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DOLLAR ACTAVIS CEO

IDEAS BRENT SAUNDERS
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BOTOX, BUYOUTS
AND BIDDING WARS
WALL STREET’S
DRUG DEALER FIVE YEARS, THREE COMPANIES,
$100 BILLION IN M&A—
AND ZERO INVENTIONS.
THE 44-YEAR-OLD FUTURE OF MEDICINE.
Contents // February 9, 2015 VOLUME 195 NUMBER 2
ON THE COVER
64 | WALL STREET’S DRUG DEALER
Brent Saunders generated $25 billion in value for
investors by flipping drug companies rather than
discovering new drugs. Is this the future of the
pharmaceutical business?
BY MATTHEW HERPER
COVER PHOTOGRAPH BY JAMEL TOPPIN FOR FORBES
4 | FORBES FEBRUARY 9, 2015

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February 9, 2015
13 | FACT & COMMENT // STEVE FORBES
Obama has no heart for the war on terrorism.
LEADERBOARD
18 | HOOPS HYSTERIA
NBA franchise values skyrocket thanks to newer,
more lucrative television deals.
23 | AMERICA’S RICHEST POLITICIAN

For billionaire Tennessee Governor Bill Haslam,
cheap oil is a total gas.
26 | BLOCK PARTY
A Minecraft billionaire’s $70 million Beverly Hills mansion.
18
28 | THE KING’S RIDES
Exiled from Graceland, Elvis’ jets go up for auction.
30 | DEAL TOY
How Wilbur Ross found coal comfort in a dirty business.
32 | ACTIVE CONVERSATION
The FORBES 30 Under 30; this year’s best cities for jobs.
THOUGHT LEADERS
34 | INNOVATION RULES // RICH KARLGAARD
Data wimps.
36 | CURRENT EVENTS // DAVID MALPASS

Lower inflation: another chance for government mistakes.
38 | THE APOTHECARY // AVIK ROY

The real minimum wage: zero.
STRATEGIES
42 | JET FOOLED
Delta Air Lines, the smartest carrier in the business, thought it could
cut costs by buying its own oil refinery. Boy, was it wrong.
BY CHRISTOPHER HELMAN
46
TECHNOLOGY
46 | PROFITING FROM CHEATING
You can scorn it, ban it, firewall it and throw Tinder at it. As a peek at
the books shows, the Ashley Madison money machine rolls along.
BY ADAM TANNER
50 | SAVING US FROM THE SNOOPS

Stealthy startup Ionic Security has attracted large sums and praise
for its software, which can encrypt corporate data beyond the prying
eyes of hackers and the NSA.
BY THOMAS FOX-BREWSTER
INVESTING
54 | YOUNG, BROKE AND CREDITWORTHY
VC-backed Earnest has a deal for untested borrowers: Give us all
your info and we’ll give you a good rate.
BY LAURA SHIN
58 | PORTFOLIO STRATEGY // KEN FISHER

Why foreign stocks are primed for a comeback.
60 | INVESTMENT STRATEGIES // WILLIAM BALDWIN

Your 3.8% payout from stocks.
72 61 | FINANCIAL STRATEGY // A. GARY SHILLING
Safety first for superior returns.

February 9, 2015
FEATURES
72 | THE GUINEA PIG ECONOMY
With and without our consent, websites, wearables and
apps are running millions of experiments on us every day to
make them more money and make us healthier,
happier and smarter.
BY PARMY OLSON
80 | BILLION-DOLLAR IDEAS
Which business trends and strategies are paying off right now? We
scoured our annual list of America’s Most Promising Companies
for correlations—with surprising (and profitable) results.
BY LIYAN CHEN, KATHARINE CLOSE, EMILY INVERSO,
BRIAN SOLOMON AND KARSTEN STRAUSS
92 | IS VANGUARD TOO SUCCESSFUL?

80 A provocateur says that passive investing
has become too much of a fad.
BY WILLIAM BALDWIN
98 | THE FOUR HORSEMEN OF

RUSSIA’S ECONOMIC APOCALYPSE
Not all Russians are reeling from the effects of plummeting oil,
rampant inflation and Vladimir Putin’s grand strategy in Ukraine.
BY NATHAN VARDI
102 | DAUGHTER KNOWS BEST

Every family goes through messy moments. Few do so with
billions on the line. The saga surrounding 84 Lumber stars a
reformed party girl, an unreformed “prick”—and one of the
great turnarounds of the decade.
BY DAN ALEXANDER
LIFE
108 | CAN LOTUS BLOSSOM AGAIN?
Having been lapped by its rivals for decades, the famed British
automaker is on a mission to regain supercar supremacy.
BY MARK EWING
112 | THOUGHTS
102 On Great Britain.
92

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FACT & COMMENT — STEVE FORBES
“With all thy getting, get understanding”
OBAMA HAS NO HEART

FOR THE WAR ON TERRORISM
BY STEVE FORBES, EDITOR-IN-CHIEF
DESPITE THE EVENTS in Paris, lating in Washington and state capitals:

President Obama isn’t about to Raise taxes on gasoline! Thanks to a
fundamentally alter his lethally stronger dollar and burgeoning oil in-
desultory approach to prosecuting the ventories, gas prices have plummeted.
war against Islamic terrorism. The typical family may save $550 or
His absence from Paris was a more this year, money they can now
political blunder, but it was part of spend on other necessities or things
a pattern. He thinks playing down they enjoy. Winter heating bills will be
these “incidents” will somehow make lower. Should this trend last, auto and
them occur less often and put them in truck manufacturers will get a big break:
“proper” perspective. He still feels the People will buy bigger vehicles, which
U.S. should do as little as is politically is where the juicy profit margins are.
feasible in battling these groups overseas. Bump off So how do our politicians react to this good news?
some of their bigwigs by drones, bomb them from time They make it yet another opportunity to pick people’s
to time with air strikes and provide a bit of training pockets. What’s ghastly about this is that a number of
and military assistance to their foes, and that should Republicans, at all levels of government, are buying into
be enough to keep things from getting out of hand. this gaseous idea. We all know that liberals never pass
Why the relative passivity in the face of the growing up an opportunity to grab more money, but the GOP is
strength of these totalitarian barbarians? To his 1960s, supposed to be the taxpayers’ friend.
rigid and sophomoric mind-set, an active U.S. overseas Let’s deal with the excuses for this latest tax raid by
poses the greater threat to the peace of the world. Even our piggy politicians.
Neville Chamberlain and Jimmy Carter could—even- ƀǇ"Ǉ#!"13Ǉ,/-.Ǉ/(Ǉ1#&&Ǉ,/(Ǉ)/.Ǉ) Ǉ')(3Ǉ#(Ǉ
tually—be somewhat educated by events. Not Barack 3ź This is easy to swat down. The fund was created in
Obama. He knows it all already. He’s not chastened a bit the 1950s to build and maintain the Interstate Highway
by a sickeningly long string of foreign policy blunders. System. Federal levies on vehicular fuels were supposed
At home Obama won’t back down on his support of to be truly dedicated monies, but since then—Washing-
politically correct campus speech codes that suppress ton being Washington—the fund has been plundered to
debate and stifle free speech. He won’t chastise insti- finance mass-transit systems, hiking trails and all sorts
tutions that cravenly withdraw their honorary degree/ of other things. Take out all the nonhighway stuff and
commencement speech invitations, the way Brandeis voilà: The Highway Trust Fund is virtually balanced.
University did with Ayaan Hirsi Ali, who has seen ƀǇ/,Ǉ#( ,-.,/./,Ǉ#-Ǉ,/'&#(!ŻǇ1"#"Ǉ#-Ǉ(!,)/-Ǉ
firsthand the ugly, murderous face of Islamic fanati- (Ǉ"/,.-Ǉ."Ǉ)()'3ź The real infrastructure crisis
cism and risks her life by exposing and opposing it. is government. Politicos don’t want you to notice that
Will we luck out? The more likely scenario is that infrastructure isn’t a problem when free enterprise is in
we’re in for a very rough and bloody two years. charge. Our freight railroad system is the best in the world,
by far; no other nation even comes close. This unheralded
Political Gasbags triumph came about after railroads were deregulated in
1980. We have no “infrastructure crisis” regarding passen-
If you want to know what fuels Americans’ ire with ger aircraft, but we do have a problem with our technologi-
our political class, just look at the hot new idea perco- cally backward air traffic control system, which is under
FEBRUARY 9, 2015 FORBES | 13

FORBES
FACT & COMMENT // STEVE FORBES
the thumb of the federal government. code have on budget revenues and eco- rebates are in creating an environment
Transportation? No shortage of cars and nomic growth. For as long as anyone for vibrant economic expansion.
trucks. Energy? No shortage of filling can remember, the CBO has employed A really good system would also
stations. Moving oil and gas? Tens of static scoring, which essentially as- take note of how pro-growth tax
thousands of miles of pipelines criss- sumes that reductions in tax rates have reductions affect the net assets of the
cross the nation. While President Obama very little impact on economic growth American people. In the 1980s, for
wails about infrastructure, he blocks and simply reduce the government’s instance, Ronald Reagan sharply cut
the Keystone XL pipeline and hobbles tax revenue. It doesn’t take a Sherlock tax rates. He also made big boosts
permits for liquefied natural gas termi- Holmes to deduce that this methodol- in defense outlays, which paid off in
nals, nuclear power plants and dams. ogy is biased against tax cuts. helping us win the Cold War. Con-
On the state and local levels cash- Back in the late 1980s a U.S. senator gress mostly ignored Reagan’s efforts
short politicians should devise more asked the JCT to calculate the impact to whack spending in other areas.
projects that make use of private capi- of a 100% income tax. Like robots, The national debt more than doubled,
tal. Toll roads are better maintained. the agency concluded that such a tax increasing by $1.7 trillion. Despite
More states should follow the splendid would bring in a gusher of revenue. this, the net wealth of the nation
example of Indiana, which in 2006 Notoriously, the CBO has al- surged by an astonishing $17 trillion.
leased its turnpike—with appropriate ways abysmally underestimated the You can say one thing about the
safeguards—for several billion dollars. revenue impact of reductions in the left: It knows the crucial importance
ƀǇ#!",Ǉ!-Ǉ.2-Ǉ1#&&Ǉ"&*Ǉ-0Ǉ."Ǉ capital gains tax. This is one levy in of seemingly arcane governing rules
(0#,)('(.ź No, they won’t. They’ll which a cut immediately brings in and procedures on budget matters
make us poorer, which is bad for ev- more money, if only from those inves- and everything else. The most damag-
erything, including the environment. tors deciding to cash in on some unre- ing example is how ObamaCare was
Poor nations have lousier environ- alized gains. Reluctantly, the CBO has scored when it was making its way
ments than do rich ones. Cars emit granted that more cash might flow in through the legislative mill. Through
a tiny fraction of the pollution they from a rate cut but then has declared a permissible sleight of hand, the
once did. The big, bad thing in gaso- that this would take revenue from the Administration got the CBO to con-
line—lead—was dealt with decades future! The same warped approach clude that the bill wouldn’t increase
ago, when it was removed. has been applied to reductions in the the deficit by front-loading taxes and
ƀǇ/,)*(-Ǉ"0Ǉ-#!(#Ŧ(.&3Ǉ tax rates on personal and corporate back-loading expenses.
"#!",Ǉ!-Ǉ.2-Ǉ."(Ǉ1Ǉ0,Ǉ1#&&źǇ incomes: The timing of economic ac- Is the current crop of Republicans
"3Ǉ&&3"Ǉ)/.Ǉ(Ǉ#(,-Ǉ tivity may change, but really nothing up to the tasks facing them? They say
.".Ǉ1)/&ǇǇǇ,)/(#(!Ǉ,,),Ǉ#(Ǉ much in substance would be altered. they are. House Republicans have
')-.Ǉ0&)*Ǉ)/(.,#-Ƅ Those The CBO also assumes that govern- already passed rule changes mandat-
countries are densely populated; ment spending stimulates economic ing that the CBO and the JCT take
Great Britain (pop. 64 million) would growth. This is nonsense. The govern- greater heed of the real world when
comfortably fit into Oregon (fewer ment gets resources from people who they calculate the revenue impacts
than 4 million). We are a vast, con- produce them; spending this money of major pieces of legislation when
tinental nation, and we do consid- for politically favored projects more Congress puts together its annual
erably more driving. Besides, we’re often than not saps economic vitality. budget resolution.
already overtaxed, as are most other One of the big blunders the Repub- This is pretty timid stuff. But the
nations these days—a key reason that licans made in 1994, when they took Senate may not do even that much.
the global economy is in trouble. control of both houses of Congress, Sadly, it looks like Republicans
was in not reforming this destructive don’t have the stomach to do what’s
pro-big-government bias. Nor did the necessary. For one thing, they should
Congress’ Bias For George W. Bush Administration push sweep out the CBO personnel who
More Taxes for this reform when the GOP held
congressional majorities.
are attached to obsolete, ever-bigger-
government-is-good economic ideol-
One of the main tasks of the new Re- A sensible scoring system would ogies, starting with director Douglas
publican Congress will be to change take note of the real-world response to Elmendorf. He stood by as the Ad-
fundamentally how the Congressional lower tax burdens. It would also recog- ministration played its ObamaCare
Budget Office (CBO) and the Joint nize that not all tax cuts are equal. Rate budget games. “Personnel is policy”
Committee on Taxation (JCT) evalu- reductions are infinitely more powerful is a wise Washington adage that the
ate the impact that changes in the tax than various tax credits and one-time GOP should take to heart. F

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don’t use this
month rolls over
to next month.
Rollover Data expires after 1 mo. or
SM
w/any plan change & is consumed after

all other data allowances.
Now all Mobile Share Value customers ®
automatically get Rollover Data. On the network with the SM
nation’s strongest LTE signal.
Learn more at att.com/rolloverdata.
Rollover DataSM is only available with Mobile Share Value® plans. Unused data from the monthly plan allowance rounds up to the nearest MB and carries over for one billing period. Unused Rollover
Data automatically expires after one billing period, with any plan change, or when a group or account is terminated. Unused additional data resulting from data overage is not included.
Rollover Data is always consumed last, after your other data allowances. Unused Rollover Data is not redeemable for cash or credit and is not transferable, including to other Mobile Share Value groups on your
account. Original Mobile Share and Mobile Share data-only plans are excluded. Visit att.com/rolloverdata for more info. Signal Strength: claim based ONLY on avg. LTE signal strength for national carriers. LTE is
a trademark of ETSI. LTE not avail. everywhere. ©2015 AT&T Intellectual Property. All rights reserved. AT&T, the Globe logo and Mobilizing Your World, and other marks are trademarks of AT&T Intellectual Property.
LeaderBoard
February 9, 2015
In aggregate,
the NBA’s highest
earners saw their
incomes rise 3% over
the past year. Kevin
Durant’s new $300
million shoe deal gave
him the biggest boost;
last year’s number one,
Kobe Bryant, falls to
third after a pay cut.
These stars should
be paid well: The
average value of a pro
basketball team rose a
staggering 74% in the
last 12 months.
PAGE 18
THE TOP-EARNING
NBA PLAYERS
LEBRON JAMES $64.6 MIL
Cleveland Cavaliers
KEVIN DURANT $54.0 MIL
Oklahoma City Thunder
KOBE BRYANT $49.5 MIL
Los Angeles Lakers
DERRICK ROSE $38.9 MIL
Chicago Bulls
CARMELO ANTHONY $30.5 MIL
New York Knicks America’s Richest Politician 23
DWYANE WADE $27.0 MIL
Miami Heat The $70 Million
AMAR’E STOUDEMIRE $26.4 MIL Minecraft Mansion 26
New York Knicks
CHRIS PAUL $26.1 MIL
Inside Elvis’ Planes 28
Los Angeles Clippers
Reassessing Wilbur Ross’
DWIGHT HOWARD $25.9 MIL
Houston Rockets 2011 Mother Lode 30
BLAKE GRIFFIN $24.7 MIL
Los Angeles Clippers
BARRY GOSSAGE / NBAE VIA GETTY IMAGES

LeaderBoard
SPORTSMONEY
Hoops Hysteria
THE AVERAGE NBA team is worth $1.1 billion, 74% more
than last year and three times more than five years ago. Why?
In October the league inked expanded national media deals
with Walt Disney (ESPN/ABC) and Time Warner (TNT) The Kings are
that will begin with the 2016–17 season and are worth nearly scheduled to move
into a new,
three times the current deals. With live sports proving one of $477 million arena
the few DVR-proof plays (people watch the commercials), in downtown
local rights deals are surging, too. Plus, it never hurts when Sacramento
in 2016. Baseball
rich people look for trophy assets in a bull market—and credit
legend Hank
is cheap. For much more on the business of basketball, go to Aaron is part of a
www.forbes.com/nba. group interested in
buying the Atlanta
Hawks.
+94%
The
Minnesota
+86%
Timberwolves
have not been in +80%
the playoffs since +77%
2004, the NBA’s +75%
longest current +73%
drought.
+66%
+62% +61%
$900
+55% $855
$875
$825 $830
$800 $810 $910
+48% +49% $850
$750
+45% $725 +45% +56%
$650
$700
$600
$625
$479
$429
$344 $361
$343
$305 $306 $321 $313
$268 $267 $278 $281
$254 $257
Minnesota
Charlotte
Milwaukee
Timberwolves
New Orleans
Philadelphia
Memphis
Detroit
Atlanta
Indiana
Utah
Denver
Orlando
Washington
Wizards
Phoenix
Bucks
Pelicans
76ers
Hornets
Grizzlies
Sacramento
Kings
Pistons
Hawks
Pacers
Jazz
Nuggets
Magic
Suns

+178%
1-YEAR CHANGE (%) The
Los Angeles
$2,600
Lakers’ 20-year,
CURRENT VALUE ($MIL) $4 billion cable $2,500
deal is the
league’s richest.
VALUE 5 YEARS AGO ($MIL)
The
Brooklyn Nets paid
Since the a league-high $91
return of LeBron million luxury payroll tax
James, local tele- for the 2013–14 season
vision ratings for the and are being shopped $2,000
Cleveland Cavaliers by Russian billionaire
have nearly Mikhail Prokhorov.
doubled.
$1,700
$1,600
+100%
$1,500
+94% +93%
+92%
$1,300
$1,250
+78% +77% +79%
$1,175
$1,150 +73%
$1,000
$940
+61%
$915 $920 $930
+52% +53%
+60% +50%
+58%
$607
$586
$511
$476 $470
$446 $433
$386 $398
$364
$338
BY KURT BADENHAUSEN
$310 $315
$295
$269
Oklahoma City
Dallas
Cleveland
Portland
San Antonio
Miami
Houston
Golden State
Los Angeles
Boston
Chicago
Los Angeles
Cavaliers
Toronto
Raptors
Thunder
Trail Blazers
Spurs
Mavericks
Heat
Rockets
Warriors
Brooklyn
Nets
Clippers
Celtics
Bulls
New York
Knicks
Lakers

For people with a higher risk of stroke due to
Atrial Fibrillation (AFib) not caused by a heart valve problem
ELIQUIS® (apixaban) is a prescription medicine used to reduce the risk of stroke and blood clots in
people who have atrial fibrillation, a type of irregular heartbeat, not caused by a heart valve problem.
IMPORTANT SAFETY INFORMATION: Get medical help right away if you have any of
these signs or symptoms of bleeding:
Do not stop taking ELIQUIS for atrial fibrillation - unexpected bleeding, or bleeding that lasts a
without talking to the doctor who prescribed it for long time, such as unusual bleeding from the
you. Stopping ELIQUIS increases your risk of having gums; nosebleeds that happen often, or
a stroke. ELIQUIS may need to be stopped, prior menstrual or vaginal bleeding that is heavier
to surgery or a medical or dental procedure. Your than normal
doctor will tell you when you should stop taking - bleeding that is severe or you cannot control
ELIQUIS and when you may start taking it again. If - red, pink, or brown urine; red or black stools
you have to stop taking ELIQUIS, your doctor may (looks like tar)
prescribe another medicine to help prevent a blood - coughing up or vomiting blood or vomit that looks
clot from forming.
like coffee grounds
ELIQUIS can cause bleeding, which can be serious, - unexpected pain, swelling, or joint pain; headaches,
and rarely may lead to death. feeling dizzy or weak
You may have a higher risk of bleeding if you take ELIQUIS is not for patients with artificial heart valves.
ELIQUIS and take other medicines that increase your
risk of bleeding, such as aspirin, NSAIDs, warfarin Spinal or epidural blood clots (hematoma). People
(COUMADIN®), heparin, SSRIs or SNRIs, and other who take ELIQUIS, and have medicine injected into
blood thinners. Tell your doctor about all medicines, their spinal and epidural area, or have a spinal
vitamins and supplements you take. While taking puncture have a risk of forming a blood clot that
ELIQUIS, you may bruise more easily and it may can cause long-term or permanent loss of the
take longer than usual for any bleeding to stop. ability to move (paralysis).
I was taking warfarin.
But ELIQUIS was a better find.
I TAKE ELIQUIS® (apixaban) FOR 3 GOOD REASONS:
1 ELIQUIS reduced the risk of stroke better than warfarin.
2 ELIQUIS had less major bleeding than warfarin.
3 Unlike warfarin, there’s no routine blood testing.
ELIQUIS and other blood thinners increase the risk of bleeding which can be
serious, and rarely may lead to death.
Ask your doctor if ELIQUIS is right for you.

