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Holding cryptocurrency losses isn’t easy, but to earn rewards tomorrow you need vision today.
“A bad decision that works out well becomes a brilliant decision in hindsight.”
— Daniel Kahneman
Coca-Cola versus Pepsi, Intel versus AMD, Microsoft Windows versus Apple OSX.
Have you ever heard of OS/2?
The Man Who Would Be King
In the early 1970s, Gary Kildall invented CP/M, or computer program for microcomputers. He’s the true father of the home computer revolution, yet you’ve almost certainly never heard of him.
Bill Gates and Paul Allen started Microsoft in 1975 and became billionaires. Kildall walked into a biker bar in 1994 and died in a bar fight.
History records the winners and lays down the events that become legend. It always seems so obvious in hindsight, when looking back from the future, but real life is more complicated.
The story begins like this…
Once upon a time in 1974, Gary Kildall registered his company, Intergalactic Digital Research, and created the CP/M operating system. Designed originally for Intel, who was looking for a program that could control its new dual floppy disk system and coordinate the resources of the computer and its peripheral devices: the CPU, disks, ports, and graphics card. CP/M quickly became the dominant operating system.
Rather than fail, Kildall’s program, CP/M, was a success, used by companies like Xerox, but history tells us that Kildall was unable to see the bigger picture. Maybe the clue to Kildall’s vision was in his company’s original name — Intergalactic Digital Research. (Later shortened to Digital Research.)
Kildall isn’t a household name, like Bill Gates, but it wasn’t for lack of trying.
Running parallel to this, it’s at this part of the story a small Seattle based computer company, SCP — Seattle Computer Products enters into history.
In 1980, sales of SCP’s computer kit were slow. Hardware is one thing, but if a product is going to be used and eventually mass-adopted, the product has to do something useful — it has to solve a problem, and at the same time be useable by anyone without any technical knowledge of how the product actually works.
What SCP needed was an easy to use operating system. Using CP/M as the core template, SCP created 86-DOS named after the Intel processor (the 8086), the operating system was designed to work with.
With 86-DOS, non-technical users could learn simple syntax commands to create directories, later becoming known as folders; then, be able to manipulate the files and directories by finding, copying, moving, and deleting.
Using wildcards like and ?, users could type in commands like dir C:*.bat /s to find all files that had a .bat extension on drive C, including all of drive C’s sub-directories. Simple.
Running concurrently along their own path, Bill Gates and Paul Allen started their first company, Traf—O-Data, in 1972. The company sold a computer that recorded and analysed vehicle traffic patterns.
By 1975, Allen had embarked on developing a BASIC - Beginners All Syntax Instruction Code interpreter, for the Altair 8000 computer. MITS — Micro Instrumentation and Telemetry Systems, the maker of the Altair 8000, then agreed to distribute the BASIC interpreter, coded by Allen and Gates, as Altair-BASIC.
In 1976, Gates and Allen started a new company, with Gates as CEO, to manage their distribution deal with MITS.
The new company name — Microsoft.
Two years later in 1978, Microsoft’s year-end sales exceeded $1 million.
History gives us the illusion that events happen fast, but, of course, real life occurs in slow motion — compared to history. Looking back in time, 1975 to 1980, compresses into the blink of an eye, but during those five years Gates and Microsoft had built up an understanding of business and how software distributed for royalties could be used as a vehicle for a successful business model.
By 1980, IBM needed an operating system for their new and soon to be launched IBM PC. It’s now the timelines of Gary Kildall, SCP — the Seattle Computer Products company, Bill Gates and Paul Allen intertwine.
Gates, having built up the experience distributing a BASIC interpreter to MITS, was ready to move up a gear.
But Gates didn’t have it all his way. IBM didn’t just give the contract to Microsoft.
Remember Gary Kildall, the creator of CP/M? He was courting IBM for the rights to provide them with an operating system too. The legend tells us Kildall was late for a meeting because he was too busy flying his plane, and this, like all good stories, is based on some truth. Kildall was a little late for the IBM meeting, but the fact is Kildall wanted a distribution royalty deal with IBM, so his company, Digital Research, could make profits from the royalties from every sale. IBM refused.
Instead, IBM offered Kildall a $250,000 one-off deal for the exclusive right to use his software. Kildall rejected IBM’s offer, and that’s how Digital Research lost the IBM contract.
Meanwhile, the legend tells us that in 1980, IBM, who had underestimated the demand for home computers, needed an operating system for its new computer, the IBM PC. IBM had copyrighted their computer BIOS, but it was possible for other hardware companies to reverse engineer the BIOS and create what would become “IBM Clone” PC’s.
Gates and Allen understood that an operating system written for IBM could be used on other cloned IBM hardware. What Gates and Allen saw, ahead of their competition, was that the copyright IBM had taken out on its BIOS did not apply to software.
Gates realised instead of re-inventing the wheel and developing a new operating system from scratch, that SCP, the Seattle Computer Products company, already had an operating system, and just like the work both he and Allen had done a few years earlier developing the BASIC program for MITS, they could modify SCP’s operating system and market it as their own.
It's at this point the legend tells us that Gates and Allen pulled off the deal of the century.
