I think a lot about the following exchange which comes from Soros on Soros:
Byron Wien: You once said to me that I was smart enough to get rich, but I did not seem to want to make a lot of money. What did you mean?
George Soros: Business isn't that complicated. A lot of people of average intelligence make a good living. Really smart people can accumulate a fortune if they are truly committed. Your problem is that you like to do interesting work. Someone who wants to get rich doesn’t care what he does. He only focuses on the bottom line. All day long he thinks about how he can make more money. If that means setting up more shoe shine stands, that’s what he does.
The older I get, the more I think that Soros’s statement is true.
Let’s take a quick detour to discuss the general trajectory of big business (vs small business) as it is important to the point of this post. Big business seems to work as follows:
A few people figure out something “new” which has big fat juicy margins. Generally, these select few are more in the right place at the right time versus out seeking the next great white whale business. This leads to…
These few people make a lot of money - so much money that they attract attention which leads to…
New participants entering the fray seeking to make these huge margins for themselves which leads to…
Widespread competition, efficiency, and reduction in margins which leads to…
The big fish lobbying with regulators and such to increase barriers to entry to protect their position from further competition which leads to…
Mature overregulated businesses with not so spectacular margins taking most of the pie leaving not much more than a few crumbs.
I’d say hedge funds, asset managers, and related firms are in stage 6.
Quick aside, modern tech companies are probably in stage 6 too - think Microsoft, Apple, or Meta (Facebook) could be started from a dorm room or garage nowadays?! But let’s get back to the point of this post.
Industries being in stage 6 doesn’t mean that the world lacks opportunity, but opportunity tends to be in other places.
Stick with me on this.
In a 2018 CNBC interview, billionaire Home Depot financier Ken Langone said:
“The Wall Street game is over for all intents and purposes...More electronic, less hands.”
In lieu of working on Wall Street, Langone gave the following advice:
"Go out and go to work for a company and learn the business...Learn what drives a customer, learn about cost, learn about margins, learn about inventory, learn the basics of the business.”
When you consider average compensation, number of jobs, and related factors, it is hard to argue against Mr. Langone regarding the Wall Street game being over (at least the non-computer programmer Wall Street). Moving along…
I talk to a lot of people from different walks of the larger investment business. Unlike 15 or 20 years ago, it is rare to hear about someone really thriving. In fact, most of us come to a similar conclusion: there are opportunities with big firms if you adopt the old lawyer mentality of get in the door and work your way to partner. But as it relates to entrepreneurial endeavors, Wall Street is not where it is at anymore.
In a somewhat counter-intuitive twist, most of my conversations with investment people end with the conclusion that the most opportunity we currently see lives in “not-too-sexy” small business (electrician, HVAC, landscaping, etc.).
As evidenced by the popularity of a recent meme (below), we are not alone in our conclusions:
As best I can tell, these boring small businesses are not struggling to find customers. In fact, they have so much demand they can decide to just not return phone calls. Compare that reality to someone trying to start an investment firm nowadays. One of the main reasons for this reality is a supply/demand imbalance.
40+ years ago, a college degree was the ticket to a nice life, so everyone went to college leaving fewer people willing to go to trade school as trades were not a good place to be. Tradesmen told their kids to go to college so they could earn their living with their minds not their hands. Trades also had something of a social stigma (and they arguably still do). So, the world lacks tradesmen now. But the demand for the trade-oriented services remains. Translation, tradesmen are mostly shooting fish in a barrel right now.
Meanwhile, the world is awash in people with not only undergraduate degrees but also graduate degrees. These degrees cost a ton and leave people with a lot of debt and in need of salaries to pay off the debt. But these salaries are typically a fraction of the debt, so it takes a long time to pay off the debt. These debts also inhibit entrepreneurship since there are bills to pay.
Comparatively, the ratio of trade school cost to first year income is below 100% meaning the cost of your trade school might be 20% of your first year’s income working in a trade. And sometimes you can join associations that actually pay you to be an apprentice as you learn. Now you aren’t going to get rich on this path, but, again, stick with me. And, to be clear, this post isn’t just about trades, but I use trades here to capture the general idea of what I’m seeing in the world of business.
I live outside of Cleveland Ohio which, after 20+ years of living in high finance cities like NYC and Chicago, is interesting to say the least. In case you’re wondering, I’m from the Cleveland area and returned for family reasons. Back to the point…
Northeast Ohio is kind of “anytown” USA in terms of the economy. If anything it has vestiges of the Rockefeller era industrial economy. But what is interesting about it is the BSDs here own “small” businesses. The wealth management guys do ok, but they’re chasing the guys with big money who usually own a broomstick factory (or something like it).
The “recipe” for big success here mostly involves an ambitious person starting a small “boring” business (ex. a car wash or landscaping company). Then, if it works, they start another across town. Then another, and another, etc. Usually this by itself leads to a very comfortable living. But, if someone is really ambitious, they might decide to write up a business plan/model and franchise the model across the country which can lead to an IPO and beaucoup dollars.
And these businesses have some serious benefits. The owners have to keep customers happy but they’re not asking their boss for an afternoon off to see the doctor. And, perhaps more importantly compared to Wall Street, they’re not at high risk of aging out - they can keep doing their thing until the proverbial cows come home.
But here’s the thing, these businesses are not sexy - no one will line up to hear you talk about supplying port-a-johns to construction sites (even if you’re crushing it financially). These businesses do not involve high finance. They involve finding something people want to pay for and selling it to them. Whether that is tools or baseball gloves doesn’t really matter. And this can be a challenge in a society focused on image or to people who took the college route like me and probably most of you reading this. But, back to Soros’s opening comment, the guy who wants to get rich doesn’t care - he goes where the opportunity lives.
You might be wondering if these businesses are also subject to the 6 stages above and the answer is mostly “no”. Indeed geographic areas can be saturated with things like a car wash, but, for whatever reason, many of these small businesses never become gigantic conglomerates. Or, if they do, there is still room for upstarts - just because McDonald’s exists doesn’t mean there aren’t lots of great local chains.
Now maybe this is the way it has always been and, having lived in financial hubs, I was just in a microcosm. But I think it is more than that, I think the game has changed and I can find evidence (like the stuff above) to support my contention hence this post.
Finally, for whatever it is worth, I’ve historically been in Byron Wien’s camp of wanting interesting work. That said, and while I won’t stop trading/researching/writing, lately I find myself thinking there probably isn’t much downside in exploring the unsexy business world as it has a lot of positive attributes.
Food for thought.
I welcome any input - feel free to comment below.
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George, i love reading your material. This one is so true. I’m a 30 year automotive collision tech and i trade/invest my savings to build up for my retirement.
There are few techs in my industry right now so i can almost ask for whatever pay i want. Great time to be a laborer. If someone wanting to enter this industry knows the right people, there’s no initial schooling required. The companies pay for certifications and continuing education and some even help with your tool investment.
Another great article, George. I trade for the freedom of schedule and intellectual challenge. I have no interest in selling my asset management business to anyone, ever again. I did so once and that was the biggest single mistake of my life.