This risk is higher if, an epidural catheter is placed You are encouraged to report negative side effects
in your back to give you certain medicine, you take of prescription drugs to the FDA. Visit www.fda.gov/
NSAIDs or blood thinners, you have a history of medwatch, or call 1-800-FDA-1088.
difficult or repeated epidural or spinal punctures.
Tell your doctor right away if you have tingling, Please see additional
numbness, or muscle weakness, especially in your Important Product Information
legs and feet. on the adjacent page.
Before you take ELIQUIS, tell your doctor if you
have: kidney or liver problems, any other medical
condition, or ever had bleeding problems. Tell Individual results may vary.
your doctor if you are pregnant or breastfeeding,
or plan to become pregnant or breastfeed.
Do not take ELIQUIS if you currently have certain Visit ELIQUIS.COM
types of abnormal bleeding or have had a serious or call 1-855-ELIQUIS
allergic reaction to ELIQUIS. A reaction to ELIQUIS
can cause hives, rash, itching, and possibly
trouble breathing. Get medical help right away if
you have sudden chest pain or chest tightness, ©2014 Bristol-Myers Squibb Company
have sudden swelling of your face or tongue, 432US14BR01976-01-01 11/14
have trouble breathing, wheezing, or feeling

dizzy or faint.
IMPORTANT FACTS about ELIQUIS® (apixaban) tablets
The information below does not take the place of talking with your healthcare professional. Only your healthcare
professional knows the specifics of your condition and how ELIQUIS may fit into your overall therapy. Talk to your
healthcare professional if you have any questions about ELIQUIS (pronounced ELL eh kwiss).
What is the most important information forming a blood clot that can cause long-term Tell your doctor about all the medicines you
I should know about ELIQUIS (apixaban)? or permanent loss of the ability to move take, including prescription and over-the-
For people taking ELIQUIS for atrial (paralysis). Your risk of developing a spinal or counter medicines, vitamins, and herbal
fibrillation: Do not stop taking ELIQUIS epidural blood clot is higher if: supplements. Some of your other medicines
without talking to the doctor who prescribed • a thin tube called an epidural catheter may affect the way ELIQUIS (apixaban) works.
it for you. Stopping ELIQUIS increases your is placed in your back to give you certain Certain medicines may increase your risk of
risk of having a stroke. ELIQUIS may need medicine bleeding or stroke when taken with ELIQUIS.
to be stopped, prior to surgery or a medical • you take NSAIDs or a medicine to prevent How should I take ELIQUIS?
or dental procedure. Your doctor will tell you blood from clotting Take ELIQUIS exactly as prescribed by your
when you should stop taking ELIQUIS and when • you have a history of difficult or repeated doctor. Take ELIQUIS twice every day with or
you may start taking it again. If you have to epidural or spinal punctures without food, and do not change your dose or
stop taking ELIQUIS, your doctor may prescribe • you have a history of problems with your stop taking it unless your doctor tells you to.
another medicine to help prevent a blood clot spine or have had surgery on your spine If you miss a dose of ELIQUIS, take it as soon
from forming. If you take ELIQUIS (apixaban) and receive as you remember, and do not take more than
ELIQUIS can cause bleeding which can be spinal anesthesia or have a spinal puncture, one dose at the same time. Do not run out
serious, and rarely may lead to death. This is your doctor should watch you closely for of ELIQUIS. Refill your prescription before
because ELIQUIS is a blood thinner medicine symptoms of spinal or epidural blood clots you run out. When leaving the hospital
that reduces blood clotting. or bleeding. Tell your doctor right away if you following hip or knee replacement, be sure
You may have a higher risk of bleeding if you have tingling, numbness, or muscle weakness, that you will have ELIQUIS available to avoid
take ELIQUIS and take other medicines that especially in your legs and feet. missing any doses. If you are taking ELIQUIS
increase your risk of bleeding, such as aspirin, for atrial fibrillation, stopping ELIQUIS may
nonsteroidal anti-inflammatory drugs (called What is ELIQUIS? increase your risk of having a stroke.
NSAIDs), warfarin (COUMADIN®), heparin, ELIQUIS is a prescription medicine used to: What are the possible side effects of
selective serotonin reuptake inhibitors (SSRIs) • reduce the risk of stroke and blood clots in ELIQUIS?
or serotonin norepinephrine reuptake inhibitors people who have atrial fibrillation. • See “What is the most important
(SNRIs), and other medicines to help prevent or • reduce the risk of forming a blood clot in the information I should know about
treat blood clots. legs and lungs of people who have just had ELIQUIS?”
Tell your doctor if you take any of these hip or knee replacement surgery. • ELIQUIS can cause a skin rash or severe
medicines. Ask your doctor or pharmacist • treat blood clots in the veins of your legs allergic reaction. Call your doctor or get
if you are not sure if your medicine is one (deep vein thrombosis) or lungs (pulmonary medical help right away if you have any of
listed above. embolism), and reduce the risk of them the following symptoms:
While taking ELIQUIS: occurring again. • chest pain or tightness
• you may bruise more easily It is not known if ELIQUIS is safe and effective • swelling of your face or tongue
• it may take longer than usual for any in children. • trouble breathing or wheezing
bleeding to stop • feeling dizzy or faint
Call your doctor or get medical help right Who should not take ELIQUIS?
Do not take ELIQUIS if you: Tell your doctor if you have any side effect that
away if you have any of these signs or bothers you or that does not go away.
symptoms of bleeding when taking ELIQUIS: • currently have certain types of abnormal
bleeding These are not all of the possible side effects of
• unexpected bleeding, or bleeding that lasts ELIQUIS. For more information, ask your doctor
a long time, such as: • have had a serious allergic reaction to or pharmacist.
• unusual bleeding from the gums ELIQUIS. Ask your doctor if you are not sure
Call your doctor for medical advice about side
• nosebleeds that happen often What should I tell my doctor before taking effects. You may report side effects to FDA at
• menstrual bleeding or vaginal bleeding ELIQUIS? 1-800-FDA-1088.
that is heavier than normal Before you take ELIQUIS, tell your doctor if This is a brief summary of the most
• bleeding that is severe or you cannot control you: important information about ELIQUIS.
• red, pink, or brown urine • have kidney or liver problems For more information, talk with your
• have any other medical condition doctor or pharmacist, call 1-855-ELIQUIS
• red or black stools (looks like tar) (1-855-354-7847), or go to www.ELIQUIS.com.
• cough up blood or blood clots • have ever had bleeding problems
• are pregnant or plan to become pregnant. Manufactured by:
• vomit blood or your vomit looks like coffee It is not known if ELIQUIS will harm your Bristol-Myers Squibb Company
grounds unborn baby
Princeton, New Jersey 08543 USA
• unexpected pain, swelling, or joint pain Marketed by:
• are breastfeeding or plan to breastfeed. Bristol-Myers Squibb Company
• headaches, feeling dizzy or weak It is not known if ELIQUIS passes into your Princeton, New Jersey 08543 USA
ELIQUIS is not for patients with artificial breast milk. You and your doctor should and
heart valves. decide if you will take ELIQUIS or breastfeed. Pfizer Inc
You should not do both New York, New York 10017 USA
Spinal or epidural blood clots (hematoma).
People who take a blood thinner medicine Tell all of your doctors and dentists that you are COUMADIN® is a trademark of Bristol-Myers Squibb
(anticoagulant) like ELIQUIS, and have medicine taking ELIQUIS. They should talk to the doctor Pharma Company.
injected into their spinal and epidural area, who prescribed ELIQUIS for you, before you
or have a spinal puncture have a risk of have any surgery, medical or dental procedure.
© 2014 Bristol-Myers Squibb Company
ELIQUIS is a trademark of Bristol-Myers Squibb Company.
Based on 1289808A1 / 1289807A1 / 1298500A1 / 1295958A1
This independent, non-profit organization provides assistance to qualifying patients with financial hardship who August 2014
generally have no prescription insurance. Contact 1-800-736-0003 or visit www.bmspaf.org for more information. 432US14BR00770-07-01
WILLIAM ERBEY
–$620 MILLION
NET WORTH: $440 MILLION
Shares of subprime king’s Ocwen Financial drop
LeaderBoard 57% after he settles accounting investigation

with regulators, resigns as chairman.
NEW BILLIONAIRE
America’s Richest Politician

For Tennessee’s Bill Haslam, cheap crude is a total gas.
FALLING PRICES at the pump are typically good for politicians,
and that’s doubly true for Tennessee Governor Bill Haslam. An
heir to truck stop chain Pilot Flying J, Haslam has seen his net
worth more than double since August—from $980 million to an
estimated $2 billion—thanks to cheaper gas. He’s now the richest
elected official in America.
Cheap unleaded means more people filling up—and a greater
chance for gas stations and truck stops to profit off fuel, plus ancil-
lary goods and services. “In a declining fuel market, these opera-
tors do much better,” says John R. Lawrence, managing director at
investment bank Stephens.
Pilot Flying J’s trailing 12-month operating income has grown
from $1.1 billion in August to $1.4 billion, according to the company.
That means fatter coffers for Haslam, a Republican, who owns 15%
of the $38 billion (sales) roadside giant,
BILLIONAIRE DROP-OFFS
which his father founded in 1958.
Haslam’s ties to Pilot Flying
No Wonder
J drew scrutiny after the FBI Chris Burch falls out of the ranks of the richest.
launched a fraud investigation
in 2013. Last July the com- “WE’RE GOING TO be opening 200 to 300 stores
pany settled, admitting it had globally in the next three years,” C. Wonder founder
shortchanged trucking firms on Chris Burch said at his Manhattan flagship store in
gasoline rebates and agreeing 2013 among racks of sherbet-colored preppy duds.
to fork over $92 million in Little more than a year later Burch—who split from
fines. The governor, his wife, fashion designer Tory Burch, in an acrimoni-
who was Pilot Flying ous 2006 divorce—has announced plans to shutter
J’s president from every C. Wonder store. (The brand will maintain a
1995 to 1999, wasn’t modest Web presence.) A company spokeswoman
involved in its cited “the highly competitive nature of the current
NEW BILLIONAIRE BY DAN ALEXANDER; BILLIONAIRE DROP-OFFS BY ABRAM BROWN

management at the retail environment”; Burch declined to comment.
time. His brother FORBES estimates that he’s now worth some $950
JONATHAN KOZOWYK (TOP); CHRIS BURCH: SCOTT EELLS / BLOOMBERG

Jimmy—the own- million, down 21% from $1.2 billion in September. His
er of the Cleve- wealth originates from having pocketed an estimated
land Browns, $550 million from selling part of his stake in his ex-
who’s worth an wife’s firm; he has also invested in startups, including
estimated $2.9 digital fitness tracker Jawbone (see story, p. 64).
billion—was C. Wonder was born from the ashes of the Burches’
CEO but has de- divorce. Tory regarded the chain as a cheap knockoff
nied knowledge of her ideas; Chris accused her of interfering with his
of the scheme. suppliers. The two settled in 2012, and Chris cashed
out and shifted focus to his new venture. He foresaw a
tough go: “It’s a difficult project,” he admitted that day
in his flagship outpost. Perhaps a little too difficult.

DATA-DRIVEN
BUSINESSES
OUTPERFORM
Becoming a data-driven organization is now a matter of survival in
the market, because such organizations tend to outperform. Evolving
a data-centric culture is critical, and leadership is central to this effort.
DATA-DRIVEN COMPANIES WITH LOW

VS. RELIANCE ON DATA
COMPANIES
Data-driven companies are more They are more likely to realize

likely to outperform their competitors the benefits of data, including:
when it comes to profitability
BETTER KNOWLEDGE SHARING
68% vs.
40% 70% vs. 41%
MORE COLLABORATIVE
They are also more likely to ORGANIZATION
have a culture of creativity
and innovation
59% vs. 33%
78% vs.
37%
GREATER QUALITY AND SPEED
OF EXECUTION
And are better positioned for

top-down and bottom-up cultural
55% vs.
24%
evolution and success:
TOP LEADERS WHO LAUNCH

AND DRIVE DATA INITIATIVES FASTER DECISIONS
65% vs. 42% 55% vs. 28%
The data in this infographic is based on a global survey of 362 senior

executives conducted in September/October 2014 by the Economist
Intelligence Unit.
Data-driven companies don’t want to predict tomorrow’s trends.
They want to create them.
Don’t just compete. Win.

Big data doesn’t automatically give you insights. Or make you a leader in your
industry. That’s why we’re here. Teradata’s big data and analytics solutions are
unmatched, giving you a more comprehensive level of insight, faster and with
more transparency than ever before. So you can power data into opportunities.
And go from just driven to data driven.
teradata.com/bigdata
BEAN FAMILY
–DUCK BOOTS
NET WORTH: $1.7 BILLION
After selling more than 400,000 pairs, L.L. Bean
LeaderBoard runs out of its iconic product during its peak season:
the dead of winter. More available ... in April.
The Minecraft version.
REAL ESTATE The real thing.
Block Party
Minecraft billionaire pays $70 million cash
for a spec mansion in Beverly Hills.
MARKUS PERSSON sold his videogame company,
Mojang, to Microsoft for $2.5 billion last September—
a sale spurred by the enormous popularity of Minecraft,
Mojang’s building-block adventure game.
Persson, 35, a Swede known universally among gam-
ers as “Notch,” put some of that haul into a new place in
December—no assembly required. The 23,000-square-foot
Beverly Hills mansion, built on spec, has a movie theater, 8 A (virtual) peek inside.
NOTCH’S HOUSE: HTTP://WWW.YOUTUBE.COM / USER / DANBOVEY
bedrooms, 15 bathrooms, place settings by Roberto Cavalli

and a car showroom. (A scarily accurate depiction of how
it would look in Persson’s game is shown above.)
It’s the priciest home ever sold in Beverly Hills. Among
the bidders were Jay Z and Beyoncé, whose $70 mil-
lion offer Persson matched, with one key sweetener: He
agreed to pay cash. John Aaroe Group, the luxury broker
that repped Persson, noted afterward that “cases of Dom
BY BRIAN DAWSON
Pérignon were part of the deal.” Jay Z recently acquired

the Armand de Brignac champagne brand; that little detail
must have really burst his bubble.

Loves fresh air. And Bel Air.
Introducing the new Volkswagen Touareg TDI® Clean Diesel. This turbocharged engine gets up to 765
highway miles on a single tank* which should give you plenty of time to enjoy its sophisticated, refined interior
and the view from the available 12.7-sq-ft panoramic sunroof. Take it out, get its wheels dirty, use the available
hands-free Easy Open liftgate, drop the rear seats and fill its 64 cubic feet of cargo space. The new Touareg
is ready for real life and the finer things in life in equal measure. Isn’t it time for German engineering?
vw.com *20 city/29 highway mpg (2015 Touareg 3.0L TDI®, 8-speed automatic transmission). Range based on 29 mpg highway EPA estimates and a 26.4-gallon fuel tank. Your mileage will vary and depends on several factors, including your driving habits and
vehicle condition. ©2015 Volkswagen of America, Inc.
LEI JUN
+$2.9 BILLION
China’s Steve Jobs raises $1.1 billion in
LeaderBoard venture capital, valuing his cellphone

maker, Xiaomi, at $45 billion.
ON THE MARKET
The King’s Rides

Exiled from Graceland, Elvis’
private jets go up for bid.
FOR 30 YEARS Elvis Presley’s two planes have
stood silent sentry across the street from Graceland:
Lisa Marie, a Convair 880 commercial airliner he
bought from Delta in 1975, and Hound Dog II, a much
smaller Lockheed JetStar he picked up shortly there-
after to use while Lisa Marie was being refurbished.
The current operators of Graceland, however,
want to build a 450-room hotel across the street from
where the planes sit, so both of them—neither is cur-
rently airworthy—have gone up for a sealed-bid auc-
tion whose winner will be announced in early March.
“You’re buying a ready-made museum,” says Martin
Nolan, executive director of Beverly Hills-based
Julien’s Auctions, which is running the sale. “No matter where you place these
planes, people will show up.”
The jets are being sold as a matched set, though Lisa Marie is the prize pick-
up. Capable in its heyday of ferrying 28 passengers, it’s resplendent in late-70s
fat-Elvis decor: 24kt-gold seat belt buckles and water faucets, a queen bed, a
bar, a polished-wood conference table, a 50-speaker stereo system and more. It
last flew in 1977, transporting Priscilla and Lisa Marie Presley, along with actor
George Hamilton, from California to Memphis for the King’s funeral.
Prospective buyers must deposit $50,000 (refundable) in an escrow account
along with their bid; Nolan has fielded inquiries from around the world. “These
are sophisticated investors. They want a revenue stream. They’re not the die-
hard Elvis fan—if you’re coming up with $10 million to $15 million for these
planes,” he says, “you’re more a fan of the greenback.”
30 UNDER 30 Pelu Tran

AUGMEDIX | 26
Lifesavers Tran’s tech uses Google Glass to automate
the medical charting process, saving
ZHANG JIN / NEWSCOM (TOP); JON HICKS / CORBIS; PATRICK FRILET / REX USA
Medical innovations doctors time. In January the company

ON THE MARKET BY BRIAN DAWSON; 30 UNDER 30 BY KATHRYN DILL
from the Forbes scored $16 million in funding.

30 Under 30, in
30 words or less.
Jessie Becker
INPRESS TECHNOLOGIES | 25
Becker is developing
Maria Pereira
a device to counteract GECKO BIOMEDICAL | 29
postpartum hemorrhage, The light-activated glue that
the most common cause Pereira created can repair a hole in
of maternal death around a beating heart, simplifying high-
the world. stakes cardiovascular procedures.

Trusted, Secure
Cloud
—
BMC cloud software is used by
Orange Business Services in
165 countries.
Bring IT to Life
Experience BMC cloud management
at bmc.com/CloudSolutions
© 2015 BMC Software, Inc. All rights reserved.

