial affiliates of our giant manufacturers (think General Electric Capital, for example, or the auto financing arms of 1 For the record, the 2006 operating earnings of the S&P 500 totaled $787 billion.

The rise of the financial sector to pre-eminence is one of the seldom-told tales of the recent era. Twenty–five years ago, financials accounted for only about 5 percent of the earnings of the 500 giant corporations that compose the Standard & Poor’s 500 Stock Index, rising to 10 percent twenty years ago, then to 20 percent in 1997, and to a near-peak level of 27 percent in 2007. (Chart 7) If we add to this total the earnings of the financial affiliates of our giant manufacturers (think General Electric Capital, for example, or the auto financing arms of General Motors and Ford) financial earnings now likely exceed one-third of the annual earnings of the S&P 500. In fact, the finance sector is now by far our nation’s largest generator of corporate profits, larger even than the combined profits of our huge energy and health care sectors, and almost three times as much as either industrials or information technology.8)

Ethical Principles and Ethical Principals Remarks by John C. Bogle, Founder and former chief executive The Vanguard Group ∞ ∞ ∞ Upon receiving The Exemplary Leadership Award from The Center for Corporate Excellence at The “Charging the Game” Forum Denver, CO November 1, 2006 I’m deeply honored to receive your award. During my now 55-year career in the mutual fund industry I’ve done my best to meet your standard of “consistent ethical leadership.” But I freely confess that, perhaps like all of us, I could have provided even more leadership toward a better corporate and investment America. In whatever years may remain, I pledge to you this evening that I will “press on, regardless” in this quest.1 The title of my remarks this evening arises from, of all things, a typographical error. In a mailing sent out by the Center for Corporate Excellence earlier this year to announce that General Electric would receive your Long Term Excellence in Corporate Governance award, you quoted GE President Jeffrey Immelt on the importance of “sound principals of corporate governance.” But while the quotation said, yes, principals, it clearly meant principles. I can’t help myself from noticing that sort of stuff (query whether it’s a strength or a weakness!), and as I did, it occurred to me that there might be a speech in that distinction.

I. Principals and Principles The first of these three subjects focuses on the title I have chosen for my remarks this afternoon—“Ethical Principles and Ethical Principals.” That talk was inspired by, of all things, a typographical error. A mailing I received a few years ago announced that General Electric would receive an award for long-term excellence in corporate governance; GE President Jeffrey Immelt was quoted as focusing on the importance of “sound principals of corporate governance.” But while the quotation spelled principals with the concluding a-l-s, Mr. Immelt clearly meant principles, with the concluding l-e-s. But, at least in this instance, that is distinction without a difference. After all, no matter how strong the ethical principles of the world of business may be, of what use are they without ethical principals to honor them, especially ethical leaders who have the responsibility to assure that these ethical principles permeate and dominate the culture of our corporate world?1 I describe these classic ethical principles of our society in words very similar to those of Steven Pinker— integrity, honesty, and trustworthiness; fairness and justice; doing good and preventing harm; concern for the well-being of others and respect for their autonomy, and so on. But applying these societal principles to business principals is far easier said than done.

Neither Germany nor Italy became unified states until 1871. In fact, 48 of the 192 countries that are members of the United Nations are less than thirty years old. Young as we may be, our own country is something of an oldster among the world’s nations. I’m reminded of that country song from the movie “Nashville” that runs, “We must be doing something right to last 200 years.” Arguably, to last 300 years is even more impressive. So I hope that the Presbyterian Church can take a moment to reflect on her signal achievement. Even by the relatively modest standards of longevity achieved by the nations of the world, the lifespans of our commercial enterprises seem rather puny. General Electric is the only company in the Dow Jones Average to survive the past 100 years. Even the Dow Jones Average itself goes back only to 1894. What’s more, its early components—for example, Standard Rope and Twine, Pacific Mail Steamship, U.S. Leather, and American Cotton Oil—have long been consigned to the dustbin of history. Clearly, survival in the brutal competition that is central to our capitalistic system faces long odds. That is not necessarily bad.Schumpeter’s

