Hes an electrical engineer by training, and after starting his career at Bell Labs, he moved on to Wall Street, where he spent almost 20 years as an analyst, investment banker, venture capitalist, and hedge fund manager. Andy is one of the sharpest minds around with regards to the intersection of technology and finance. On Friday I had the good fortune to interview Andy Kessler, of Silicon Valley and Wall Street fame, about his latest book, Grumby.
He co-founded the hedge fund Velocity Capital, which was wildly successful, delivering average annual returns of 55% to its investors. Soon after, he started a second career as a writer, telling witty stories about his unique experiences. His previous works are all non-fiction bestsellers that explore the wild, wacky worlds of Silicon Valley and Wall Street – and the driving forces behind them. At the peak of the tech boom, Andy and his partner closed up shop, delivering the funds capital back to their investors.
We’re going to talk about the intersection of innovation, Silicon Valley, and Wall Street. We’re going to talk about that as well. Brett: Hi, this is Brett Owens, and I’m here today with Andy Kessler. He’s also has a new fiction book called “Grumby,” which I just read. It’s an excellent fiction, with a lot of nuances in there relating to Silicon Valley and Wall Street. He worked on Wall Street for about 20years as a research analyst, investment banker, venture capitalist, and also as a hedge fund manager of a very successful fund called Velocity Capital. And then interestingly, as if that weren’t enough, Andy started a second career, after his career with Silicon Valley and Wall Street, and has written a number of best-selling books, including “Wall Street Meat,” “Running Money,” “How We Got Here,” and “The End of Medicine.” Those were all nonfiction. In my book, Andy is the guy to speak with on these topics. So we wanted to talk about those points as well.
Of course, after working there for a little while, I realized that nobody on Wall Street really knows what makes stocks go up or down. Anyway, I got tired of working at the giant bureaucracy, bigger than the Post Office and bigger than the Pentagon, which was the phone company. I ventured out and accidentally tripped across a job on Wall Street following the chip business; the Intels and Motorolas and Advanced Micro Devices and Texas Instruments. I took economics, but I didn’t know anything about the stock market or what makes stocks go up or down.
So I was happy to jump in and learn about how to put together a forecast for an income statement and balance sheet and figure out how stocks work and start recommending stocks. Andy: But they wanted someone with a technical background to go figure out what all these weird chip companies were doing. In ‘83 and ‘84, there was an IPO boom that took public quite a few new companies that were doing custom silicon and all this kind of stuff. And I was fortunate to recommend Intel early on, when I realized that, while with the 8086 and 286 they had hired other companies make them second sources it was called, Advanced Micro Devices and with the 386 they were going to keep it to themselves.
I worked at Morgan Stanley and in the investment banking world, helping take public the next wave of great companies. I wanted to be involved at the early stages, when these companies were just forming, and provide access to capital growth capital or startup capital to these companies. And I realized that, when you work on Wall Street, you sort of follow what has happened. You catch these companies on the tail end.
So I started investing along those ways. I thought there was this whole, new media world, that technology would intersect with media and create this interactive media marketplace. Fortunately, a whole bunch of those early investments were the first wave of Internet companies those that were selling CDs online, basically selling things online or coming up with the tools to allow others to do that. So, I left and went to a small firm and raised a venture fund in ‘93 or something like that.
I connected with one of my clients, and sort of one of everyone’s on Wall Street clients, a gentleman by the name of Fred Kittler, who was at JP Morgan running a billion dollar public fund investing in technology. He owned 10 percent of Cisco right after the thing went public, because he saw these great long-run trends. And I hooked up with him to start Velocity Capital Management. The fund was successful.
If something gets cheaper, you are going to end up using more of it. It didn’t because it was regulated and it was stuffed inside of phone companies. What we were going to do, and what we ended up doing successfully, is duplicate what happened in the silicon world. In the silicon world, costs go down by 30 percent per year, and it creates these huge new markets that spurt out of nothing because of elasticity. We had a very fun time running an investment fund, and we ended up being at the right place at the right time. The two of us were going to do public and private investing. But as that became slightly less regulated, you had this big boon in TCP/IP, Internet protocol companies and devices. We thought the same thing would happen with bandwidth that happened with silicon.
And these guys would pay 30 times earnings, or 50 times earnings, and whatever future earnings would be. We would buy five or ten percent of the company. So we would look for these waterfalls. But we weren’t investing in dotcoms. We were investing in all of the infrastructure companies that these dotcom companies would buy their equipment. A lot of it, of course, had to do with the frothy nature and the dotcom boom and all that. And we were making, not just 10x on some of these things, but 50x kind of returns. And three years later, the stocks would get bid up to $2 billion valuations. So we would buy companies at a 40 or 50 million dollar market capitalization. These companies that would start to grow, and then their growth would accelerate until the rest of Wall Street the fund managers at Fidelity or Janus or whoever else would discover the companies that we had invested in at how much revenue they had or cash they had.
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