LI KA-SHING
+$2.5 BILLION
Asia’s richest man restructures, plans to split real
LeaderBoard estate assets from rest of empire. Shares of his two

flagship companies jump more than 12% in a day.
DEAL TOY
Coal Comfort
MINING IS A DIRTY BUSINESS, but worse for company had a rough start: In 2006, 12 miners
investors, it’s seldom made them money—with one died in an explosion at an ICG mine in West Vir-
big dust-smudged exception named Wilbur Ross. ginia that was part of the Anker pickup. Then U.S.
The distressed-investing icon bought Ashland, coal prices cratered some 70% in the immediate
Ky.–based Horizon Resources out of bankruptcy aftermath of the 2008 global financial crisis.
in 2004, renaming it International Coal Group and ICG survived, though, and in 2011 Ross sold
quickly beginning to add mining assets. it to Arch Coal for $3.4 billion, a deal that pretty
In 2005, tunneling toward an IPO, ICG added much top-ticked the coal market: After Ross’
heft with a deal to acquire Anker and CoalQuest, exit the industry was dealt further blows by the
two mining concerns in which Ross already held abundant, cheap natural gas produced by the
large stakes, for $275 million. The newly combined fracking boom.
COAL ROLL-UP
Anker and CoalQuest gave ICG the
critical mass it needed to withstand
the Great Recession, though it
wasn’t pain-free: ICG’s stock, which
listed at $11 per share shortly after
the Anker takeover, went as low as
$1.09 in March 2009. It rebounded,
though; Arch Coal paid $14.60 a
share for the business in May 2011.
THREE OF A KIND
Ross’ roll-up strategy wasn’t just
a coal play; he’d already executed
a similar move with steelmakers
and textile mills. In 2004 he sold
International Steel Group to fellow
billionaire Lakshmi Mittal for
$4.5 billion. International Textile
Group, of which Ross is chairman,
maintains operations out of North
Carolina.
PEAKS AND TROUGHS

The miner’s helmet here could
have doubled as protection on the
coal-price roller coaster ride: $143
per ton in July 2008, plummeting
to below $43 less than a year later.
PHOTOGRAPH: DAVID ARKY; TOMOHIRO OHSUMI / BLOOMBERG (TOP)
Ross anticipated the next price

move perfectly, selling ICG in 2011
when coal neared $80; it now sells
for less than $50.
BUYER’S REMORSE?
Arch Coal, which was trading at
more than $34 a share when it
bought ICG, has since sunk to less
than $3. Still, it has managed to
avoid Chapter 11—escaping (so far)
BY STEVE SCHAEFER
the fate of such rivals as James

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Shares of Carnival Cruise, where he was CEO
LeaderBoard from 1979 to 2013, tick up after Obama

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CONVERSATION
OUR JAN. 19 “30 UNDER 30” cover BOOMTOWNS
package featuring 600 young disruptors FORBES staff reporter Kathryn
across 20 fields drew intense interest, some Dill hosted a Twitter chat about
of it for the slick appearance of ordinarily America’s best cities for jobs in
slovenly cover boy Palmer Luckey. “Should the year ahead.
have left him in the Hawaiian shirt,” reader
@TEHRRIFIC Best city for
Jim Redner said of the 22-year-old founder job growth on the West
of virtual-reality company Oculus Rift. Many Coast?
groups tweeted congratulations to their
alumni or colleagues for their inclusion:
Harvard, the Aspen Institute, Dell and more. @FORBES Seattle is not
only the best city for jobs
Perhaps the wryest tribute to our compilation, on the West Coast—it’s
though, came from the Web’s listicle machine, No. 1 in the U.S.
Buzzfeed, which put forth a sardonic “30
Under 30 Making Under 30K”: a Starbucks
barista, a security guard, a rickshaw driver @MEGCHRISTENSEN
Why do you think most of
from Berkeley, a “Segway tour guide.” the best cities on the list
are in the western part of
the country?
THE INTEREST GRAPH
Youth will be served: Reader clicks on our 30 Under 30 cover package dwarfed all else in our Jan. 19 issue. @FORBES A lot of cities
You win, Millennials. are providing good job
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THE FORBES 30 Under 30: 600 Next-Gen Leaders 14,007,859 page views
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Palmer Luckey: Defying Reality
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From Michelle Phan to Christian Siriano: 30 Under 30 in Art and Style
young. This is the oil prices affect Texas’
year he gets to prove growth? Are states like
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“By noon on game 9.3 million permanent
day, Nigel Eccles was jobs in the U.S., but not
18,156 raking in $30,000 per all of them are energy
minute. By the first jobs specifically; many
Ken Fisher’s 2015 Forecast: Another Year to Thrive snap, he had collected are in local economies
$18 million.” where energy compa-
14,796 nies are headquartered.
If you’re considering
TOP: LYNNE SLADKY / AP
BY MEHRUNISSA WANI
Delightful Cubans and the Oil Narrative

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RICH KARLGAARD // INNOVATION RULES
DATA WIMPS
BILL SIMMONS, ESPN’s cocky But a worse outcome is when data and ana-
sportswriter, made an odd confession lytics make businesspeople timid, in the same
in his Jan. 9 Grantland column. Data way Bill Simmons says he has become more
and analytics in sports, he said, should timid. Apple’s Steve Jobs favored products that
be a writer’s gift. They should anchor had a spare look with only a few features that
opinion to facts and reveal truths that worked brilliantly well. However, marketing
the eyes and ears missed in real time. data tend to suggest more, not fewer, features
But the opposite has happened, said are what’s desired. (The more data you have,
Simmons. Rather than making writers the more roads you can take.) But Jobs, confi-
more confident, the availability of data dent in his instincts, knew when to say no to
makes them more timid. data. That’s a harder call for us mere mortals.
Data make us “unquestionably and Think of a doctor who goes against a ca-
undeniably smarter now. But you also read and hear so much more reer’s worth of experience and instincts and
hedging … because writers don’t want their opinions thrown back in instead opts for a diagnosis that’s more data-
their face later.” “Later” meaning, of course, when the data are ana- defensible. If you were a doctor and worried
lyzed and the writer’s take on events is shown to have been wrong. about lawsuits, you might do that, too.
In pro basketball, for example, Simmons thinks the great LeBron Recently I interviewed Howard Behar
James is not the player he was. Simmons saw signs of it while watch- onstage at a Vistage conference in Seattle.
ing him play late last season. He saw more of it this year, before James I’ve written about Behar before; he was the
was injured. “He just didn’t look like LEBRON,” writes Simmons. second in command at Starbucks during
“Something was different—he didn’t have the same energy.” But Sim- the coffee chain’s rapid national and global
mons’ observations weren’t written with his usual gale force. He expansion period in the late 1990s and early
hedged. He was afraid the data might show him to be wrong. 2000s. His partnership with the legendary
Why should we care about one sportswriter’s musings about one Starbucks chief, Howard Schultz, is worth
athlete? Well, Simmons happens to be the top pro-basketball writer studying in detail. Behar and Schultz share
of his generation and is normally fearless. (Look at his criticisms of the Starbucks vision: “A culture of warmth
NFL Commissioner Roger Goodell, if you doubt this.) Yet, here was and belonging, where everyone is welcome.”
Simmons admitting that he was afraid to write what he’d observed of But temperamentally they are opposites:
LeBron James. Mind you, Simmons wasn’t afraid of James. Or of the Schultz is competitive, driven, analytical;
Cleveland Cavaliers and their fans. Or of the NBA. No, Simmons was Behar’s gift is empathy.
afraid the data might embarrass him. In the early 1990s Starbucks hit a slow
patch. The data on why weren’t clear.
DOUBLE-EDGED SWORD IN BUSINESS Schultz, the Starbucks CFO and the board
The age of big data and powerful analytics is a double-edged sword recommended a deeper data dive. But Behar
in business, too. To the good, these powerful new tools can show us had visited stores, talked with employees and
patterns and opportunities that 99% of businesspeople would miss. knew the score. The problem, he discovered,
Imagine you run a business that has subscribers. One part of your wasn’t complicated: New employees weren’t
company has data on customers and their subscription terms. Anoth- buying into the Starbucks culture; older em-
er part has data on service problems. In theory the two data pools can ployees felt alienated from headquarters.
alert your sales team to which customers might not renew because of Putting his career and reputation on the
THOMAS KUHLENBECK FOR FORBES
a bout of dropped calls near the end of the service contract. Because line, Behar told Schultz and the Starbucks
locking in a new customer costs up to ten times more than retaining a board, “We don’t need more data. Our prob-
current one, that’s valuable information. lem is simple. Our employees are unhappy. Is
that enough data for you?”
RICH KARLGAARD IS THE PUBLISHER AT FORBES. HIS LATEST BOOK, THE SOFT EDGE: WHERE GREAT COMPANIES
FIND LASTING SUCCESS, CAME OUT IN APRIL. FOR HIS PAST COLUMNS AND BLOGS VISIT OUR WEBSITE Trust your eyes and ears. The data are
AT WWW.FORBES.COM/KARLGAARD.
your tools, not your master. F
THOUGHT LEADERS
DAVID MALPASS // CURRENT EVENTS
LOWER INFLATION: ANOTHER CHANCE

FOR GOVERNMENT MISTAKES
WORLD INFLATION IS FALLING, ing to keep massive government spending
along with oil prices. This shouldn’t and the lifetime pensions that go with it in-
have caught financial markets by tact for a few more years.
surprise, since private-sector credit
growth remains very slow. As discussed WEAKER GROWTH RATE
in past columns, the Federal Reserve is A side effect of lower inflation is that nominal
creating IOUs called bank reserves but growth rates will fall well below expectations.
is not fostering new money in the pri- World GDP reached an estimated $77 trillion
vate sector or adding to inflation. The in 2014, the fifth increase in a row. However,
slowdown in inflation and the decline it began shrinking in the fourth quarter and
in oil prices are part of the same phe- is likely to be smaller in 2015 than in 2014,
nomenon: a limited amount of private- perhaps $75 trillion or less. This will undercut
sector money chasing a plentiful global supply of goods and services. corporate earnings, cause lower government
Lower oil prices and the stronger dollar would normally be a lop- tax receipts, widen fiscal deficits and chal-
sided positive for the U.S. economy, as they were in the 1990s. How- lenge public pension funds to lower their rosy
ever, under current circumstances the benefits are muted because projections for investment returns.
the U.S. has been producing more oil and the Fed has already forced These problems will come as a shock
interest rates and bond yields to very low levels. after decades of easy gains from compound
Central banks are ratcheting up their existing policies, making interest and inflation-puffed tax receipts.
matters worse. Extending the zero interest rate policy, one of the Fed’s For example, many public pension funds
options, would be harmful because the zero interest rate freezes interbank still assume a 7.5% annual return, a carry-
markets and rechannels credit away from the economy’s growth engines— over from decades of high bond yields. With
new businesses. The zero interest rate is a government-imposed price bond returns likely to be a fraction of those
control. The result is a credit rationing process in which credit flows to well- in the past, taxpayers and creditors will be
connected borrowers at the low price but avoids new and small businesses. on the hook for the shortfall. This makes it
Having the central banks buy more bonds to fight deflation would all the more important that public pension
also be harmful. Bond buying distorts capital flows and distracts govern- funds begin to provide clear disclosure of
ments from the urgency of structural reforms. Since 2009 almost all of their long-term outlay projections—as Social
the central bank “stimulus” has gone into long-term government bonds, Security does—not just their wishful return
one of the world’s highest-priced and least productive assets. By driv- expectations and estimated underfunding.
ing bond prices even higher, the central banks are favoring bond issuers The pressure abroad on fiscal deficits and
(governments, big corporations and the rich) at the expense of savers retirement savings will be even greater than in
and small-business lending. Wall Street and Washington love central the U.S., because many parts of the world have
bank activism and profit from it, but there’s a tremendous cost to eco- fallen into recession. This points to disap-
nomic growth and median incomes that should be taken into account. pointing disclosures about fiscal progress as
To fight recession and deflation, Japan has chosen to accelerate its 2015 proceeds. The reforms needed for faster
already huge monthly purchases of high-priced government bonds growth aren’t rocket science—look at my July
rather than undertake structural reform. Europe faces its own policy 21, 2014 column, “Peace Through Weakness:
impasse. Recession is spreading, and France’s core inflation turned The U.S. and Japan Sputter,” for some ideas.
negative in late 2014. However, instead of pursuing growth-oriented However, the chances of any action being
structural reform in labor laws, taxes and regulatory policy, France taken are going down with the inflation rate,
and much of Europe expect the European Central Bank to rescue as central banks gain power and promise to
them. The governments are urging the ECB to buy their bonds, hop- solve the growth problems by themselves. F
DAVID MALPASS, GLOBAL ECONOMIST, PRESIDENT OF ENCIMA GLOBAL LLC; PAUL JOHNSON, EMINENT BRITISH HISTORIAN AND AUTHOR;
AMITY SHLAES, PRESIDENTIAL SCHOLAR AT THE KINGS COLLEGE AND CHAIR OF THE COOLIDGE FOUNDATION BOARD; LEE KUAN YEW, FORMER PRIME MINISTER OF SINGAPORE,
ROTATE IN WRITING THIS COLUMN. TO SEE PAST CURRENT EVENTS COLUMNS, VISIT OUR WEBSITE AT WWW.FORBES.COM/CURRENTEVENTS.

THE LEUKEMIA & LYMPHOMA SOCIETY CHALLENGED
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THOUGHT LEADERS
AVIK ROY // THE APOTHECARY
THE REAL MINIMUM WAGE: ZERO

THE OBAMA ECONOMY has been hikes in more than a dozen states. Ground
great for some people. Thanks to Ben zero in the minimum wage war is Seattle,
Bernanke and Janet Yellen, owners of where left-wing mayor Ed Murray signed a
equities and real estate have done very law jacking the minimum wage up to $15 an
well since 2009. But things have been hour. “We have taken a great step forward in
more challenging for those at the other the challenge of addressing income inequal-
end of the occupational ladder: those ity,” says Murray.
who work in jobs that pay by the hour. Howard Behar, the former president of
Due to ObamaCare, and to hikes in the Starbucks, expressed a different view at a
minimum wage, these workers are cost- conference organized by the Washington
lier to hire. In some cases, too costly. Policy Center. “You’re going to see more au-
ObamaCare requires firms with tomation. … Don’t be surprised if Starbucks
more than 50 employees to offer federally approved health insurance goes to all-cashless payment,” because then
to all of their full-time workers or pay a steep fine. The law defines Starbucks wouldn’t have to employ cashiers.
“full-time worker” as someone working more than 30 hours a week, Even after Starbucks sheds workers, Behar
so guess what? Employers in the restaurant and retail sectors have calculates, the $15-an-hour wage mandate
been trimming their workers’ hours so that fewer of them qualify as will make a $5.20 order cost $6.20. That
“full-time.” dollar might not seem like much if you’re
The data are starting to tell the story. Among part-time employ- making six figures at Microsoft or Amazon.
ees, the proportion that works 25 to 29 hours a week is rising and the But higher retail prices raise dramatically the
proportion that works 31 to 34 hours is shrinking. Only about 20% cost of living for those in the middle class.
of hourly employees work less than 35 hours a week. But these are Taylor Hoang is an entrepreneur behind
precisely the jobs held by those teetering on the edge between upward Pho Cyclo Café, a chain of Vietnamese restau-
mobility and unemployment. rants in the Seattle area. At the same confer-
ence where Behar spoke, Hoang said
that the older, lower federal wage
OBAMACARE AND MINIMUM WAGE HIKES mandate “allows me to hire students,
ARE KILLING ENTRY-LEVEL JOBS allows me to hire new immigrants to
this country.” Now that wages will
The new Republican Congress is trying to do something about this have to exceed $15 an hour, starting in April,
by amending the health law’s definition of “full-time” to 40 hours a Hoang won’t be able to hire new immigrants,
week. It would be far better for them to repeal the employer mandate because it’s too costly to train them. Instead,
altogether. But the Congressional Budget Office says that a full repeal she plans to seek out “experienced workers”
would cost the federal government $100 billion, principally in lost from other restaurants who already have the
mandate fines; the 40-hour tweak costs only $53 billion. The repeal- required skills.
or-tweak debate is probably moot, however, as President Obama has There’s one reason above all that Demo-
promised to veto the legislation regardless of the details. crats push wage mandates, and it has noth-
Democrats haven’t been content with ObamaCare’s impact on part- ing to do with the interests of line cooks and
time hourly workers. They’ve compounded the problem by leading a cashiers. It’s about labor unions, many of
nationwide effort to increase the so-called minimum wage above the which have negotiated collective bargaining
federally mandated $7.25 an hour. I say “so-called” because the real agreements indexed to minimum wage hikes.
minimum wage is zero—the wage you get if you’re unemployed. Their goal is to increase labor costs through-
Obama failed to persuade Congress to raise the federal minimum out the economy. Thus far they’re succeeding.
wage, but last year activists were successful in passing minimum wage But the end result is fewer workers, higher
prices and a more stagnant job market for
AVIK ROY IS FORBES’ OPINION EDITOR AND A SENIOR FELLOW AT THE MANHATTAN INSTITUTE.
those who most need the help. F
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Verticals
February 9, 2015
STRATEGIES
The Smartest Airline’s
Dumbest Deal 42
TECHNOLOGY
Hacker-Proof Your Data 50
INVESTING
Millennials’ Unearned Credit
54
Average annual spend

on find-a-fling site
Ashley Madison: $250
(men); $0 (women).
PAGE 46
GEORGE SIMHONI FOR FORBES

which has generated roughly
STRATEGIES $100 million of losses. Is Delta
at least getting cheap jet fuel?
AIRLINES It doesn’t appear to be. Before
the acquisition Delta was
sourcing fuel for 9 cents a gal-
lon cheaper than its peers. Its
Jet Fooled edge today: still 9 cents. Mean-

while, much of its rationale for
owning a refinery has disap-
Delta Air Lines, the smartest carrier in the peared: Oil prices have plum-
business, thought it could cut costs by buying meted, while refiners’ margins
its own oil refinery. Boy, was it wrong. on jet fuel have declined.
BY CHRISTOPHER HELMAN
“Even if you can run the op-
eration as well as anyone else,
I
n 2012 Delta Air Lines did something the opportunity cost of the fuel
strange. It bought an oil refinery. No is still determined by the world
other airline owns a refinery. But market,” says Richard Langlois,
Delta executives, led by CEO Rich- professor of economics at the
ard Anderson, thought it was time to University of Connecticut. “It
do something radical about the painful cost only makes sense if you can run
of fuel. Back then oil prices were stubbornly the operation better than oth-
high—more than $90 a barrel. Its planes were ers—unlikely for an airline.”
burning the equivalent of 260,000 barrels a What went wrong? Pretty
day, representing a third of total costs. much everything. But the big-
At the time, Delta figured, $2.2 billion of gest problem is that buying a
the $12 billion a year it was spending on fuel refinery just isn’t a big hedge
went to refiners as profit. By making jet fuel against fuel prices. Why? Be-
in the company’s own refinery, Anderson and cause the real cost of fuel is
his team figured Delta could keep some of the oil, not the refining. “It’s
that profit for itself. So they plunked down as wrongheaded as buying a
$180 million for an aging Phillips 66 plant in bakery to hedge against rising
Trainer, Pa., near Philadelphia. bread prices,” says Hirs. “If
Two and a half years later, “this deal is you really want to hedge your
Pumped up: Owning an even more idiotic now than it was then,” says bread price, then buy a wheat
oil refinery in Trainer, Ed Hirs, an energy economist and lecturer field. Likewise, if these guys
Pa. (below) has done
little to help Delta with at the University of Houston. Delta has sunk want to hedge fuel prices what
its huge jet fuel bills. $420 million of capital into the refinery, they should buy are oilfields—
which are on sale right now.”
Given how the Trainer project has gone,
that’s probably not a great idea. In the crys-
tal ball of hindsight Delta would have been
better off just waiting for oil prices to fall
and then locking in lower fuel prices in the
futures market. Instead it’s stuck with an
expensive albatross. Nonetheless, a Delta
spokesman says the company is committed to
Trainer. “The refinery has been a worthwhile
investment for Delta and has been a part of
JESSICA KOURKOUNIS / GETTY IMAGES
our overall strategy to be proactive about jet

fuel prices rather than be a victim to the vola-
tility of the global energy markets.”
The plant, which was in mothballs when
Delta bought it, is capable of cracking 185,000
barrels of crude oil per day into gasoline, diesel

and jet fuel. ConocoPhillips had decided to balance sheet, raised dividends, bought back
offload the plant even before spinning off its shares, been proactive with labor unions and
refineries as Phillips 66, in large part because made smart moves like buying 49% of Vir-
it had a better refinery just up the coast in gin Atlantic. Delta’s estimated net income for
New Jersey. Selling the deal to investors, Delta 2014 is $2 billion. Shares are up 400% in the
explained that with $30 million in grants from last three years. “Refining is the one move that
Pennsylvania and a $2.7 billion replacement raises eyebrows,” says Derchin.
value, Trainer was a bargain at $180 million. In 2012 Delta already had a vast jet fuel lo-
But that cost estimate doesn’t include the in- gistics chain, with storage terminals, pipeline
variable environmental liabilities hidden in the capacity and a team of energy traders. They
dirt under the plant, a figure the airline refuses saw restarting the refinery as a clever way to
to share. reduce fuel prices for the entire Northeast by
JEFF TOPPING / GETTY IMAGES
The refinery fiasco is a rare misstep by argu- adding back Trainer’s big slug of jet fuel into
ably the best-managed airline in America. “I’d the market. “It was never really meant to be
rate them right at the top,” says analyst Michael a profit machine,” says analyst Julie Yates at
Derchin of CRT Capital Group. Since emerging Credit Suisse. “Rather, the intent was to aid
from bankruptcy in 2007, it has deleveraged the in ensuring supply.”