They purchased the rights to use SCP’s operating system 86-DOS, a system based on Gary Kildall’s CP/M, for $50,000. Incredible as it sounds from the wisdom and safety of the future, SCP did the deal without finding out who Gates was going to sell the product on to.
Remember, SCP was a small struggling company selling hardware kits. Their market was niche and small.
IBM offered Gary Kildall $250,000 as a one-off payment for the exclusive rights to use Kildall’s operating system. Kildall refused the offer, but Gates and Allen, having the bigger picture, sold IBM the exclusive rights to use their operating system for $50,000 — $200,000 less than IBM offered Kildall.
Gates and Allen realised that the exclusive deal they signed with IBM, didn’t restrict them from selling their operating system to the up and coming IBM PC clone market.
In effect, Gates and Allen used IBM’s money to purchase the 86-DOS operating system rights from SCP, and then, after making a few tweaks, selling their product on to IBM. Genius.
Gates and Allen’s edge? They calculated, in the future, as IBM’s marketing machine pushed the IBM PC into the marketplace, new clone PC’s would also enter the market, and as the number of new IBM compatible computers increased, so would the demand for their operating system — MS-DOS.
MS-DOS, or Microsoft Disk Operating System, became Windows and grew to rule the personal computer world.
MS-DOS, developed from 86-DOS, which was itself based on CP/M, was bought with someone else’s money, and made Bill Gates and Paul Allen billionaires, with Gates becoming at one point, the world’s richest man.
Microsoft, the tiny company, run by a couple of nobodies, had taken on IBM and won.
Microsoft even co-developed a 32-bit operating system with IBM, called OS/2. IBM intended to use OS/2 to outmanoeuvre Microsoft and put an end its PC operating system dominance. But it was too late. Microsoft had become the standard, and OS/2 faded into obscurity.
History makes it sound like there was no alternative and that the success of a company or person is guaranteed. Go back in time to the 1970s though, and nothing was further from the truth.
Fifty years from now, history will have judged the winners, not of the personal computer market but of blockchains. It will make it seem like it's obvious and clear for all to see. Meanwhile, you have to live history in real time where the future winners and losers are not so obvious.
You have to deal with history as it happens and adjust from there. Will the newest shiniest technology from today’s leaders make it? Or, like Gary Kildall, are they destined to die in a bar fight, forgotten by history, remembered by no one.
Monday Morning Quarterback
Looking back to the 1970s from 2019, it’s a no brainer. Find Gates and buy into everything he touches.
Even if you could go back in time, tapping a skinny kid on the shoulder in 1972, and saying, “Hi Bill,” might not have made you an insider. Gates, even at a young age, was focused and, if the stories are true, anything but a pushover. Paul Allen, who resigned from Microsoft in 1983, after being diagnosed with Hodgkin’s disease, alleged Gates was trying to dilute his Microsoft shareholding because, according to Allen, Gates thought Allen wasn’t working hard enough.
As an outsider, the first time you would have got to invest in Microsoft was after the primordial soup had settled, after the backroom deals, and after the famous early meetings of the Californian Home-brew Computer club. You would have had to wait eleven years before being able to invest. In March 1986, Microsoft went public and launched its initial public offering.
The IPO price was set at $21, but the first trade hit the tape at $25.50. On that day, let’s say you purchased 500 shares at the opening price of $25.50.
The IPO made Gates rich, leaving you with a certificate for 500 shares, spending almost all of your savings, your purchase cost you $12,750.
History tells you how good a decision that was. Few realise how good.
Today, in March 2019, Microsoft shares are trading for $110. To anyone who doesn’t understand how the stock market works, the shares going from $25.50 to $110 does not sound too good, especially if you compare this to Bitcoin’s price performance.
Bitcoin, unless you were a tech geek, was probably off your radar until Bitcoin broke through $500 and started getting media coverage. In this case, if you think of Bitcoin before breaking through $500 as pre-IPO, and all prices afterward as a realistic price you would have purchased your Bitcoin holdings.
$12,750 in 1986 is worth $29,211 today, adjusting for inflation. If you had purchased 58 Bitcoin in November 2013, the investment would have cost you $29,000, about the same in dollar terms as the inflation-adjusted $12,750 purchase of Microsoft shares at IPO in 1986.
In January 2015, your investment of $29,000 had lost 70% of its value and was worth at one point just $8,800. The only question is, would you have held on or would you have bailed?
Let’s assume you did hold on. For the vast majority, the only reason to hold on to a 70% drop in value is if they could see the bigger picture.
Would you honestly have held your nerve? Could you afford to lose 70%? Remember a 70% loss requires a 233% gain to get you back to $29,000. Think about that, while we talk about this.
Let’s say your timing was perfect and you sold your 58 Bitcoin during the week of the high for an average price of
Your $29,000 is now magically worth $957,000. A gain of 3,200% in just over 3 years — a fantastic return, but to earn it, you had to sit through a 70% drawdown.
Buying Microsoft shares in 1986 for $25.50 per share and selling them today for $110 looks like a terrible return compared to buying Bitcoin. $25.50 growing to $110 is a 332% return, but it took 33 years to do it, giving a compound growth rate of just 2.68%.