giant manufacturers (think General Electric Capital, for example, or the auto financing arms of General Motors and Ford) to this total, financial earnings now likely exceed 33 percent of the earnings of the S&P 500. While, given the recent collapse of collateralized debt obligations that have already led to the demise of the careers of CEO’s of our nation’s largest bank and largest brokerage firms, that share may decline this year as it remains enormous. We’re moving, or so it seems, to a world where we’re no longer making anything in this country; we’re merely trading pieces of paper, swapping stocks and bonds back and forth with one another, and paying our financial croupiers a veritable fortune. We’re also adding even more costs by creating ever more complex financial derivatives in which huge and unfathomable risks—now beginning to emerge—are being built into our financial system. “When enterprise becomes a mere bubble on a whirlpool of speculation,” as the great British economist John Maynard Keynes warned us 70 years ago, the consequences may be dire. “When the capital development of a country becomes a by-product of the activities of a casino, the job of capitalism is likely to be ill-done.” Once a profession in which business was subservient, the field of money management and Wall Street has become a business in which the profession is subservient.

(Chart 6) Twenty–five years ago, financials accounted for only about 5 percent of the earnings of the 500 giant corporations that compose the Standard & Poor’s 500 Stock Index. Fifteen years ago, the financial sector share had risen to 10 percent, then to 20 percent in 1997, and to a near-peak level of 27 percent in 2007. If we add to this total the earnings of the financial affiliates of our giant manufacturers (think General Electric Capital, for example, or the auto financing arms of General Motors and Ford) financial earnings now likely exceed one-third of the annual earnings of the S&P 500. In fact, (Chart 7) the finance sector is now by far our nation’s largest generator of corporate profits, larger even than the combined profits of our huge energy and health care sectors, and almost three times as much as either industrials or information technology.1 To some degree, of course, the growth of the financial sector reflects not just the rise in demand for financial services (the mutual fund industry is a good example). It also reflects the fact that many privately-owned firms have become publicly-owned, including investment banking firms, mutual fund managers, once-mutual insurance companies, even our stock 1 Standard & Poor’s Corporation.

But now if you do stupid research, you buy some company that has no sales, no earnings, a terrible financial position and it goes down, you say, "Well, it because of the programmed trading of those professionals," that's because you didn't do your homework. So I -- I've tried to convince people they can do a job, they can do very well, but they have to do certain things. Wouldn't one of those things be letting you do it for them? Well, the small investor can do three things. They can avoid the market entirely. They can just say, ah, "I can't stand it. It's too volatile for me. I'll just put my money in money market funds or put my money in the bank." That's one choice. The other choice is they can invest directly in the stock market by buying stocks individually, or they can buy mutual funds and invest in stock. I think they can do the course of investing in mutual funds and every now and then, they find some stocks, they have a chance the make a big hit. I think the average person could know three or four or five companies very well. They could lecture on those three or four or five companies, and if one or two of 'em becomes attractive, they buy 'em. They just can't wake up in the morning and say, "Now's the time to buy this. Now's the time to buy IBM. Now's the time to by GE. Now's the time to buy Dow Chemical. Now's the time to buy some biotechnology company," if they don't know something about it. You have to know the story.

[26:13] Eventually, they always come back. This one doesn’t work either. People think RCA just about got back to its 1929 high when General Electric took it over. Double knits never came back; remember those beauties? Floppy disks, Western Union, the list goes on and on. People saying: “Iit’ll come back.” [26:40] Here’s another one you hear all the time: “It’s $3, how much can I lose?” I’ve had people call me up all the time saying, “I’m thinking of buying this stock at $3. How much can I lose?” Well, again you may need a piece of paper for this, but if you put $20,000 into a stock at $50 or your neighbor put $20,000 into a stock at $50 and you put $20,000 in at $3 and it goes to zero, you lose exactly the same amount of money, everything. If people say, “It’s $3. How much can I lose?” If you put $1 million on it, you can lose $1 million.