STRATEGIES AIRLINES
On that score it worked. It did moderate cial harm to Monroe,” the letter said. BNSF STAT SHEET
jet fuel prices for Delta—but also for every declined comment.
other airline flying out of New York and At this point Delta has resorted to charter- AMERICA’S BEST
Philly. For that altruistic move, maybe Delta ing a tanker to carry crude oil from the Texas BANKS 2015
ought to pass the hat: In 2012 Delta invested Gulf Coast to Trainer and ordered construc- Having survived the
$180 million to modernize the plant—which tion of a brand-new ship to help out. Mean- global financial crisis,
generated a $63 million loss. In 2013 it added while, as oil prices have plunged, those price many big U.S. banks
are bouncing back
$52 million in fresh cap ex—with a $116 mil- differentials between Nigerian and Bakken
with strong profits and
lion loss. Late that year company president crudes have all but disappeared. improved asset quality in
Ed Bastian said the refinery had experienced Delta still tries to put a good face on Trainer. recent quarters. Here are
some “teething pains.” After sinking some $40 million more into the the top three performers,
Those pains included the costs to comply plant in 2014, Delta said in a December presen- as ranked by FORBES.
with federal regulations: tation that Trainer was prof- 1. SIGNATURE BANK
Because Trainer didn’t have itable in the fourth quarter HEADQUARTERS:
the ability to blend ethanol WHAT’S THE POINT? because fuel prices did not fall
New York, N.Y.
DESPITE ITS REFINERY STRATEGY, ASSETS: $26 billion
into the gasoline it pro- DELTA’S EXPENSES REMAIN HIGH. quite as fast as crude oil.
PRICE/BOOK VALUE: 2.5
duced, Delta would have to COST TO FLY A PASSENGER 1,000 MILES.
That thin profitability is NONPERFORMING
spend millions a year to buy set to evaporate. Inventories LOANS1/LOANS: 0.1%
what are known as “blend- FUEL of refined products are high, RESERVES/
NONPERFORMING LOANS:
ing credits” from the gov- LABOR $156 and jet fuel prices are falling 634%
ernment (Delta lost a legal OTHER
$136 $138 to catch up with crude. Ana-
$44
challenge against the EPA $126 lysts expect the average U.S.
$114
over the policy). $41 $45 refining margin to drop from
$41
Delta has also struggled $38 about $17 per barrel in the
$51 first quarter of 2014 to just
to capitalize on the Ameri- $36
$42
can oil boom. Trainer had $28 $7.50 per barrel this year.
$33
historically processed What’s more, Delta is set
Nigerian oil, priced off the $61
up to forgo upwards of $1.5
$56 $53 $57
Brent Index. North Dakota $43 billion in savings this year on
oil, from the Bakken fields, the rest of its fuel-hedging
program. Turns out that 2. BANK OF HAWAII
is similar enough to substi- Alaska Hawaiian United American Delta
HEADQUARTERS:
tute and in 2012 was selling FIGURES EXTRAPOLATED FROM COST PER AVAILABLE SEAT
MILE. SOURCE: PLANESTATS.COM, NOVEMBER 2014.
Delta’s futures traders had Honolulu, Hawaii
about $20 a barrel cheaper— bought their 2014 puts and ASSETS: $15 billion
in large part because there calls in such a way that they PRICE/BOOK VALUE: 2.4
are no crude oil pipelines from the Bakken to limited the pain Delta would feel if fuel prices NPLS/LOANS: 0.6%
RESERVES/NPLS: 285%
Philly, making it hard to move. Delta turned went higher, by giving away some of the bene-
to rail, which costs about $15 a barrel, eating fit Delta would get if they went down. Accord-
3. BANKUNITED
up most of that discount but still worthwhile. ing to comments from CFO Paul Jacobson, HEADQUARTERS:
But all this American oil has strained the Delta will participate in only about two-thirds Miami Lakes, Fla.
railroads. Last September the CEO of Delta’s of the oil-price plunge. Thus Delta’s 2015 ASSETS: $18 billion
PRICE/BOOK VALUE: 1.4
refining division, known as Monroe Energy, fuel bill will likely be about $2 billion lower,
NPLS/LOANS: 0.3%
sent a letter to the federal Surface Transporta- instead of the $3.5 billion it would have saved
RESERVES/NPLS: 269%
tion Board complaining that BNSF (the rail- without those hedges.
road owned by Berkshire Hathaway) wasn’t Not all airlines make such tortuous efforts 1Nonperforming loans
doing an acceptable job delivering Bakken oil. to manage fuel expense. American Airlines, include loans 90-plus
days past due and
This had resulted in a million-barrel shortfall by contrast, has no hedging, no refinery and nonaccrual loans.
to Trainer in August and September. “The fewer headaches. Maybe it’s time Sources: SNL Financial (data);
Forbes (rankings).
failure of the railroads to meet the crude by for Delta to do the same. Refinery,
rail commitments has caused severe finan- anyone?
FINAL THOUGHT
“Oil is a resource that anesthetizes thought,

blurs vision, corrupts.” —RYSZARD KAPUSCINSKI

© 2015 SAP SE or an SAP affiliate company. All rights reserved.
COMPLEXITY
HAS A MILLION IDEAS IT
CAN’T MAKE HAPPEN.
SIMPLE
FINISHES WHAT IT STARTS.
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TECHNOLOGY
INSIDE THE NUMBERS
Profiting
From
Cheating
GEORGE SIMHONI FOR FORBES

You can scorn it, ban it, firewall it and throw Tinder at it. As a peek at
the books shows, the Ashley Madison money machine rolls along.
BY ADAM TANNER
N
oel Biderman will usually lie if that owns Ashley Madison, CougarLife and In flagrante capitalism:
Avid Life Media
a passenger on an airplane asks a handful of other love-connection sites. CEO Noel Biderman
him what he does for a living. Biderman is out to prove that he can still understands the
He’ll say he’s a lawyer, which is compete in an age of free hookup apps like struggle of monogamy.
true. Biderman is also a success- Tinder and OkCupid. Tinder, which has
ful entrepreneur who earns more than logged 600% growth over the past 12 months
$5 million a year, but just uttering his firm’s as of November, has more than 30 million
name is enough to halt the niceties. Biderman registered users who collectively check out
is the cofounder and CEO of Ashley Madison, 1.5 billion prospective partners daily—that’s
a website that facilitates extramarital romance 17,000 per second. The app is even canni-
and sex. “There are times that I have told peo- balizing revenue from its sister company
ple, and that’s the end of the conversation.” Match.com (both owned by IAC). Match was
All the attention and money that dating up a mere 5% toward the end of 2014. Ashley
apps like Tinder are attracting has drawn Madison, in contrast, is still going strong.
Biderman into opening up some more Tax documents and figures shared by Bider-
about the financials at Avid Life Media, the man showed that Avid Life Media grossed
privately held Toronto holding company $115 million for 2014, up 45% from the $78

TECHNOLOGY INSIDE THE NUMBERS
GADGETS
million it grossed in 2013, and up nearly classifies Ashley Madison as an adult site, WE LOVE
threefold since 2010. Pretax profits, says making it easier for corporate IT to block
Biderman, will come in at $55 million, which access for employees. Ryanair turned down FIT AND
financial analysts say is a typical margin for Biderman’s offer of 120,000 euros to paint FASHIONABLE
the industry. Worldwide, the site has had 31 the Ashley logo on one of its planes that flies
Everyone is gaga for
million total users over its lifetime, 6.8 mil- to Spain (site of possible vacation trysts). the debut of the Apple
lion of whom logged in over the previous 90 But Biderman has found plenty of willing Watch, but let’s face
days as of late November. media outlets, including MSNBC, CNN and it: The thing will make
Biderman appreciates Tinder as a rival Fox News. you look like a jayvee
and is quick to point out that Avid Life once His marketing is shifting more abroad, Dick Tracy. Try instead
the Activité Pop from
owned and then sold HotorNot.com, a proto- where most of Avid Life Media’s growth Withings (withings
Tinder site that lets you judge an endless se- is coming from. It opened sites in Israel, .com), a French
ries of people based on their looks but without Hong Kong, Turkey and India in 2014 and electronics company
the swiping or chat feature. After the Apple is launching next in Thailand, with plans that debuted this
App Store rejected it, Biderman sold Hotor- afoot for Russia, Ukraine and Nigeria. Bider- elegant smartwatch at
the recent Consumer
Not. “Rating people was offensive; swiping man also sees growth possibilities in private Electronics Show in
them is okay,” he says. “I regret that I didn’t texting and e-mailing features, and wants to Las Vegas. Linked to
think of it first. Congratulations to them.” build a voice product as well. a “Health Mate” app
Ashley Madison’s clients are older and Biderman says his company is worth on your phone, the
more prosperous than Tinder’s and not ex- $1 billion; analysts (too spooked by taboo Pop will monitor your
steps during the day
actly eager to broadcast their moves. “Forty- to be named) say that’s high but not far off. and your 40 winks at
to 50-year-old married men are not going to An October report from Bank of America night—plus the laps
log into an account on Facebook,” he says. Merrill Lynch says Match.com is worth $3.8 you swim and miles
Biderman, a former sports lawyer, billion, or 12 times estimated 2015 operating you run in between.
launched Ashley Madison with a business earnings, and Tinder $1.3 billion, or 18 times No charging necessary;
just replace the battery
partner in 2002. They each put up $500,000. estimated earnings. A valuation for Ashley every eight months.
It took five years to attract the first million Madison, with $55 million in earnings, is Best of all? It’s cheap:
members, but growth took off after the 2008 likely to fall on the lower end of that range, just $150, or 40% of the
recession’s job cuts created a lot more free assuming a sin discount. Biderman disagrees: price of the cheapest
time on many men’s calendars. Ashley Madi- “If there’s anyone that should be riding the Apple Watch. And you
won’t feel nearly as
son embraced the nightclub model early on, 18- to 20-times multiple it should be a service conspicuous with it
after noticing that men on the site initi- like ours, which has proven it for the better on, whether you’re in
ate contact with women 99.6% of the time. part of a decade.” shorts at the gym or in
Women pay nothing, but men are charged for A sale would be a healthy but not crazy- Armani at the Met.
each contact with a woman. Men typically big payday for Biderman. He owns just over
spend $200 to $300 a year on the site. If you 10% of the firm after selling off most of it in a
want to wipe your profile completely from $40 million round in 2007. The investors are
the site, that’s an extra $19. a handful of institutions and high-net-worth
Even in an era of ubiquitous Web porn, a individuals, most of whom are Canadian, with
site promoting adultery (after murder in the a few Americans and Germans. But Bider-
Ten Commandments) still has the power man is doing fine. He has a new Maserati
COURTESY OF WITHINGS
to offend. Ashley Madison is banned from Ghibli courtesy of his board, a Patek Philippe
South Korea and Singapore, and the justice Calatrava from his wife and a beach house in
secretary in the Philippines said she would Fort Lauderdale. The one thing the married
like to do the same. Despite Avid Life’s 2014 father of two has not enjoyed, he says, are the
ad budget of $34 million, Microsoft’s Bing extracurricular possibilities his site affords. “I
search engine will still not run Ashley Madi- understand the problems of monogamy and
son ads, although Google will. Many TV the people who need my service. I
stations in the U.S., including ABC, and all think I have been able to build a prod-
stations in Britain won’t run its spots. Cisco uct for them.”
FINAL THOUGHT
“Thy sin’s not accidental, but a trade.” —WILLIAM SHAKESPEARE

TECHNOLOGY
CYBERSECURITY
Saving Us From the Snoops

Stealthy startup Ionic Security has attracted large sums and praise for its software,
which can encrypt corporate data beyond the prying eyes of hackers and the NSA.
BY THOMAS FOX-BREWSTER
I
n 1990 William Ghetti, a staff sergeant scale, not just on Ghetti’s laptop. In 2012 he
in the U.S. Air Force, had a letter began hiring software engineers, and a year
published in British newspaper The later he dropped the Social Fortress name. Ionic founder Adam Ghetti
Independent in which he challenged It has taken four years of development, but says his software can end
the era of the data breach
the purpose of American offensives in Ionic’s product is close to hitting the market. by shrouding the data in a
the Gulf. His comments, later cited in a U.K. At the heart of the technology is a fine- smarter way.
Parliament debate over whether U.K. military grained data-encryption
should assist the U.S., still resonate: “The technique that offers
greed that drives our oil-based world econo- companies control over
my has put us in the position that we are will- who sees what and when.
ing to risk our nation’s sons and daughters in In a product demo with
the quest for stable prices at the pumps.” FORBES, Ghetti showed
Fast-forward a quarter of a century and how this could be used on
Ghetti’s 28-year-old son, Adam, is about to a corporate social net-
embark on a mission that will also fly in the work, turning specific
face of Western governments’ thinking. Amid timeline posts into gobble-
calls from heads of state to allow intelligence dygook for one employee
agencies access to all private communica- at the switch of a button
tions, Ghetti the younger has launched a via a simple dashboard.
business, Ionic Security in Atlanta, that he Anyone who isn’t validat-
hopes will make spies’ intrusions into digi- ed by Ionic simply won’t
tal lives a near impossibility and data theft be able to view the data.
“irrelevant.” Insiders with malicious in-
Ionic was born not in Silicon Valley or tent can be shut out quick-
any other hotbed of innovation, but in San ly. Though Ghetti won’t
José, Costa Rica, where Ghetti, one of the discuss Ionic’s inner work-
FORBES 30 Under 30 in 2014, spent much of ings, he offers some teas-
his time coding in the sun. “I like the beach,” ers. The encryption keys
he says. In late 2010 the itinerant Ghetti that lock and unlock data
started building a personal tool he called are created on customer-
Social Fortress, a browser add-on that would owned hardware, and keys
act as a layer over Facebook and allow him are exchanged digitally via
full control over his personal data beyond the a “shared secret” between
social network’s own privacy settings. “Quite an employee’s device and
frankly, those aren’t really privacy controls. an appliance sold by Ionic.
They’re ‘make you feel good controls’ be- No one on the business’
cause you already gave them the data. They network can access the
can do whatever they want with it.” shrouded data, not even
In the following months it became appar- government snoops sitting inside Internet
ent in meetings with various Global 2000 service providers rifling through people’s
companies that Social Fortress would be a communications. That isn’t to say govern-
considerably more powerful tool if used at ments won’t be using Ionic’s tools. “This has

gone through significant scrutiny from the as Meritech Capital Partners, Kleiner Perkins TRENDING
most discerning customers on Wall Street Caufield & Byers and Google Ventures. Ghetti
and the energy sector and the federal sec- has coaxed a number of bigwigs of the securi- What the 65 million
tor—we have two major federal customers,” ty world onto Ionic’s board, among them Phil Forbes.com users
says Ghetti. Ionic’s style of encryption may Dunkelberger, cofounder of PGP Corp., and are talking about.
For a deeper dive go to
find uses in the physical world as well. Ghetti Ted Schlein, a serial cybersecurity investor
FORBES.COM/TECHNOLOGY
is working with a big carmaker on protecting at KPCB. “You get one dose of Adam Ghetti,
communications between vehicles and the that’s all you need,” Schlein says. “He’s one of
IDEA
manufacturer’s servers. the more compelling entrepreneurs I’ve met RESTRAINING
With so much potential, Ionic’s ambitions in the last decade.” ARTIFICIAL
are understandably big. “We’re going to build For Ghetti, building Ionic into a security INTELLIGENCE
In a true “don’t be
the next big independent security com- monolith will offer a means to some more
evil” move, Elon Musk
pany. There hasn’t been one since Symantec altruistic ends. Already Ionic is quietly fund- donates $10 million
and McAfee,” says Ghetti. (We’d disagree, ing a number of activist initiatives. In 2014
EVAN KAFKA FOR FORBES
to research ways to
given the emergence of big startups such as it signed a $10,000 check for an audit of keep AI from turning
CloudFlare and Lookout.) Ionic has attracted TrueCrypt, a private communications tool against humans.
$78 million in venture backing to date, includ- that some suspect the National Security Agen-
ing $40 million in January, from firms such cy had compromised. “They sent the funds
over while we were still trying to
OLE SPATA / AFP / GETTY IMAGES

figure out if they were serious. It was
pretty amazing and was instrumental
in getting the whole project going,”
says Matthew Green, a cryptography
researcher at Johns Hopkins and one
of the TrueCrypt auditors.
Ionic’s technology, however, could COMPANY
GOOGLE
just as easily benefit businesses It shut down its Google
deemed as enemies of the techno- Glass Explorer program,
libertarian dream of free and open an admission that
dissemination of information. It consumers aren’t yet
ready for the $1,500
could certainly be used as part of a
nerd appurtenance.
digital-rights-management scheme
by film studios such as the recently PERSON
hacked Sony Pictures. Sony would ROSS ULBRICHT
Alleged Silk Road
surely salivate at being able to lock drug kingpin’s trial is
down its digital files and detect theft. under way in New York.
Ghetti doesn’t see Ionic operating in Totally worth following
that market, going so far as to ban the if you love Bitcoin,
term “DRM” in the office. weed and confused
narratives.
Ionic also has a blacklist of firms
and countries it will never work
with. He won’t name names, saying
only that those organizations “we
think have wronged the population
at large” will be off the table. Like his
father before him, Ghetti is taking a
stand against authority in a
bid to protect citizens’ rights,
whatever country they’re in.
FINAL THOUGHT
“Nobody ever confides a secret to one person only.

No one destroys all copies of a document.” —RENATA ADLER

Promotion
“Any money
spent toward
buying, installing
and operating
these routers and
switches is now
an investment in
obsolescence.”
-Andrew Feinberg
INVESTING
LENDING
Young,
Broke And
Creditworthy
VC-backed Earnest has a deal
for untested borrowers: Give
us all your info and we’ll give
you a good rate.
BY LAURA SHIN
A
fter graduating from Princeton
in 2003, Louis Beryl took a job
in New York City trading energy
derivatives. While his new em-
ployer, Morgan Stanley, prom-
ised to reimburse his relocation expenses, he
needed $8,000 to front the costs of the move—
not the sort of thing a 22-year-old with little
credit history could get a bank loan to cover.
So Princeton’s financial aid office lent him the
money at 7% annual interest for five years. He
paid it off six months after graduation.
Six years later he needed to borrow again, investors, that aim to use fancy algorithms Despite his honest face
this time to finance the M.B.A. and master’s and novel information sources to make small and Princeton degree,
banks wouldn’t lend to
in public policy he was earning at Harvard. loans to young folks with thin conventional Louis Beryl without his
He took $20,500 a year in student loans from credit files—too thin, that is, to borrow at rea- mom as a cosigner.
the federal government at 6.8%, but beyond sonable rates, if at all, from the banks. Credit
that, Uncle Sam wanted 7.9%. Commercial Karma, a free credit-tracking service, reports
banks, despite Beryl’s six years of prompt bill that 7.5% of its more than 30 million members
payment, demanded double-digit interest have thin files.
and his mother as a cosigner. Instead, he bor- The venture capital firms that put up
rowed at 4% through his mom, who tapped $15 million last May to launch San Francisco-
into her home equity line. based Earnest include Atlas Venture, Collab-
“I knew in my gut how low-risk I truly orative Fund, First Round Capital, Maveron
was,’’ says Beryl, who had saved for grad and Andreessen Horowitz, where Beryl
school while working. But banks weren’t worked for a year and a half after Harvard.
interested in looking at evidence of his thrifty Palo Alto-based Upstart was founded by two
behavior or at his future earning potential. Google veterans and Paul Gu, a 24-year-old
Which turns out to be a good break for the who dropped out of Yale to take a fellow-
now 34-year-old Beryl, who is the cofounder ship funded by billionaire Peter Thiel. It has
and CEO of online lender Earnest. Despite its raised $20 million from Google Ventures,
down-home name (and Beryl’s resemblance First Round Capital, Thiel’s Founders Fund,
to a young Garrison Keillor), Earnest is one Kleiner Perkins and Khosla Ventures. New
of three startups, all backed by sophisticated York City-based Pave is funded by angel in-

bills, mortgage and other bank loans on time, TRENDING
but it doesn’t always capture prompt pay-
ment of rent and doesn’t consider earnings What the 65 million
or education. In contrast to FICO, Earnest, Forbes.com users
with its deep data access, factors in not only are talking about.
whether an applicant makes timely payments For a deeper dive go to
FORBES.COM/INVESTING
on his credit cards but also whether he pays
the minimum or in full each month, giving
PERSON
more brownie points to the latter. It also con- MARIO DRAGHI
siders rent payments and earnings poten- Europe’s central banker
tial, diving into an applicant’s education and is pushing ever closer to
employment background and prepopulating a Fed-style stimulus for
that history on a loan application by linking his wheezing continent.
directly to the applicant’s LinkedIn account.