But this is not correct. New investors in cryptocurrencies, might not realise that this is not how the stock market works, in fact, if you’d have purchased Microsoft stock in 1986 for $25.50, your shares, although priced at $110 per share, are not worth $110 — they’re worth $31,680 per share.
In growth stocks, and Microsoft in its early days was a growth stock, wealth is not built from share price appreciation alone. It’s built from stock splits, and Microsoft split its shares many times.
Your 500 shares, purchased at $25.50, cost you on a split-adjusted basis under 10 cents per share. Each time a stock splits the price changes depending on the split multiple, but the number of shares you own also changes.
If you start with 500 shares purchased at $25.50, and the stock splits 2 for 1, the share price will drop to $12.75 per share, but you’ll now own 1,000 shares instead of 500. And so on.
With fast-growing companies, with double, and sometimes even triple digit year on year growth rates in turnover and profits, as the share price appreciates the stock price is split again. With Microsoft, because of the share splits, your 500 shares in 1986 are now 141,666 shares in 2019, and your $12,750 investment is now worth $15,583,260 — a gain of not 332%, but 122,121%.
This figure doesn’t include dividend payments. In 2018 Microsoft paid out a total of $1.72 per share in dividends. With 141,666 shares that’s $243,665 to you, and that is just in 2018. Microsoft has been paying dividends since 2003.
Buying and holding a winner is how wealth is created. Looking back from the future makes it look easy, but it’s not easy to hold onto 70% drops in your investments. After peaking out in late 1999, Microsoft enjoyed a 75% drop in price over the next 9 years.
If you think Microsoft’s fall from late 1999 looks similar to falls in Bitcoin and the top alt-coins, you’d be right.
After an emotion bar low in December 2000, Microsoft started forming a base — Stage 2 of the price cycle — an accumulation after a downtrend. The basing process lasted nine years, but investors who had built up an understanding of the business Microsoft was building behind the bad news surrounding Windows Vista and XP were eventually rewarded.
From March 2009 Microsoft recovered and is now back at all time highs.
To earn future rewards, you need vision. Monday morning quarterbacking just isn’t going to do it.
Go back 33 years and history records Microsoft as the winner, but even then, nine years after the company was formed, its success was not set in stone.
Thirty-three years into the future, history will have recorded the winners and losers in the blockchain revolution.
Some, like Gary Kildall, will be recorded as the first movers, the people who create the systems and products that go on to change the world, but who history has largely forgotten.
Alan Turing died in obscurity. His reward for saving millions of lives by shortening the second world war was chemical castration by the British government.
Every heard of Tommy Flowers? Probably not, yet Flowers created and built the world’s first programmable computer.
Flowers never received recognition of his pioneering work during his lifetime. The British government gave him a grant of £1,000 to help cover his costs while building his computer. It was nowhere near enough.
Flowers like Turing died obscure and unknown.
In 2052, people will read history and begin to fantasise. “If only I could go back to 2021 and buy…”
The reality though for us living life in real time is that change happens slowly compared to history. Nothing is obvious, yet some people, as history will record, will become household names because they could see through the fog of time, and build a probable likelihood of what the future will look like.
With coins like EOS and Litecoin outperforming Bitcoin over the last few months, the internet is awash with bullish articles.
Last week, using “cryptocurrency news” as a search term brought up this headline: “Highest reading since 2017 signals return of the Bull.”
Clicking on the article revealed the writer's information source. The MACD, the moving average convergence divergence indicator had just given its highest reading over the last few months.
Gary Kildall, Tim Patterson of Seattle Computer Products, and Bill Gates were all there in real time. Kildall created CP/M; Patterson took CP/M and changed the code to develop 86-DOS, and Gates took 86-DOS, rebranded it as MS-DOS and sold it to IBM while retaining the right to resell MS-DOS to other computer manufacturers. Better yet - Gates used IBM’s money to do it.
Kildall wanted the royalty deal and refused the money. Patterson just wanted the money and Gates? Bill Gates took the same information but had a bigger, broader, more vivid view of the future.
Ask yourself this. Do you think it’s possible to see the future between now and 2052 using a daily reading on a MACD indicator?
In the future, a company you’ve probably not heard of, run by a nobody, will start something and change the world.
Gates could see the future of computing and made his move. In the 1990s Lycos ruled the search engine world, then along came Yahoo. The future seemed set, but along came Google.
In 1986, the year of Microsoft’s IPO, an unknown twenty-two-year-old graduated from Princeton, and in 1993, around the time Microsoft was crowned undisputed king of the personal computer world, this unknown decided to start an online book store. He named it Amazon, after the rain forest. A crazy idea, but today Jeff Bezos is the wealthiest person on the planet.
By 2004, the Internet was all sewn up. History tells us otherwise with the arrival of Facebook.
No magic stick can predict the winners. Rather than watch the technical indicators, which at best will give you a vision into the future of a few days or weeks, look at the background conditions — conditions that don’t last for weeks or months but decades.
In computing, history records Gates as the winner. He saw the future in 4K, while his competition was looking through soda bottles.
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