“This is all about FICO and the other credit
scoring companies failing to keep up with the
times,” says Brendan Ross, president of Direct
Lending Investment, which runs a $115 mil-
lion fund that allows accredited investors to
fund direct small-business loans. “If the credit
scoring companies could add all this data
MARTIN LEISSL / BLOOMBERG

themselves, then Earnest wouldn’t be able to
add value to it in a way that is cost-effective
enough to make loans at very low rates.”
In exchange for all this data, which Mil-
lennials seem to have fewer qualms than their
elders about sharing, Earnest offers people
COMPANY
with short credit histories unsecured loans of JPMORGAN CHASE
$2,000 to $30,000 at rates of 4.25% to 9.25%, Executives dismiss calls
for one to three years, with no origination fee. to break up the bank
Jasmine Knowles, 25, applied for a one- after a rough fourth
quarter, saying its
year $3,000 loan late last May, as she was
size and scale remain
vestors and plans to seek venture capital and finishing up a two-year University of Penn- beneficial.
possibly private equity money this year. sylvania program in which she earned a
Upstart and Pave offer individual accred- master’s in education while working in Teach IDEA
MAULED MALLS
ited investors the chance to fund loans (see for America. She wanted the cash to travel DoubleLine Capital’s
box, p. 56), an approach that Beryl says he has to Peru and Bolivia during a two-month Jeffrey Gundlach
rejected because it gets in the way of putting break before beginning a well-paid manage- says retailer woes
the interests of borrowers first. ment consulting job. “I liked their business make shopping mall
Earnest goes beyond the conventional model and that they rewarded people who REITs the worst
investment going.
credit reports banks get from Equifax, Ex- consistently strive to do great things,’’ says
perian and TransUnion to crunch big data— Knowles, who was approved in eight days
80,000 to 100,000 data points per applicant, for an Earnest loan at 5.5%, the lowest rate it
collected in large part by linking directly to then offered. That was more than a percent-
an applicant’s bank and credit card accounts age point less than the best rate offered by
and downloading a full history, including de- peer-to-peer lending sites Lending Club
posits, withdrawals, balances and payments. and Prosper and less than a third of what
That compares with the 500 to 1,000 data Knowles would have paid had she financed
TIMOTHY ARCHIBALD FOR FORBES
points that Credit Karma estimates are in a her travels on her credit cards.
typical 25-year-old’s credit file, which forms Knowles isn’t likely to need such a tiny
the basis for the FICO score from Fair Isaac advance again. But Beryl clearly wants to
used by most banks. build a longer-term and deeper lending
A traditional credit score considers relationship with the bank-wary Millennial
whether an applicant paid his credit card generation. While Earnest had just $8 mil-

INVESTING LENDING
lion in loans outstanding at the end of 2014, than their FICO scores would suggest.
it is aiming to make hundreds of millions in Pave, too, starts with conventional credit
loans this year. Two other startups, SoFi and scores, requiring at least a 660, but then
CommonBond, have been making inroads adjusts that score based on both educational
with young borrowers by refinancing student history and its analysis of what FICO for-
loans, which seems a logical next place for mulas get wrong. “There are a lot of things that
Beryl to take his big data approach, given the
$1.3 trillion in student debt outstanding. A Piece of the Action
Each of the three small loan startups is BOTH UPSTART AND PAVE OFFER ACCREDITED INVESTORS—those with an
cracking lending’s inefficiencies to serve a investable net worth of at least $1 million or $200,000-plus in annual income—a
slightly different slice of the roughly 20-to- chance to invest in Millennial loans.
35 age demographic. Earnest, focused on the With Upstart, investors can specify the quality and/or size of loans they
best risks, says its typical borrower earns just want to fund, and their money is used for the next individual loan that fits
over $100,000. their standards. Investors keep all interest, and Upstart keeps an origination
Upstart lends to the widest range, and its fee of up to 6%. But if a loan defaults the investor gets that fee, in addition to
rates on three-year loans of up to $25,000 vary whatever can be recovered from the borrower. Upstart isn’t relying only on
accordingly, starting at a 5.7% APR but topping individual lenders, however. In August Victory Park Capital, which runs alternative
investment funds for institutional investors and family offices, said it plans to
out at a hefty 30% APR, including an origina-
funnel $100 million into Upstart loans over the next two years.
tion fee of up to 6%. Its algorithm uses both
Pave investors must commit a minimum of $10,000, compared with $100 at
credit bureau information (it won’t lend to Upstart, and their money is put into a fund of loans, which pays out all interest,
those with a FICO score of less than 640) and minus a 1% servicing fee. (Unlike Upstart, Pave doesn’t promise to fork over its 2%
factors like the college a prospective borrower origination fee if there’s a default.) Pave cofounder Oren Bass says he hopes future
attended, GPA and SAT scores, and work his- regulatory changes will allow Pave to take money from nonaccredited investors, too,
tory to identify folks it predicts are better risks and permit investors to pick the quality of Pave loans they want to fund. —L.S.
Old Dominion’s focus on premium service means every item arrives with one of the
lowest claims ratios and one of the best on-time records in the industry.
Old Dominion Freight Line, the Old Dominion logo, OD Household Services and Helping The World Keep Promises are service marks or registered service marks of
Old Dominion Freight Line, Inc. All other trademarks and service marks identified herein are the intellectual property of their respective owners.
© 2015 Old Dominion Freight Line, Inc., Thomasville, N.C. All rights reserved.
FICO simply excessively penalizes or under- They’re very new. Sometimes you don’t peak
penalizes,’’ says Pave cofounder Oren Bass, a on your defaults until month 12 to 24. It’s real-
37-year-old British solicitor who last worked ly the second-year loans where you’ll histori-
in Goldman Sachs’ structured finance depart- cally run into these things,” warns Kenneth
ment. For example, he says, someone with Lin, founder and CEO of Credit Karma.
limited credit history who hadn’t maxed out his At least some defaults are inevitable and,
credit card but applied for a store card just to Ross points out, necessary for the newcomers
get a discount on a purchase would be exces- to train their algorithms. “If you don’t have
sively penalized by FICO. Pave’s APRs on loans any loans that have ever defaulted, then the
of up to $25,000 currently range from 6% to temptation is to loosen your lending standards
16%, including a 2% origination fee. (It has been to add volume. You don’t really know when to
conducting a pilot in New York but plans to go stop loosening standards,’’ says Ross, who has
nationwide soon, offering an even wider range been involved in peer-to-peer lending as both
of interest rates.) an investor and an analyst since 2011.
The big question, of course, is whether “With the right mathematicians and the
these newcomers and their algorithms are right use of data,’’ he adds, “it should be pos-
really better at predicting how young borrow- sible to beat FICO and to find the fu-
ers will perform. “You have to keep in mind, ture 1% faster than traditional credit
[these companies] have really small portfolios. bureaus.”
FINAL THOUGHT
“Once a man is in debt, he becomes a flesh-and-blood sort

of money, a walking investment.” —BARRY UNSWORTH
OD Domestic offers: • More than 225 service centers nationwide

• Competitive transit times and pricing
• Proactive shipping solutions
For more information, visit odfl.com or call 1-800-235-5569.

INVESTING
KEN FISHER // PORTFOLIO STRATEGY
WHY FOREIGN STOCKS ARE

PRIMED FOR A COMEBACK
MY 55 2014 STOCK picks lagged diversified. It provides a more stable path to
badly. Equal money invested in each, get you to that same very long-term equity
upon publication, less a 1% commis- return.
sion haircut, did four percentage My picks lagged the S&P in 6 of these
points worse than the same money 19 years since this accounting started. One
plunked into the S&P 500 (with no hopes 2015 isn’t number 7. If you bought my
haircut). Why? Mine were only 47% global stocks last year, hold on. If not, these
American. So while my picks actually eight, spanning six industries, are a start.
beat the Morgan Stanley World Index Israeli drug leader TEVA PHARMACEUTICAL (TEVA,
(which itself is 58% U.S.) by more than 58) should keep growing via generics and brand-
2%, that’s cold comfort when the S&P name remedies. It sells at ten times my 2015
fared so much better. earnings estimate with a 2% dividend yield.
America has led this whole six-year bull market overall and, with South Africa’s NASPERS (NPSNY, 137) keeps grow-
hindsight, for many reasons. Increasingly I hear investors ask if they ing in seemingly standard media channels. That
shouldn’t just junk overseas stocks and stay home. says lots by itself. It’s not cheap, but it’s leading-
Unless you’re some kind of supertimer savant (in which case, you’re edge in its market, the less developed world.
certainly not reading me), that’s a big mistake. U.S. and foreign have Multiyear history, Greek nonsense and
largely traded leadership in fairly long and tricky-to-time rotations. For recession fears cause pessimism for Italy. You
example, foreign led the last bull market. America led most of the 1990s. run through the world’s 158 largest stocks
And so on. In the very long term the overall difference between both, cor- to find Italy’s first—global energy giant Eni,
rectly calculated, is essentially a rounding error. Why? which isn’t terribly Italy-sensitive. Amazing-
Counter to intuition, it isn’t about whether the U.S. economy leads or ly, only 11 of the 1,300 largest stocks are Ital-
lags. For example, foreign did lead that last bull market—but America did ian—mostly way down that list. That alone
better economically then. Ultimately supply catches up with any demand is a great reason to own some of the world’s
eighth-largest economy.
Three Italian picks: INTESA SANPAOLO (ISNPY, 17),
STAY GLOBALLY DIVERSIFIED. IT Italy-sensitive with a meaninglessly high P/E
PROVIDES A MORE STABLE PATH due to depressed earnings, yet 80% of book
value. Its top insurer, ASSICURAZIONI GENERALI
shifts and often overshoots. Supply shifts control long-term pricing. (ARZGY, 10), 41st globally in revenue but only
If some stock categories get too hot-and-pricey, mass supply is created 354th by stock size. And finally auto giant FIAT
via stock offerings to tap that cheap money—and when overdone drives it CHRYSLER (FCAU, 12), at nine times my 2015 earnings
all down. If stocks get too cold, and cheap, supply is eventually destroyed estimate and 16% of annual revenue. Its market
by endless buybacks and cash-based takeovers—capturing those cheap cap? More than half Tesla’s.
earnings (relative to interest rates). That shoves those stocks skyward, In America PROCTER & GAMBLE (PG, 91) lagged
until they rival faster-growing, pricier categories, wherever in the world. for years but is turning fundamentals
It’s all financial arbitrage, endless, and derived from Stock Mar- around and sports the world’s best consum-
ket 101. Bank on it. You don’t want to bail on foreign, or be all U.S., er staples brands—and marketing. It’s cheap
just before the cycle swings back overseas—usually when folks are at 18 times my June 2016 earnings with a
maximally freaked about foreign and see no good foreign future. 2.8% dividend yield. And you need tech.
Maybe now! Own big, basic, fundamental old tech now
Am I confident foreign will lead, here and now? No. Were I, I’d be like CISCO (CSCO, 28) and QUALCOMM (QCOM, 71).
foreign-only—and a fool. Timing is always tricky. Hence stay globally These three have an average 2.6% dividend
yield. Like a U.S. T bond—with more global
MONEY MANAGER KEN FISHER’S LATEST BOOK IS MARKETS NEVER FORGET (BUT PEOPLE DO)
(JOHN WILEY, 2011). VISIT HIS HOME PAGE AT WWW.FORBES.COM/FISHER. upside. F

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INVESTING
WILLIAM BALDWIN // INVESTMENT STRATEGIES
YOUR 3.8% PAYOUT FROM STOCKS

IT’S NAIL-BITING TIME—as always. tomed to spending a fixed percentage of
Stocks up 11%! Let’s buy a new car. the portfolio’s value every year (like 4%),
Stocks down 20%! We’ll have to keep the price change will have you eating out
working until we’re 80. half as often and turning the thermostat
I have a method to protect you from down to 53 degrees.
the upsetting ups and downs on your With my valuation rule, though, you
march to a comfortable retirement. It will scarcely feel the damage. In the Great
will also tell you, once you do retire, Correction of 2007–09 the S&P’s long-term
how much you can safely draw from a earnings dropped 10%. If that happened
portfolio. again, your $38,000 would dip to $34,000.
I take my inspiration from a novel. You’d tighten your belt just a bit. You
In Pride and Prejudice Mr. Darcy is wouldn’t panic. You wouldn’t sell out at
the rich and handsome man who marries the heroine. How rich? the bottom.
The narrator never assigns a net worth. Instead, we are informed If average earnings are less sensitive than
that the man draws 10,000 pounds a year from his estate, an ample prices to recessions, they are necessarily less
sum in 1813. exciting in good times. With your eyes on
Darcy did not tote up the value of his land, consols and other as- earnings you will be denied the exuberance
sets, and fret when the prices went down. Instead, he looked to a of a hot bull market. Your broker may say that
steady stream of earnings. The size of the stream was a full measure your stocks were up 11% last year. Pay no at-
of his wealth. tention to that. The S&P’s inflation-adjusted
To use Jane Austen’s approach to wealth, disregard the fluc- earning power gained a mere 5%. (I have
tuations in the bottom line on your brokerage statement. In their details online.)
place, estimate the long-term earning power of the companies What about dividends? I think they are
you invest in. useless in measuring either the wealth in
a stock portfolio or the spendable income
from it. The corporate shift to share repur-
MEASURE YOUR PROPERTY BY THE chases is making dividends irrelevant. Ignore
EARNINGS IT GENERATES them. Enjoy your 3.8%. If your portfolio is
typical, with a 1.8% yield, you can cash all
By long-term earnings I mean a ten-year average, with inflation the dividend checks and also sell 2% of your
adjustments for historical data. To meticulously apply this rule to a shares every year to live on.
collection of stocks (100 shares of Apple, 150 shares of Caterpillar and Now for a scorecard on my 2014 col-
so on) would be a chore. But you can take a shortcut, using figures umns. Buying all 131 recommendations,
for the market as a whole as a guidepost. I’ve done the spadework. most of them carryovers from earlier years,
Average earnings on the S&P 500 Index over a decade come to $78. would have earned you 14%. Investments
That is 3.8% of the recent index price of 2050. So if you have a well- at the same times in a stock index (or
diversified collection of stocks like Apple and Caterpillar, and the bond index, for the bond buys) would have
portfolio’s price today is $1 million, then you can spend $38,000 a gained just 11%.
year without dipping into capital. For 2015 I am carrying over only some
What happens in the next recession? If it’s like the last one, you index funds: Schwab’s INTERNATIONAL EQUITY
will wake up one morning to see that your $1 million portfolio is (SCHF, 28), U.S. AGGREGATE BOND (SCHZ, 53), U.S. BROAD
priced at only $500,000. Lacking a Darcy-like view of the world, MARKET (SCHB, 49) and U.S. SMALL-CAP (SCHA, 54); and
you will fall into a state of panic. If you are retired and accus- Vanguard’s SMALL-CAP (VB, 114), TOTAL BOND MARKET
(BND, 84), TOTAL INTERNATIONAL STOCK (VXUS, 48) and
GO TO FORBES.COM/SITES/BALDWIN FOR MORE ON TAX-WISE INVESTING STRATEGIES. TOTAL STOCK MARKET (VTI, 103). F

INVESTING
A. GARY SHILLING // FINANCIAL STRATEGY
SAFETY FIRST FOR

SUPERIOR RETURNS
SLOW ECONOMIC GROWTH, ECB fears Japanese-style deflation.
especially outside the U.S., sets the Similarly, the Bank of Japan is junking
investment stage in 2015. the yen. Indeed, virtually all currencies are
Real GDP advances in China have falling against the dollar, which, as the global
dropped from double digits before standard, can’t follow suit. The robust green-
the Great Recession to about 7%, if back encourages U.S. imports and discour-
you believe the official numbers. You ages exports, but the effects are small. The
may remember that Chinese demand spillover to America of foreign woes is much
was the rationale for the commodity more in financial risks than to the economy,
bubble that started in 2002, right after which should continue to grow at 2%.
it joined the World Trade Organiza- This year I’m continuing the investment
tion. With slowing economic growth strategy that propelled my portfolios in 2014. A
there and elsewhere, commodity prices have been falling since early year ago the herd forecast the ten-year Treasury
2011, augmented by the recent halving of crude oil prices. note yield to rise from 3% to 3.5%. Instead it fell
Cartels exist to keep prices above equilibrium, but that encourages to 2.17%. The 30-year bond that I’ve loved for 33
cheating. So the cartel leader must cut its output to accommodate the years returned nearly 30% as the yield dropped
cheaters—Iran and other OPEC countries as well as American frack- from 3.96% to 2.75%, while the 30-year zero-
ers, in the view of OPEC’s leader, Saudi Arabia. But this time, rather coupon bond rose 46%.
than give up market share, it decided to play chicken, figuring the With troubles abroad pushing money into
kingdom can stand low crude prices longer than the cheaters. safe-haven Treasurys, I see a further decline
In this game the chicken-out price isn’t what’s needed to fund in the long bond yield to 2% this year with a
OPEC budgets—$100 per barrel or more. And it isn’t the “full cycle” 19% total return and 27% for 30-year zeroes. If
$50 to $70 per barrel for American frackers. Instead it’s the marginal the ten-year note yield falls to 1%, as I predict,
the total return will be 12.4%. The perennially
overoptimistic Fed will probably postpone
THE KINGDOM IS PLAYING CHICKEN tightening for years in view of troubles abroad
FIGURING IT CAN STAND LOW CRUDE and spreading deflation.
PRICES LONGER THAN THE CHEATERS I’m still short the commodity currencies
against the buck as well as the euro and yen,
cost of production once the wells are drilled—about $10 to $20 per which may fall to €1.00 and ¥150 to ¥200,
barrel in the Persian Gulf and the same in Texas’ Permian Basin. respectively. I’m also short commodities, es-
Sure, consumers enjoy low prices, but highly leveraged energy compa- pecially sugar, copper and natural gas, which
nies and countries are already in trouble at $48-per-barrel oil and spending is in excess supply due to fracking and is also
being slashed. The financial risks outweigh the low-energy-cost benefits. depressed by falling oil prices.
Commodity currencies—the loonie, aussie and kiwi—were already U.S. stocks may still be in “risk on” mode, but I
dropping, and now the oil-driven ruble has collapsed. Deflation is spread- remain defensive, with long positions in utilities,
ing with CPI in 12 of 34 OECD countries registering flat or negative num- health care and consumer staples—things people
bers year-over-year in November. buy regardless and with good dividend cushions.
To combat essentially no growth in the euro zone and deflation If oil’s collapse generates a major financial shock,
as of December, the European Central Bank is about to embark on the investment climate will shift to “risk off” and
quantitative easing, with a goal of trashing the euro. It will probably my favorite quartet—long safe-haven Treasurys
be no more effective than the Fed’s QE. Like all central banks, the and the dollar, and short commodities and stocks
globally will shine. Interestingly, the first three
A. GARY SHILLING IS PRESIDENT OF A. GARY SHILLING & CO. AND AUTHOR OF THE AGE OF DELEVERAGING: members of the quartet are already onstage and
INVESTMENT STRATEGIES FOR A DECADE OF SLOW GROWTH AND DEFLATION (JOHN WILEY & SONS, 2011).
WWW.FORBES.COM/SHILLING. playing. F

MIRANDA COSGROVE
WANTS TO KEEP
DOLPHINS SINGING
DOLPHINS USE SOUND

TO FIND FOOD, TO
COMMUNICATE AND LIVE.
But dolphins and their song could be blown
away by seismic blasts a hundred thousand
times louder than a jet engine. It could hurt
and kill tens of thousands of dolphins.
Join Miranda and help save the dolphins.
oceana.org/dolphinsong
Features February 9, 2015
You Are a Lab Rat 72 A molecular model of

America’s Most Promising Companies 80 botulinum toxin A, a
protein that binds to
Are Index Funds Morbidly Obese? 92
the tissue between
Russia’s Destructive Dealmakers 98 muscles and nerves.
Wrecking (And Rebuilding) 84 Lumber 102 It can cause paralysis
and even death—yet
you know it as Botox,
the $2 billion pharma
of youth that made
Allergan an irresistible
takeover target.
PAGE 64
LAGUNA DESIGN / SCIENCE PHOTO LIBRARY / CORBIS

CREDITTOPPIN
JAMEL TK FOR FORBES
Brent Saunders generated $25 billion in value
for investors by flipping drug companies
rather than discovering new drugs. Is this the
future of the pharmaceutical business?
BY MATTHEW HERPER

FORBES
ACTAVIS — HEALTH CARE 2025
I
n early January Bren- roll him with $2 billion for a proposed patients onto a pricey new formulation
ton “Brent” Saunders, the startup. “When I met him, in my mind, didn’t help. It infuriated consumer
chief executive of upstart he stood out right at the top.” Ackman advocates and was blocked by a fed-
pharmaceutical giant Ac- agrees with Icahn (incredibly, given eral judge. “One of their first forays
tavis, reclined in a medi- their bitter history). He calls Saunders as a top ten company is harming the
cal chair on a stage in an “capable and smart.” pharmaceutical industry’s reputation,”
Orlando hotel ballroom Saunders insists that Actavis- says John LaMattina, former head of
as a plastic surgeon pierced his face Allergan is more than just a short- research at Pfizer.
30 times, delivering needles full of term trade. It’s the springboard for a Meanwhile, investors are cheering.
Botox to the crooks of his eyes and revolutionary new kind of drug com- Five years ago Actavis was a generics
nose and injecting Juvederm Ultra, a pany: “growth pharma,” he calls it. company called Watson Pharmaceuti-
dermal filler, into his cheeks. A cam- Actavis-Allergan will have the scale cals that had annual sales of $2.5 billion.
eraman documented every prick and in marketing and clinical trials of Since then it has quintupled sales and
projected it on a huge screen behind a global powerhouse like Eli Lilly delivered shareholders a total return of
him. These are bestselling products or Bristol-Myers Squibb, but it will 545%. They know that Saunders may
for Allergan, which Actavis is buy- eschew the core mission of most drug pontificate on the future of pharma, but
ing for $67 billion, the biggest health companies—inventing drugs—pre- there’s always a plan B if that doesn’t
care deal in six years. The audience, ferring to buy them from universi- work out: an even bigger deal.
1,000 Allergan sales reps, went wild. ties or biotechs all the time. The new
“I don’t have any crow’s feet any- company will be the first big pharma THE SON OF A UROLOGIST and a so-
more, and I don’t have any wrinkle that doesn’t even pretend to invent cial worker, Saunders grew up in Penn-
lines above my nose,” says Saunders, sylvania and paid his own way through
who was boyish-looking even before that state’s college system as a furni-
his face was shot up with treatments.
“Now I can say I’m not just the CEO, “THE IDEA THAT ture mover (he still has a bad back)
and a clerk, earning both a J.D. and an
I’m a user.” TO PLAY IN THE M.B.A. By 29 he had made partner at
BIG LEAGUES
He’s also, at just 44, the hottest ex- PricewaterhouseCoopers, focusing on
ecutive in the global pharmaceutical regulatory compliance in health care.
business and, at least for now, the un-
disputed deal king of Wall Street. Five YOU HAVE TO DO He might have stayed a consultant
for life had he not caught the attention
years ago Saunders had never been DRUG DISCOVERY of Fred Hassan, the legendary pharma-
IS REALLY A
a CEO. Now he has run three major ceutical turnaround artist. Hassan had
drug companies and sold two, gener- made Pharmacia, a Swiss company,
ating $25 billion for his public share-
holders and investors such as private FALLACY.” into a market darling through a huge
acquisition, a spinout and a $64 billion
equity firm Warburg Pincus. In the sale to Pfizer. By 2003, when he met
last year alone he did deals worth $97 Saunders, Hassan was chief executive
billion. Actavis, a generic-drug maker, medicines. of Schering-Plough, and many thought
was the white knight that saved Al- “The idea that to play in the big the company was unfixable. Schering
lergan from a bitter hostile take- leagues you have to do drug discov- was accused of kickbacks, dangerous-
over attempt by rival pharmaceutical ery is really a fallacy,” says Saunders. ly bad manufacturing and illegal mar-
company Valeant and activist inves- “You have to do research, you have to keting. Hassan needed an outsider to
tor William Ackman. The combined be committed to innovation. I strong- come in and help him clean up.
Actavis-Allergan will be the world’s ly believe that, but discovery has not Hassan heard about Saunders from
tenth-biggest drug firm, with 30,000 returned its cost of capital.” Schering’s chief financial officer, and
employees and, despite being unprof- A drug company that doesn’t even though there were two other candi-
itable, $8 billion in free cash flow on try to make drugs is plain outrageous dates more qualified on paper, Has-
revenues of $23 billion. to some. Skeptics see a roll-up based on san became impressed by the younger
“I interview a lot of people for top tax dodging—run from Parsippany, N.J., man’s drive and focus. “I just became
jobs,” says Carl Icahn, who backed Actavis has a tax domicile in Ireland— convinced that this guy was going to
Saunders for the CEO slot at Forest and merger math, led by a neophyte. be all-in,” says Hassan. “In the end I
Labs, which he ran for five months in Saunders’ decision to stop selling a think all of us have the IQ. The peo-
2013, and who once promised to bank- blockbuster Alzheimer’s drug to force ple who look to doing a job as really

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FORBES
something they enjoy doing, they are $4.5 billion in 2007 after its contact industry that recognized that much
always going to do better than those lens solution caused dangerous eye in- of their R&D spend was not produc-
who look upon it as a job. I said, ‘This fections. Hassan would be chairman. tive,” he scoffed at a 2014 investor
guy’s really going to get into it.’” It was a tough assignment. Bausch conference. “But they feared reduc-
Hassan sold him to the board of was a 160-year-old company that ing R&D spend because they thought
directors as Schering’s new chief com- hadn’t grown for 30 years. Saunders their stock price would go down.”
pliance officer, and once on board replaced two-thirds of the company’s By 2008, when he took over Vale-
Saunders stamped out bad practices, managers. He made a string of acqui- ant, that formula had been reversed:
negotiated hundreds of millions of dol- sitions and introduced 34 new prod- Cutting R&D meant your stock
lars in settlements with the feds and ucts, including a new laser for eye would go up. This was the absolute
personally entered the company’s procedures. In the two years he ran nadir for drug research productivity.
guilty plea. He rose fast: In 2007 Has- the firm, sales grew at an annualized Despite more than $60 billion spent
san tasked his apprentice with leading 9% and Ebitda 17%. globally on drug R&D that year, only
the integration of Dutch biotech Or- Bausch & Lomb prepared for an 18 medicines were approved by the
ganon, which Hassan had bought for IPO, with Saunders still at the helm. Food & Drug Administration in 2007,
$14 billion. In the process Saunders But then he got a call from Michael the lowest number ever. If you want-
began internalizing Hassan’s dealmak- Pearson, a former McKinsey consul- ed to make money, Pearson reasoned,
ing playbook: Create your own team; tant who was now the chief execu- dump R&D and focus on lower-risk
eliminate middle managers and pay at- tive of Valeant Pharmaceuticals. They projects and aggressive financial
tention to the people who actually deal knew each other well from their con- engineering—like merging with a
with your customers; find products sulting days. Pearson got right to the Canadian company with a Barbados
that can be made to perform better. point: He wanted to buy Bausch. tax domicile to lower Valeant’s tax
Also: Wrap your strategy up in a nice
slogan employees, journalists and in-
vestors can get behind—maybe some-
thing like “Growth Pharma.”
End result: Schering was sold to
Merck for $41 billion in 2009. Has-
san left to become a partner at War-
burg Pincus, and Saunders was left to
manage the integration with Merck
from the Schering side. “It’s a tough
experience,” says Saunders. “You’ve
worked so hard, and you’ve become
so passionate for the people and for
the way of doing things. All of a sud-
den there is a new owner, and they
want to do things their way.”
When Saunders got another job
offer, to be chief operating officer of
a health care products company, he Hatchet man: Valeant CEO Michael Pearson’s
called Hassan, his top reference. “Do plans to cut billions at Allergan hurt his bid.
you have to take it?” Hassan asked.
Saunders, taken aback, asked if there Pearson, who declined to com- rate to just 5%, as he did in 2010.
was something wrong with his pro- ment for this article, had his own phi- It was clear Pearson was going to
spective employer. No, Hassan re- losophy on the drug business—and cut Bausch to the bone. (Later, on
plied, but could he call him back? little respect for many of the people a conference call announcing the
Hassan set up a meeting the next running it. Pharmaceutical compa- deal, he said that Saunders’ team
day between Saunders and the part- nies, he said, spend far too much on “had made very little cuts” and that
SCOTT EELLS/BLOOMBERG
ners at Warburg. Within a week Has- both research and marketing, stuck Bausch had a cost structure compa-
san’s 40-year-old protégé had an offer in a model decades behind the times. rable “to a Big Pharma company.” He
to be chief executive of Bausch & “When I was a consultant, I’d often promised to cut selling, general and
Lomb, which Warburg had bought for have conversations with CEOs in the administrative expenses from 40% of

$140
THE MAKING OF A MONSTER

Close Date Pending
Actavis acquires Allergan
for $66.7 bil
120 Nov. 17, 2014
PURCHASE PRICE Actavis acquires Durata
Therapeutics for $769 mil
WATSON/ACTAVIS MARKET CAP ($BIL)
100 Jul. 1, 2014

Actavis acquires Forest
Laboratories for $27.6 bil
Oct. 31, 2012 Apr. 1, 2014

80 Watson acquires Actavis Actavis acquires Silom
Group for $6 bil Medical for $100 mil
Jan. 24, 2012 Oct. 1, 2013

Watson acquires Ascent Actavis acquires Warner
60
Pharmahealth for $390 mil Chilcott for $8.4 bil
May 25, 2011 Jan. 23, 2013

Watson acquires Specifar Watson acquires Uteron
40 for $621 mil Pharma for $305 mil
Jan. 28, 2010
Watson acquires Eden
Biodesign for $15 mil
20
0
2010 2011 2012 2013 2014
SOURCES: FACTSET RESEARCH SYSTEMS; COMPANY FILINGS.
sales to 20%. Once in charge, he did.) the board of directors, convinced that take approached $2 billion on the deal.
Saunders returned from an IPO Forest’s 84-year-old CEO, Howard Sol- “He came in and he got it done in five
road show, went to meet Pearson on omon, had lost his touch. He chafed at months,” says Icahn. “If you look at
a Friday and signed the deal to sell Solomon’s plan to hand the business to that result that’s pretty damn good. I
Bausch & Lomb at 4 a.m. on a Satur- his son David. “FOREST LABS IS NOT just thought he did a great job.”
day. “It was emotional; I poured my A DYNASTY TO BE DESPOTICALLY Successfully jobless once again,
heart and soul into Bausch & Lomb,” HANDED DOWN FROM FATHER Saunders had dinner with Icahn and
he says with surprising passion, con- TO SON IGNORING THE GREAT suggested starting a company by buy-
sidering he had spent just 24 months RISK OF THIS ACTION TO ITS ing some aging drugs from a large
at the firm. “I love the brand. I love SHAREHOLDERS,” Icahn thundered pharmaceutical company. Icahn of-
the people. I love the customers. It in all caps in a letter to investors. fered to give him $2 billion, subject to
almost becomes like your second Right after the Bausch deal closed, due diligence. “There are very few peo-
family.” But, he says, it was “the ab- Saunders was made CEO of Forest ple I would do that with,” Icahn says.
solute right decision,” and there was to appease Icahn. He quickly dipped But Bisaro, who’d built Actavis
never any doubt about the outcome. into Hassan’s playbook, dubbing the into a $6 billion powerhouse in the
“This company was for sale the day coming shake-up “a rejuvenation”— generic drugs business through his
that Warburg Pincus bought it,” he and almost immediately looking to own string of blockbuster deals, also
says. “That’s the model in private eq- make a deal. Three months after join- recognized Saunders’ talent. “If he
uity. Warburg Pincus saved this coming Forest, he was having steaks with leaves, if we lose him, then the com-
pany because this company would Paul Bisaro, the CEO of Actavis, at the pany is going to be worse off,” Bisa-
have gone through a miserable ex- J.P. Morgan Healthcare Conference in ro said. Over lunch from Actavis’ caf-
perience as a public company doing San Francisco. Saunders joked about eteria, he offered Saunders the CEO
this turnaround.” the idea of them merging. The idea job of the combined Actavis-Forest,
stuck, and they kept talking about it, and Saunders accepted. “I know I
AS THE DEAL CLOSED, Saunders more and more seriously. would probably be able to make more
went from Warburg to Icahn. In 2011 On Feb. 18, 2014 Actavis bought money doing something on my own,”
Icahn bought an 11% stake in Forest Forest for $28 billion, a 25% premium says Saunders, “but I really believe
Laboratories and put a lieutenant on to the stock’s previous close. Icahn’s Actavis is something special.”

FORBES
Of course, one of Saunders’ first in California alleging that Ackman’s points out that when you exclude its
moves was, true to his nature, a block- purchase was insider trading. generics business, Actavis will spend
buster acquisition. On July 11, 2014, On July 30 Saunders called Pyott 13% of sales on R&D, about as much as
just ten days after he officially be- and offered to be a white knight. Over a big pharma. Even when it comes to
came Actavis’ CEO, Saunders asked months of phone calls, he portrayed sales and other operating expenses, he
his board for permission to talk to Al- himself as the anti-Pearson, despite plans to cut only $1.8 billion, or about
lergan’s chief executive, David Pyott, the fact that he agreed with much of 20%. Ripping deeper, as Valeant would
who was embroiled in one of the nas- Pearson’s thesis on the drug business. have, has its own costs. Pissing off all
tiest takeover battles ever in an indus- No, Saunders told Pyott, he would your new employees can be expensive
try known for nasty takeover battles. not strip the company like Pearson. and counterproductive. “We’re not
Pyott had been chief executive Allergan would continue to do cru- the Borg; we don’t go in and assimi-
of Allergan for 17 years. He’d taken cial research on things like dry-eye late companies,” says Saunders. “We
a product Allergan licensed for lazy drugs and successors to Botox. Yes, actually try to learn from their culture.
eye and turned it into Botox (you the business could stay largely intact. We learn from their processes, and we
know what it does), a $2 bil- certainly try to learn from their talent.
lion blockbuster. He’d deliv- We want to get better.”
ered annualized sales growth
of 12% over ten years, along “WE’RE NOT THE BORG; Timing plays a part, too. Pear-
son’s slash-for-cash strategy for Vale-
with a 267% shareholder re- WE DON’T GO IN ant shined for investors at a moment
AND ASSIMILATE
turn. Yet to Valeant’s Pear- when pharma R&D was at its abso-
son, he was an inefficient CEO lute worst. But last year 41 new drugs
who allowed bloated spend-
ing to drag down shares. Pear- COMPANIES. WE got approved, 130% more than in
2007—partly because new science is
son offered $45.6 billion for ACTUALLY TRY TO delivering more successful research
LEARN FROM THEIR

the company, a 31% premi- programs and partly because of luck.
um for investors over current Still, Saunders being Saunders,
share prices, and got Pershing
Square’s activist hedge fund CULTURE.” there’s another possibility: a fast sale.
The likeliest buyer: Pfizer. Last year
manager, William Ackman, to Pfizer attempted a $100 billion hostile
take a 9.7% stake in Allergan to takeover of AstraZeneca, in part to
push the deal through. They kept talking—six times in Octo- avoid paying U.S. taxes by redomicil-
Pearson’s parsimony was on full ber alone. All the while Pearson’s and ing in London. It failed. Buying Acta-
display. He opened up an inves- Saunders’ bids for the company kept vis, analysts have pointed out, would
tor presentation by stating that they climbing, topping $60 billion. Pyott fi- also allow Pfizer to do the same thing.
were in such a nice room only be- nally agreed to Saunders’ terms when Moreover, Pfizer has entertained
cause Ackman covered the cost. his suit against Ackman went against spinning out its generics business,
“This’ll never happen again, unless him. The final offer was $67 billion— which is composed almost entirely
someone else wants to pay,” he said. far too expensive for Pearson’s blood. of old Pfizer drugs. Combining it
That extended to his plans for Aller- Saunders had won. with Actavis would give it a real ge-
gan. He promised to cut Allergan’s nerics business for that division,
$1 billion-plus R&D budget by 69% to ON THE EVE OF TAKING OVER the while bulking up the drug business,
$300 million and to cut another $1.8 company Saunders is saying all the too. In an interview with analysts
billion, or 40%, from the combined right things to keep the peace. For at Bernstein Research this summer,
company’s operating budget. starters, he’s promising to keep Aller- Pfizer seemed to embrace the idea of
Pyott was repulsed. “Valeant gan’s R&D budget intact. The new Ac- potentially buying a generics com-
is vile, and there is nothing I have tavis will spend $1.7 billion, or 7% of pany. Pfizer declined to comment,
learned since then that has changed sales, on R&D, compared with $250 and Saunders thinks the prospects of
my mind,” he says. “They’re an asset million, or just 3%, for Valeant. Saun- such a deal are “negligible.”
stripper.” He did everything he could ders even says he plans to keep some But, of course, the door is open.
to fight off the attack. He publicly research in drug discovery, because “Our stock’s for sale every day on the
disparaged Valeant, cut research and Allergan’s research in bacterial tox- New York Stock Exchange,” he says.
development and operational spend- ins (like Botox) and dry-eye disease “We’re a very shareholder-friendly
ing himself, and even filed a lawsuit is some of the best in the world. He management and board.” F

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© 2015 Towers Watson

CREDIT TK
72 | FORBES
The
Guinea Pig
Economy
WITH AND WITHOUT OUR CONSENT, WEBSITES, WEARABLES AND
APPS ARE RUNNING MILLIONS OF EXPERIMENTS ON US EVERY DAY
TO MAKE THEM MORE MONEY AND MAKE US HEALTHIER,
HAPPIER AND SMARTER.
BY PARMY OLSON
MONICA ROGATI HAD ALREADY CREATED ONE OF THE MOST INTELLIGENT JOB-
networking systems in the world, the code that sifted through LinkedIn profiles
and magically recommended “People You May Know,” when she got a recruit-
ment call in 2013 from a company known for its portable speakers, Bluetooth ear-
pieces and not much else.
Jawbone, it turned out, was getting into the health-tracking business. It had already begun
selling a sensor-rich wristband called the UP that monitors its wearer’s steps and sleep. Now it
wanted scientists and behavioral psychologists to make sense of all the health data.
Intrigued, Rogati signed on. As she began poring over the sleep patterns of tens of thou-
sands of people, something caught her eye. “I was seeing that … women were getting an aver-
age of 21 minutes more sleep per night,” she says. “I thought, ‘No way.’”
Rogati doubled-checked the data. The number kept turning up again and again. Then she
turned to academic literature. To her surprise, numerous scientific studies—the kind that
tracked 300 or so people over a short period of time—had found that women slept more than
men to the tune of about … 21 minutes. Jawbone’s millions of data points precisely correlated
with decades of scientific research.
CHRISTIAN PEACOCK FOR FORBES
But where those studies ended, Rogati was just beginning. Rather than merely contin-
ue tracking thousands of people through their smartphones and UP bands, and confirm
what she’d already verified, what if she could actually affect their behavior? Rather than fig-
ure out how much they sleep, why couldn’t she help them—women and those drowsy men

FORBES
GUINEA PIG ECONOMY
alike—sleep more? called Captology, short for Comput-

So last year Rogati and Jawbone’s ers as Persuasive Technologies, as
burgeoning team of data scientists coined by Stanford computer scien-
deployed the digital version of a psy- tist B.J. Fogg in 1996. A more cogent
chological term known as the “com- term for what has resulted: the Guin-
mitment principle”: They sent mes- ea Pig Economy.
sages to 40,000 users, asking them to There’s already big money here.
say “I’m in” to being in bed at a spe- Tally up venture capital raised along-
cific time they had determined would side revenue generated by companies
be relatively early for that user. The already making early inroads, and, ac-
result: Jawbone got one third of them cording to FORBES estimates, you’ll
to buy in and go to bed earlier. On av- find a $7 billion field, on its way to a far
erage, 23 minutes earlier. larger number (less than 20% of the
For all the Big Brother overtones, world’s top 10,000 websites use third-
those prodded into action by an algo- party tools to run experiments on their
rithm seem to appreciate the gesture: users). And that doesn’t account for the
90% of its wristband users, Jawbone ripple effect from all this digital nudg-
claims, say that it changed how they ing, which will surely be a large multi-
think about their health. “We’re only ple as these practices proliferate.
able to achieve this,” says Jawbone The ethical questions are just as
founder and CEO Hosain Rahman big: details about what we eat and
from his office at the company’s San what we watch, our pace and pulse,
Francisco headquarters, “because we and the temperatures in our bodies
have made a big investment in data and homes are all accessible. Mostly
science.” with our consent. Oftentimes not.
That investment is about to go
way further: Jawbone will soon be THE ROOT OF THE GUINEA
taking data from other apps you use Pig Economy can be traced to
on your phone, like Netflix, to ex- the 1990s and a Sun Micro-
periment with automated nudges, systems researcher named
such as suggesting you watch Mod- Jakob Nielsen, who seized on the
ern Family before going to bed be- potential of early Internet brows-
cause you slept 57 minutes more than ers as testing platforms. Rather than
when you watched the premiere of just show everyone the same thing,
The Walking Dead. Nielsen helped popularize the idea
Such intimacy underscores some- of showing smaller groups of visitors
thing fundamental going on. Con- different interfaces, in order to judge
sumers have been tracked, measured which proved more effective. A/B
and prodded into action since the testing was born.
1950s—psychology was, as any view- At the turn of the century, Google
er of Mad Men recognizes, the very weaponized the concept. In early Jawbone CEO Hosain Rahman.
core of the modern advertising in- 2000 the search giant ran its first
dustry, with symbolism, doublespeak A/B test, randomly showing millions nually, resulting in more than 450
and anxiety deployed for the first of users versions of a results page changes to its search algorithm and
time as commercial weapons. Now with 10, 20 or 30 links. It turned out page layout. Today, says Google Fel-
the proliferation of connected de- the lowest number led to faster page low Diane Tang, “our engineer-
vices—smartphones, wearables, ther- loads, and shaving those millisec- ing & data science teams are run-
mostats, autos—combined with pow- onds kept people coming back to the ning thousands of A/B tests at any
erful and integrated software spells service. one time to find ways to improve
JEFF SINGER FOR FORBES
a golden age of behavioral science. As with its “don’t be evil” credo, our services in myriad ways, from
Data will no longer reflect who we Google baked A/B testing into its assessing what color and interfac-
are—it will help determine it. operating philosophy—by 2008, it es people prefer, to using our infra-
The emerging field is sometimes was running 6,000 experiments an- structure more efficiently.”

tured ads. The answer: Two or more “splash” page generated some
were better than one, and the com- $60 million in additional donations
pany says the result was an annual by narrowing choices down to the
revenue boost of $100 million. “Data most effective one.
trumps intuition,” says Kohavi, who Siroker’s light hair and telegenic
has a Ph.D. from Stanford and used smile might have served him well if
to run Amazon’s testing. Google engi- he’d stayed in politics, but now he’s
neers are snarkier about it, deriding an evangelist for the experimenta-
any site still run on human instinct tion movement. He left the Obama
as a HiPPO, or “highest-paid person’s camp in 2009 and, with another for-
opinion.” mer Googler, Pete Koomen, started
In fairness, pretty much anyone Optimizely, a software firm selling
with a website can now get into the the same kinds of site-tweaking and
A/B testing game. Google, Adobe and analytic tools the Obama campaign
Mixpanel sell tools that let any ju- (and Google) had deployed. Its tools
nior marketing executive manipulate are simple enough that nonpro-
any pixel of a website or app to tweak grammers can create dozens of page
colors and come-ons. It’s a $3 billion variations of fonts, colors and lay-
business and growing—60% of com- outs through drag-and-drop menus
panies that use business software and then select randomized groups
plan to spend more money on A/B of visitors to show them to. “The cli-
testing tools in 2015, according to a ents that are most successful build
survey by TrustRadius. a culture of testing,” says Siroker.
The pied piper of A/B testing, Adds Oren Cohen, Optimizely’s
however, is a fresh-faced alumnus of head of sales in the U.K.: “You can
the FORBES 30 Under 30 list named run an experiment on 63,000 peo-
Dan Siroker, whose startup, Opti- ple who don’t know they’re part of
mizely, has raised $88 million. Siro- an experiment and see how it influ-
ker was a 23-year-old project man- ences their behavior.”
ager at Google back in 2006 when Optimizely now has more than
“We can tell he was asked to pitch a product idea
to founders Larry Page and Sergey
8,000 clients, including Disney,
Microsoft and Sony, and its opera-
what music Brin. Colleagues said they proba-
bly wouldn’t like it. Dreading the ap-
tions fill a cavernous warehouse in
downtown San Francisco. Siroker
is best to pointment, a senior manager gave claims that on average his testing
listen to him some sage advice: “Just tell them

you want to run an experiment,” he
tools raise online revenue by 21%.
Black & Decker’s DeWalt brand,
when you said. He got the green light.

It wasn’t until late 2007, when
for example, tested its “shop now”
button, and learned that changing
work out.” presidential candidate Barack Obama
visited the Google campus, that Siro-
it to “buy now” led to a six-figure
increase in annual revenue for the
ker thought of another way to make online store.
That ethos has become a staple of use of the randomized testing tools Other startups takes Optimize-
search. Ronny Kohavi, who oversees Google had developed for internal ly’s work a step further. Israel’s
optimization for Microsoft’s Bing, use. Obama was saying he wanted Commerce Sciences identifies what
posits that websites should be per- to run his campaign based on data, people care about most when they
petually testing on a full half of their and Siroker took him up on the chal- visit your website—whether that’s
visitors, and he walks the walk: Bing lenge, moving to Chicago to run ana- trust, price or social cachet—and
now runs 300 experiments on users lytics for the campaign. Google-style then changes the site to suit those
a day. The results translate directly A/B testing on fundraiser e-mails psychographic profiles. “What
to the bottom line. In 2013 Bing ex- and websites spurred a 40% jump in makes you tick,” says founder Aviv
tensively tested whether it should supporter sign-ups. The experiment Revach, “doesn’t necessarily make
include more than one link in fea- presented 24 variations of a sign-up me tick.”

FORBES
GUINEA PIG ECONOMY
MANIPULATING THE AC- 1,500 more. This past Thanksgiving the of $3.3 billion—more than twice its
tions of Web surfers is easy experiment included all users. Some value in a prior, pre-Big Data round.
enough, as the entire trans- were sent a large title encouraging them Those investors are betting that Jaw-
action is digital. The dis- to take more steps. Others saw a more bone can evolve beyond just a fitness-
ruptive moment we’re entering en- subtle one that said Happy Thanksgiv- band maker into a full-blown Internet
tails bringing the A/B mind-set to the ing, with a suggested step count tucked of Things connector. It has already
physical world. Data and testing will into the body of the message. In the end partnered with Samsung’s Smart
provide the much-heralded Internet the wording didn’t matter—the nudge Things division to explore applica-
of Things—the incorporation of con- itself was enough to get participants to tions that extend past health. “By un-
nectivity into our offline lives—with take the 1,500 steps. (Posing “nudges” derstanding you,” says Rahman, “we
its compass. as questions rather than commands, it can tell you what music is best to lis-
In this burgeoning area, Jawbone’s turns out, gives people the impression ten to when you work out.”
Rahman rates as pioneer. His initial they have a choice. “We don’t want to Jawbone is rapidly gaining formi-
smart-wristband launch in 2011 had threaten someone’s perception of their dable competition. Fitbit is making
been a flop, with quality issues forcing own autonomy,” says Jawbone product moves in the fitness category, and be-
him to offer full refunds. So less than manager Kelvin Kwong.) fore the summer Apple will release
two years ago, he bet the future of his The financial results were just as its smartwatch with health-track-
ing-and-data analysis. And it
seems that every legendary
“The most behavioral psychologist, hav-
ing spent the past few years
successful using Amazon’s Mechanical
Turk global labor exchange
clients build to conduct research on peo-
a culture ple at 20 or 30 cents a head

versus the traditional $5 or
of testing.” $6, is launching a startup de-

signed to bring A/B testing
into the physical sphere.
Robert Cialdini, the fa-
ther of the “commitment prin-
ciple,” is now chief scien-
tist at Opower, which focus-
es on using the psychological
trick he coined to lower energy
Optimizely founder usage. It’s based on his famous
Dan Siroker. “door-hanger” experiment: In
2007 he and colleagues went
hardware company on software and immediate. Jawbone, which is pri- through neighborhoods in San Diego
data. First, he bought an analytics com- vate, won’t reveal figures, but the re- hanging notices on doors encouraging
pany, Massive Health, taking on his first search firm Canalys estimates that home dwellers to reduce their energy
data scientist, Abe Gong, and then went Jawbone is now approaching 4 mil- usage. Some of the signs nudged people
on a hiring spree for more number lion fitness bands sold, with a huge to cut their consumption to save money
crunchers such as Rogati. By Novem- spike in the past year, when its rev- or to be better citizens, but one sim-
ber 2013 they were in full-blown ex- enue leaped as its share of the mar- ply said that “most people in the neigh-
perimentation mode. The first hypoth- ket surged to 21%, from 17% the year borhood” were conserving energy. It
esis: Could they get their band wear- prior. Those numbers will continue proved to be the most effective.
CHRISTIAN PEACOCK FOR FORBES
ers to get more active that Thanksgiv- to improve if its soon-to-debut up- Inspired by that, Harvard grad-
ing if they were told they were statisti- date, the UP3, delivers on its promise uates Alex Laskey and Dan Yates
cally more likely to be in couch mode of measuring not just heart rate but launched Opower based on Cialdini’s
that day? Jawbone sent 5% of its users also hydration, stress and fatigue. findings about our inexplicable need
a challenge to take a specific number of In late 2014 Jawbone closed a mas- to keep up with the Joneses, eventu-
steps. Those who opted in took nearly sive $250 million round, at a valuation ally bringing on the master himself to

6 YEARS.
OVER 60 PRODUCTS.
NEARLY 60 MILLION
SCHOOL MEALS PROVIDED.
JOIN THE MOVEMENT.

Photograph by Richard Foulser
WWW.FEEDPROJECTS.COM
Creating good products that help FEED the world.
FORBES
GUINEA PIG ECONOMY
help with what the company calls the HiPPOs. “These students are given on your point of view), if they didn’t
largest behavioral study ever. the opportunity for a better education reach health goals. The latter had
Opower, which now has over 95 based on their own data,” says Learn- the most success with losing weight,
utilities as customers and 40 million Metrics founder Julian Miller. and now cofounder and Yale econo-
ratepayers in its database, experi- The $2.8 trillion health care indus- mist Jordan Goldberg is encourag-
ments on as many as 1 million cus- try, plagued by wasteful spending, is ing six recently enlisted corporate cli-
tomers at a time. It has learned that becoming a laboratory of behavior- ents, including one that self-insures
adding smiley faces to the reports of shaping. A startup called Pact sells its 100,000 employees, to use the
customers who used energy most ef- wellness software to a handful of em- same punitive tactics on their staff.
ficiently helped keep them on track. ployers in Massachusetts that’s based “We did our A/B testing on consum-
Telling those good customers, how- on a three-years-running experiment ers already,” says Goldberg. “That way
ever, that they were more efficient on several hundred thousand people when we go to corporate, they don’t
than their neighbors backfired, as who downloaded its free app. Pact feel their employees are guinea pigs.”
many saw it as an excuse to be more asks people to put down stakes of $10
wasteful. “We always have a treat- or so to motivate themselves to exer- FOR A PEEK AT THE FU-
ment and control group,” says Opow- cise. Behind the scenes Pact pushed ture, check out the start-
er’s chief behavioral officer, John one group of users toward winning up jobs site Hired. Data sci-
Balz, using scientific terms for what money and threatened another with entist positions are rising
in reality is just A/B testing. The losing money. “Negative [incentives] at a double-digit clip and, more tell-
company went public in April and got your butt off the couch and into ingly, the title of “chief behavioral of-
boasts a market cap of $670 million. the gym,” says Pact founder Yifan ficer” has become a coveted hire. “A
Another granddaddy of behav- Zhang. Now employees at compa- couple years ago there were 20 or so
ioralists, Duke’s Dan Ariely, recently nies who use Pact Health can win (or of these positions,” says Jamie Kim-
cofounded Timeful, whose free mo- lose) $5 off their deductible coverage, mel of ideas42, a not-for-profit behav-
bile app constantly experiments on depending on if they stick to work- ioral economics consultancy. “Now
its users to learn how to make their outs monitored by their smartphones there’re probably hundreds of be-
day more efficient via smart noti- or fitness trackers. havioralists working in companies.”
fications. Ariely, 47, says his tests Another startup, called StickK, Stanford is even institutionalizing it,
on the app are a progression from also puts an emphasis on punishment. through a Persuasive Tech Lab.
the old, face-to-face experiments On its original website it encouraged Can an ethical compliance offi-
he used to do in a lab, resulting in one segment of visitors to give their cer be far behind? Humans inherent-
“more specific testing of how people money to a charity they liked and an- ly don’t like being unwitting guinea
use their day in very minute detail,” other to a charity they hated (maybe pigs. Facebook learned that last year
he says. What’s working for its users Greenpeace or the N.R.A., depending when it was revealed that in 2012 it
are personalized messages, sent
infrequently.
Chicago’s LearnMetrics wants to
be the Jawbone of education and has
deals with 42 schools so far. A few
months ago it won a contract in Atlan-
ta to test whether Chromebook lap-
tops were better at engaging students
than iPads at a K-12 school in Atlan-
ta. Based on grades, attendance and
log-on times, the Chromebooks are
winning. As with any test, there are
costs for those in the lagging group,
but it’s far better
They know what
than if the district makes you click:
had just bought ev- author Nir Eyal,
eryone iPads out Ron Kohavi of
Microsoft and Dan
of the gate, in the Ariely of Duke
manner of Google’s University.

Tools of the Captology Trade
Cognitive Biases Weapons of Influence Productive Laziness Decision Fatigue
These are flaws A set of power- Our minds are Prison parole
in our reason- ful, persuasive naturally lazy, boards used
ing that we’re techniques col- which is why to schedule
all prone to and lated by famed there’s a run- appeals at the
that businesses psychologist ning gag that end of the day
can use to Robert Cialdini the best place because they
manipulate us. According to Wiki- that includes the scarcity principle to hide a dead body is on page knew boards were more likely to
pedia there some 170 cognitive and the theory of authority. two of Google’s search results— take the easy route and keep an
biases, including scarcity (“Only Examples: doctors wearing white nobody ever clicks there. Irish inmate locked up. Websites can
three left in stock—buy now!”) lab coats in TV ads for medica- airline Ryanair once exploited the similarly exhaust users. Last year
and risk aversion under time pres- tion. Or Kim Kardashian. She tendency to skim rather than read after smartphone owners went
sure. An e-commerce site set up was brought on by e-commerce carefully on its booking Web page. through several steps to register
by Britain’s Daily Mail newspaper startup Shoedazzle as a chief A drop-down menu asked for with video-messaging app Glide,
used to show buyers a pop-up fashion stylist, largely because of country of residence. Pick a coun- the app suggested they invite
right before the checkout with her authority over young, shoe- try and you unwittingly bought their phone’s entire address book
the words “EXCLUSIVE LIMITED crazed women. travel insurance. Sandwiched be- to join. You had to unselect each
ILLUSTRATIONS BY ANDERS WENNGREN FOR FORBES; BELOW RIGHT: STEPHEN VOSS
OFFER” and a timer counting tween Denmark and Finland were from a list to avoid sending SMS
down from ten minutes. the words “Don’t insure me.” spam to everyone you knew.
had run a series of tests on its news- der; it was its initial indifference to done, would they regret it?’”
feed. The so-called emotional con- the experiment and the likelihood Jawbone has looked into tracking
tagion experiment manipulated the this was the tip of a large iceberg UP wearers’ GPS signals so they can
wording of around 700,000 users’ we knew very little about. Accord- nudge you to “swing by the library”
status updates to make them appear ing to one report at the time, Face- on the way home rather than just
slightly sadder or happier than they book’s data science team had operat- complete a number of steps. It’s not
were. The world, in turn, freaked out, ed under relatively little oversight to ready to take those tests public just
provoking national editorials and run their experiment. yet. “With great power comes great
government probes globally. The real Not to be outdone, Christian Rud- responsibility,” says A/B evangelist
concern wasn’t that Facebook had der, the cofounder of dating site OK- Siroker. “It’s the user of that tool that
made a lot of people seem a little sad- Cupid, came out soon after and ca- needs to be mindful of the upsides
sually declared that his site, too, had and downsides.”
manipulated people. OKCupid said For now, most of these modern-
in July 2014 that it had run a test giv- day Mad Men are looking at this new
ing a false positive reading on cou- world from the half-full lens. “In the
ples who were good matches, and last 20 years of technology humans
vice versa, to see if the matching al- have taken care of and maintained
gorithm worked. Rudder says he got computers,” says Jeff Haynie, CEO of
few complaints as a result. “Guess apps analytics platform Appcelera-
what, everybody,” he wrote in a blog tor. “The next 20 years are going to be
post. “If you use the Internet, you’re about computers taking care of us.”
the subject of hundreds of experi- Jawbone’s original data scien-
ments at any given time.” tist, Abe Gong, argues that the guinea
It need not be so Wild West. Au- pigs will eventually concoct ways to
thor Nir Eyal suggests that Web com- counter unwanted intrusion. “There
panies always run the regret test first. are more tools [like ad blockers] to
“When I decide what I will and won’t help people control what they see,”
do on different projects, I always ask he says. “I would guess we’re at peak
myself, ‘If the user took this particular manipulation right now.” That’s a hy-
behavior and knew what they had just pothesis that will surely be tested. F

The Next
Billion-Dollar
Ideas
Which business models and strategies are paying off right
now? We scoured our annual list of America’s Most Promising
Companies, as measured by sales growth and management talent,
for shared traits—with surprising (and profitable) results. For a
complete methodology go to www.forbes/ampc.
BY LIYAN CHEN, KATHARINE CLOSE, EMILY INVERSO, BRIAN SOLOMON AND KARSTEN STRAUSS
PHOTOGRAPH BY ERIC MILLETTE FOR FORBES

PROMOTION
TOSHIBA’S
HUMAN SMART
COMMUNITY
Landis+Gyr Helps Transform the Energy Industry
BY MICHAE L RONEY
Transformative changes in the smart grid are thousands of sensors promoting technology or selling
energy industry are creating both that collect essential data on power technology for its own sake, but for
challenge and opportunity for output, voltage, flow and consump- the benefit of people and society.”
utilities. Unprecedented demand tion—measuring demand, detecting
in worldwide power needs, the weaknesses, identifying faults and
introduction of renewable generation generally automating operations
resources, and tougher environmen- and responses to outages. On the
tal regulations are upsetting conven- edges are smart meters. When placed
tional business models and forcing in homes and businesses, they can
power providers to rethink how they help energy providers and consum-
manage the power supply and their ers collaborate and better manage
relationships with customers. peak demand periods, resulting in
“The power utility world used to additional cost efficiencies and sav-
be very stable, with business and ings. This solution is both compelling
technology cycles lasting decades,” and essential, which is why utilities in
says Andreas Umbach, President and the U.S. alone will invest $4.3 billion in
CEO of Landis+Gyr, a Toshiba-owned smart metering technology by 2017,
global industry leader in energy mea- according to Frost & Sullivan.
surement and metering solutions for “With a smart meter network, you Andreas Umbach, President and CEO, Landis+Gyr
electricity, gas and water utilities, with have much more system information
a presence in over 30 countries. “Now, available. In the case of an outage, you
these changes are accelerating a very immediately see it on your screen. You TRANSFORMING LOAD
classical industry.” can isolate the area and take actions MANAGEMENT
immediately,” says Umbach. “You’re
IMPROVING GRID much better able to properly inform Umbach points out that the most
OPERATIONS your customers. You can distribute environmentally friendly and cheapest
text messages with status information power source is the elimination or
The world’s overall energy demand and actions to take. This is a just a small postponement of a load—the con-
is expected to rise by nearly 40% example of what you can do when sumption of power at any given time.
between now and 2035, according to that information is available, some- “Rather than optimizing the
the International Energy Agency (IEA). thing most utilities cannot do today.” network for the highest expected
Fortunately, a new era of efficiency This intelligent approach to the demand peak, we try to postpone
and reliability is being made possible grid is part and parcel of Toshiba’s the excess demand through tech-
through the smart grid, an advanced overall product philosophy of nology,” he explains. “This can be
energy distribution system that is Human Smart Community powered managed better than ever before
supported by an intelligent commu- by lifenology. “It is all about energy through consumer-oriented demand
nications network. At the heart of the efficiency,” says Umbach. “We’re not response programs, which are made
PROMOTION
possible by smart meters in homes

and businesses that offer two-way
communication and automation.
In the past, the utility would send a
reader by the meter once a month
and just capture one value. Now
we’re measuring in 15-minute inter-
vals, and we have a thousandfold
amount of data available. Conse-
quently, utilities can profile consum-
ers to better understand what the
needs are in terms of electricity, and
most importantly its timing.
“When the pool pump stops for
half an hour, to most consumers it complexity to a level that would be gas emissions through solutions in
may be irrelevant, but if you aggre- untenable without technology. hydro, solar, nuclear, geothermal and
gate thousands of pool pumps to “The minute you connect to a wind power generation. We added
stop at the same point in time, you network, you’ve got to measure that the piece that is sitting in people’s
are postponing demand, and doing for billing data, but also for the quality houses, measuring the consump-
that represents a big opportunity to of the power, whether the voltage is tion. Now we can feed back all the
take out bottlenecks in the perfor- stable and whether there is enough information to the rest of the players
mance of the grid,” he adds. power flowing,” says Umbach. in the grid, thereby completing the
“Keeping control becomes a major entire cycle.”
MEETING THE challenge, and we do that through The two companies are further
RENEWABLES CHALLENGE introducing many sensors, compiling expanding their products and ser-
all the data, and then analyzing and vices to meet the requirements and
The European Union’s 2020 deriving the right actions out of it.” applications of a smarter grid, driv-
initiative mandates reduction of ing innovation for utilities around
greenhouse gas emissions by at least CREATING SYNERGY the world. “We are the trusted part-
20% compared to 1990 levels, while FOR THE NEXT 50 YEARS ner for utilities around the world
increasing the share of renewable seeking to upgrade their infra-
energy to 20%. In the U.S., at least Landis+Gyr and Toshiba are structure and move to a smarter
29 states have renewable targets for uniquely positioned to help energy grid,” says Umbach, “whether it is
the same period. One of the largest providers address the many changes supplying smart meters to British
challenges for the energy industry in their industry. “There probably is Gas under the largest contract in
is managing renewable generation. no combination of companies that our industry, meeting the needs
Instead of one central large power has such a wide offering in terms of of Japan’s Tepco by deploying our
plant, there can be hundreds or even portfolio,” says Umbach. “Toshiba open-standards-based communica-
thousands of generation sources has a history of strong expertise in tions network, or helping Oncor
feeding into the grid with highly generating a stable supply of energy deploy one of the first advanced
variable output, radically increasing while reducing CO2 and greenhouse smart metering, MDMS and outage
management systems in Texas.”
So what’s the next step in the
transformation? “The best piece of
Human Smart Community advice we can provide is for utilities
Toshiba’s vision for the future is a “Human Smart Community” to get very close to their suppliers
—a society that is technologically advanced but that puts people’s and technology providers,” says
well-being first. With our focus on healthcare, energy and cloud and Umbach. “We know what our tech-
storage technology, we are working to create a future ideal of a safe, nology can do, and utilities know
secure and comfortable society. In the future we envision, everyone their processes. When you put them
everywhere can flourish and enjoy a rich and vibrant life. together, you can develop road
maps into the future.”
Lifenology
We call the technologies needed to create this ideal society
“lifenology”—a combination of “life” and “technology.” Toshiba
lifenology is more than a single product or technology. Rather, by
marrying the know-how behind a wide range of technologies, we
create new value that can benefit people all around the world. Through To learn more about the Human
“lifenology,” Toshiba will realize the “Human Smart Community.” Smart Community by lifenology, visit
forbes.com/toshibalifenology
AMERICA’S MOST PROMISING COMPANIES THE NEXT BILLION-DOLLAR IDEAS
Seamless Collaboration
HELPING BUSINESSES IMPROVE INTERNAL OPERATIONS AND BOOST BOX
PRODUCTIVITY—JUST BY MAKING COMMUNICATION EASIER. 2014 REVENUE: $124 MILLION
GROWTH1: 245.7%
BOX: The cloud productivity and storage firm had a Has become the default for secure storage and
turbulent 2014. The company tested the IPO market shared workspace. How will it fare post-IPO?
last March but found enterprise stocks down and in- GUIDESPARK
2014 REVENUE: $10.3 MILLION
vestors wary of how much money it was spending. So it
GROWTH: 90%
stayed private, raised $150 million in venture capital at Creates customized h.r. training videos.
a $2.4 billion valuation and managed to double revenue PLURALSIGHT
while cutting sales and marketing expenses. It has now 2014 REVENUE: $65 MILLION
set the wheels in motion for an IPO that it hopes will GROWTH: 75.6%
raise in excess of $138 million. That capital will come In-depth video training for developers, IT staff.
in handy as Box, which along with providing secure SLACK
2014 REVENUE: $3 MILLION
storage also helps companies manage projects and cre-
GROWTH: ONLY ONE YEAR OF REVENUE
ate shared workspaces, confronts growing competition Everyone agrees: E-mail is horrible. Slack’s
from Dropbox, Amazon, Google and others. interface is far more communal and intuitive.
Extreme
Service
APPLY FOR A SMALL-BUSINESS
Customer LOAN IN THE MIDDLE OF THE

NIGHT AND SEE THE CASH IN
Stalking YOUR PAYPAL ACCOUNT IN 15

MINUTES. FOR THESE ZEALOUS
ENABLING COMPANIES TO TRACK SERVICE PROVIDERS, GREAT
POTENTIAL CUSTOMERS JUST CUSTOMER CARE IS UNDER NO
ABOUT EVERYWHERE—EVEN CIRCUMSTANCES A DYING ART.
AS THEY GO FROM ONE DEVICE
TO ANOTHER. CREEPY. COOL.
APPLOVIN
GROWTH: 146.6%
TAPAD: We’ve all grown accustomed
Determines which mobile ads you ought to see.
BLOOMUA / SHUTTERSTOCK ; GETTY IMAGES; PETER DASILVA / THE NEW YORK TIMES / REDUX
to the intrusive practice of “retarget-
LIVEINTENT
ing” —online ads that follow you
GROWTH: 78.8% from site to site. But if you have com-
Next-generation e-mail marketing that targets forted yourself with the thought that
ads to consumers on every screen they look at.
you can always escape by logging INSTACART: Too busy to go to the supermar-
MAGNETIC off your computer, think again. Not ket this week? There’s a $2 billion app for
GROWTH: 52.4%
with players like Tapad in the game. that. Founded by Apoorva Mehta just two
Charts your search history, then ensures that Founded by Are Traasdahl and Dag and a half years ago, Instacart has rocketed
relevant pitches show up on the sites you visit. Liodden, Tapad gives advertisers to its hefty valuation by providing one-
SPOKEO the power to follow consumers not hour grocery delivery for a flat $5.99 fee.
2014 REVENUE: $57 MILLION just from site to site but from device A tenfold revenue leap to $100 million last
GROWTH: 37.4%
to device, creepily stalking users year convinced venture firms in January to
Scours online public databases to find people.
as they switch from PC to tablet to give the company $220 million to expand
TAPAD
smartphone. The company does it its early lead on rival services from Amazon
GROWTH: 61.9% by collecting and processing data to and Google. With more than 4,000 inde-
It’ll make sure that the ads you see on your determine which devices are shared pendent contractors serving as personal
laptop are on your phone and tablet as well.
by a person or household. shoppers and partnerships with major
1
REPRESENTS COMPOUND ANNUAL GROWTH RATE FROM 2012-14.

MCKINSEY & COMPANY CITES KNOWLEDGE-INTENSIVE MANUFACTURING
AS ONE OF THE EMERGING GAME CHANGERS OF THE 21ST CENTURY.
GET THE WHOLE STORY AT
WWW.OHIOFORBIZ.COM/FORBES
OHIO IS EASY TO FIND.
JUST LOOK FOR THE MOST ADVANCED

MANUFACTURING IN THE WORLD.
With the broad shoulders of an enduring legacy of manufacturing to
stand on, Ohio is the epicenter of the additive manufacturing revolution.
We have galvanized the efforts of industry, universities, thought leaders
and government, an alignment that is producing breakthrough after
manufacturing breakthrough. From prototype to production, Ohio is
leading the way. The race is on. And the first one to the future wins.
THE FUTURE IS HAPPENING IN OHIO. GET THERE FIRST.

AMERICA’S MOST PROMISING COMPANIES
chains like Whole Foods and Costco al-
SMALL BUSINESS PLAYBOOK
ready in place, Instacart has plans to grow
well beyond its first 15 cities and to attack
new retail categories, like drugstores.
Watch out Walgreens!
The Next Cult Cabernet
Is…Beef Jerky?
ICRACKED
2014 REVENUE: $25 MILLION Inspired by his parents’ experience in the wine
GROWTH: 145%
iPhone repair service that makes house calls.
business, Jon Sebastiani is giving a downscale snack
INSTACART a makeover. BY KARSTEN STRAUSS
G
GROWTH: 364.1%
Picks up your groceries, delivers them to your
rowing up among the sun-
door within an hour for a $5.99 fee. kissed hills of northern
KABBAGE California wine country,
2014 REVENUE: $40.5 MILLION Jon Sebastiani learned a few things
GROWTH: 100.8%
about creating and enjoying some
Assesses loan applications in just 15 min-
utes, any time of day or night. of life’s more refined pleasures. At
PIRCH his family’s vineyard, a Sonoma
2014 REVENUE: $113.4 MILLION institution for more than 100 years,
GROWTH: 44.9% he spent his childhood tending
Cook with a stove before buying it.
grape vines and topping barrels.
PIZZA STUDIO
But five years ago Sebastiani,
GROWTH: 92.3% now 44, reinvented himself with
Piping-hot custom pies in just 7 minutes. the launch of Sonoma-based Krave
SURF AIR Pure Foods and its brand of meat
jerky—a food more commonly asso-
GROWTH: 49.2%
Unlimited flights for a flat monthly fee. ciated with truck stops than haute
ZOZI cuisine. “People thought I’d lost my
2014 REVENUE: $118 MILLION mind,” he says.
GROWTH: 188.8% Maybe not. Last year, according
Books extreme adventure travel online.
to Nielsen, Americans spent $2.5 bil-
lion on dried-meat snacks, a number
that’s been growing 10% annually,
Luxury with sales skewed heavily toward
products like Slim Jims, Jack Links
Commodities and other convenience-store fare.
Sebastiani’s mission, he says, is to
Jon Sebastiani is taking jerky to places it’s
never been before, like wine country.
GARDEN-VARIETY PRODUCTS position his jerky as a high-end, bet-
GIVEN A LUXE MAKEOVER—AND, ter-for-you snack. “It struck me that seasonings like teriyaki and pepper,
YES, A CONCOMITANT PRICE this product has been completely Sebastiani’s jerky stood out when
INCREASE. NO ONE EVER SAID misunderstood,” he says. “Most it was introduced in 2010. “We
THE GOOD LIFE CAME CHEAP. average consumers found jerky in wanted to do for jerky what [Ben
general to be an artificial-ingredi- and Jerry’s] did to ice cream, what
4MOMS ent-ridden, high-sodium, leather- Samuel Adams did to beer, what
GROWTH: 45% consuming, garbage junk food found Starbucks did to coffee,” he says.
Baby needs a stroller with an LCD dashboard. in the corner of a gas station.” Consumers took notice. The
BIG ASS FANS Krave’s product has a decidedly products are offered in the corporate
2014 REVENUE: $165 MILLION different feel. The meat is silky soft, cafeterias of Google, Twitter and
GROWTH: 23.3%
ERIC MILLETTE FOR FORBES
What the name says: Big. Ass. Fans. thanks to extended marination and Beats by Dre, as well as on Virgin
moist cooking, and comes in flavors America flights. By 2013 Krave was
KRAVE
2014 REVENUE: $36 MILLION like Basil Citrus, Chili Lime and generating $17 million in annual
GROWTH: 72.6% Sweet Chipotle. In a market where revenue. Last year it hit $36 million.
Gourmet jerky in flavors like “basil citrus.”
few players had ventured beyond “Krave is definitely growing the fast-

THE NEXT BILLION-DOLLAR IDEAS
est,” says Robert Moskow, an analyst Vicki Sebastiani divorced and sold the giving presentations to Wegmans or
who follows packaged food for Credit company for $31 million. Safeway or Target or any retailer,”
Suisse. After a failed real estate invest- he says, “we position our product
Sebastiani isn’t the first member ment, Jon decided to go back to alongside a Cliff Bar, Chobani Greek
of his family to try something dif- school. While earning a dual M.B.A. Yogurt and a Kind Bar.”
ferent. His father, Sam Sebastiani, at New York’s Columbia University By late 2011 Krave was being sold at
had once been the head of the family and the University of California, some 700 stores. And Safeway ordered
vineyard—until the family nixed his Berkeley—“I think I needed it to be $500,000 worth of jerky for 2012. But
idea to create a higher-end wine and taken more seriously as I left the then Golden Island, Krave’s manu-
Sam decided to strike out on his own. wine business”—he trained for the facturer, now owned by Tyson Foods,
He and his wife, Vicki, started a new 2009 New York City Marathon and decided to pull out and concentrate
winery, Viansa, in 1989. “That was found himself consuming jerky as a on its own brand. “It was such a sting,”
high-protein, low- says Sebastiani. “Before we fully en-
carbohydrate meal joyed this new opportunity, we were
substitute. Suddenly already dealing with the fear of not
the Krave concept being able to fulfill the order.”
began to take form, Help came from Engelhart Gour-
and just as his parents met Foods, a meat supplier in Fair-
had done with wine, field, Calif. that took over produc-
he started to think tion. Today Krave Jerky is made by
upscale. He spent co-packers in Virginia, Idaho, Utah
almost $50,000 of his and California. Hoj keeps tabs on
own money to produce them, assuring texture and flavor
a first batch in part- quality are up to par. The company
nership with Golden gets about $6 for a 3.25-ounce bag—
Island Jerky Co. $7 if it’s purchased directly from the
outside Los Angeles, Krave site—which is about 10% more
and began shopping than competitors like Jack Links and
the brand to nonchain Oberto charge.
stores in northern Sebastiani raised $1 million in
California. 2011 from over a dozen angels, in-
He quickly learned cluding his former business school
that getting shoppers professor Steve Blank, a serial entre-
to pay more than they preneur and author of lean startup
would for established bible, Four Steps to the Epiphany, and
brands required giving Daniel Lubetzky, founder of Kind
them a taste. “We did Snacks. Krave also took $11 million
an extremely challenging time of my thousands of demos in stores,” says over the past three years from Alli-
family’s life,” says Jon. “My dad had Krave partner and flavor developer ance Consumer Growth, a private
to start over from scratch.” Jens Hoj, 49, a former fine-dining equity firm. Predictably, other gour-
His parents sold their home to chef who had been managing the El met jerky companies have emerged,
finance the launch and lived in a mo- Dorado Hotel & Kitchen in Sonoma including California-based Jeff’s Fa-
bile home adjacent to the vineyard. before he joined Krave in 2010. mous Foods, which debuted in 2010,
“It was a classic all-in type move,” The conversations with consum- selling dried meats wholesale in 27
says Jon. The winery later adopted a ers led Sebastiani to make changes, states. While most of the other firms
direct-to-consumer model, accumu- including producing large strips of stayed small and regional, Krave is
lating a club of some 25,000 custom- jerky made from top round cuts of now in all Target stores in the U.S.
ers who received monthly shipments meat. “It looked like it just came Sebastiani and Hoj are developing
of wine. from the butcher,” he says. Steer- a Krave meat bar and hoping to gain
After graduating from Santa Clara ing clear of convenience stores, exposure at healthy-lifestyle events
University, Jon returned to work for Sebastiani and Hoj placed Krave like marathons, yoga festivals and even
Viansa, becoming president in 1995. in freestanding displays at north- wine and food gatherings. “Being a
A decade later, with the company ern California grocery chains like company from Sonoma,” he says, “is
generating $22 million a year, Sam and Raley’s and Draeger’s. “When we’re very important to who we are.” F

AMERICA’S MOST PROMISING COMPANIES THE NEXT BILLION-DOLLAR IDEAS
SMALL BUSINESS PLAYBOOK
That’s the Ticket

SeatGeek’s rapidly growing mobile app helps
customers find the best deals. BY BRIAN SOLOMON
A
fter Russ
Transaction D’Souza
and Jack
Transparency Groetzinger quit
their cushy manage-
BY AGGREGATING DATA AND ment consultant
DRAWING ON THE FAMED jobs within a week
“WISDOM OF CROWDS,” THESE of each other in the
BUSINESSES OFFER CONSUMERS summer of 2008,
CLEAR INFORMATION. IS YOUR they took to sitting
LOAN APPLICATION MOVING in a Boston coffee
FORWARD? IS THAT LAKERS shop every day for
TICKET REALLY THE BEST DEAL ON two months, strug-
OFFER? THEY’LL LET YOU KNOW. gling to brainstorm
a promising startup.
CARVANA Inspiration even-
GROWTH: 200%
tually came from
Online auto financing, sales, service, more. Microsoft, which
CARGURUS bought a small web-
2014 REVENUE: $40 MILLION site that predicted
GROWTH: 33%
the fluctuation of
Web car lot with price analysis, buyer reviews.
airline ticket prices,
INTEGRAL AD SCIENCE
2014 REVENUE: $50 MILLION for $115 million. “We Jack Groetzinger and Russ D’Souza figured out that people who
GROWTH: 60.9% could do that, but for search for tickets on their phones are more profitable.
Furnishes data that help media buyers sports” was the idea
assess digital-advertising opportunities.
that eventually became SeatGeek, a sales from the secondary markets it
NCINO
fast-growing has enlisted.
GROWTH: 105% e-commerce startup that puts a The company’s rapid growth has
Sells banks a cloud-based system that lets friendly face on ticket search. been driven by the site’s ability to
borrowers track their loan’s progress.
Right from the beginning users make ticket transactions more trans-
SEATGEEK ignored SeatGeek’s forecasting in parent. Much like travel site Kayak,
GROWTH: 68.8% favor of its search function, using it to SeatGeek brings deals from across the
Best-deal ticket searches for concerts, sports buy tickets from whichever secondary Web direct to buyers.
and other events. site they thought listed the best deal. The secret sauce is in its “Deal
SUPERFISH Today SeatGeek aggregates tickets to Score,” a ranking of available ticket
GROWTH: 71.7% sports, concerts, Broadway shows and offers based on price, seat location
Want an adorable new pet? Send in a repre- other events sold on more than 100 and historical trends. For example,
sentative photo, and Superfish will find one. secondary ticket marketplaces. Last a month out from Super Bowl XLIX
WEDDINGWIRE year it handled $155 million in ticket SeatGeek’s algorithm recommended
GROWTH: 34.8%
sales. That’s a fraction of the massive four end-zone seats, selling on TN
Online nuptial-supplies market, reviews of $5 billion secondary ticket market, but Direct for $3,585 each (including fees),
JOHN EMERSON FOR FORBES
wedding vendors ensure a successful day. SeatGeek tripled its total transaction as the top available value. Other online
YEXT value last year and doubled its annual markets, like StubHub, offer only their
revenue to $25 million. It doesn’t own selection, making it harder for
GROWTH: 59.6%
Manages digital presence for brick-and- charge users for the service, instead buyers to tell if they’re getting a deal.
mortar firms across platforms. taking an 8% commission on most SeatGeek, say D’Souza, 29, and

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AMERICA’S MOST PROMISING COMPANIES
Groetzinger, 30, wouldn’t have
taken off nearly as fast—or attracted
“Ticketing is a category that hasn’t
been won yet on mobile,” says John ObamaCare
$35 million in venture funding last
August—if the partners hadn’t em-
Locke of Accel Partners, who led the
company’s latest $35 million fund- Profiteering
braced the mobile shopping boom. ing round. “By going mobile first,
SUCH A VAST NEW LAW MEANS
SeatGeek has optimized its app to SeatGeek can outinnovate StubHub
VAST BUSINESS OPPORTUNITY
make it easy for users to find, select and Ticketmaster.”Not that StubHub
FOR THOSE WHO HELP DOCTORS,
and purchase tickets on the go. And is going to cede ground quietly. It has
HOSPITALS AND PATIENTS
over the last year mobile ticket sales its own mobile app, and in October
NAVIGATE AMERICA’S NEW
have grown 80% and now contrib- the leading ticket resale marketplace
HEALTH CARE LANDSCAPE.
ute 45% of SeatGeek’s total gross. pulled its listings from SeatGeek. “We
“Our native apps actually monetize want StubHub to be the place where
better than desktop,” says D’Souza, people start,” said Ray Elias, Stub-
explaining that a customer with Hub’s chief marketing officer, noting
the phone app is more likely to buy that the company is in its own “transi-
from SeatGeek. tion phase” from desktop to mobile.
With plans to double from 51 em- Despite StubHub’s departure,
ployees to 100 by the end of the year, SeatGeek’s sales volume rose from $18
SeatGeek is looking to hire dozens million in October to $25 million in
of iPhone and Android developers. December. F
Niche Niches EVOLENT HEALTH: As the Affordable

Care Act forces health care providers
WHATEVER YOUR OBSCURE INTEREST—HEY, THAT’S A BEAUTIFUL
to move from the old fee-for-service
CROSS-STITCHED COFFEE-FILTER HOLDER!—THESE COMPANIES WILL model to providing “value-based
HELP YOU FIND NEW WAYS TO BUY, SELL AND TALK ABOUT IT. care,” Evolent Health is helping
CARDCASH.COM
them adapt. The company provides
2014 REVENUE: $95 MILLION consulting and software to hospitals
GROWTH: 81% that helps them change the way they
Marketmaker for unwanted gift cards. manage doctors, incentivizing them to
CRAFTSY keep patients healthy rather than sim-
ply rewarding them for ordering tests
GROWTH: 53%
Online community (with classes) for old- or prescribing drugs. Evolent Health
school diversions: quilting, baking, etc. works with physician organizations
PANJO in more than 25 markets nationwide,
2014 REVENUE: $42 MILLION and its revenues have grown by more
GROWTH: 87%
PANJO: Noticing a gap in exist- than 1,000 percent in two years.
Hobbyist network focused on sports fans,
ing e-commerce sites for specialty gearheads, audiophiles and the like.
CENSEOHEALTH
items, Chad Billmyer, an aficionado PRINT SYNDICATE 2014 REVENUE: $163 MILLION
of hybrid and electric cars, founded 2014 REVENUE: $12.2 MILLION GROWTH: 49.3%
Panjo with two partners in 2013. It’s GROWTH: 72.5% Home-visit network: 21st-century house calls.
Social trends as tangible designs: tweet-shirts!
an online and mobile marketplace CONTEXTMEDIA
SHOPTIQUES 2014 REVENUE: $30 MILLION
for car nuts, sports fanatics and other 2014 REVENUE: $3 MILLION GROWTH: 55.4%
niche communities. Users can snap GROWTH: 211% Gives patients clear health care information.
and upload a photo of an item they Boutique fashions brought to your browser. EVOLENT HEALTH
THIERRY DOSOGNE / GETTY IMAGES (RIGHT)
want to sell. Panjo sorts the photos THREDUP 2014 REVENUE: $100 MILLION
into preexisting categories on the 2014 REVENUE: $19 MILLION GROWTH: 128.9%
GROWTH: 111.8% Helps hospitals adapt to getting paid based on
site, and buyers can browse and make
Vintage-, secondhand-clothing marketplace. results, not pure fee-for-service.
purchases through PayPal. Offerings
YAPSTONE MODERNIZING MEDICINE
on the site appeal to groups from fly 2014 REVENUE: $120 MILLION 2014 REVENUE: $30 MILLION
fishermen to Porsche enthusiasts. GROWTH: 20.8% GROWTH: 47.6%
“We’re a community of communities,” Secure online payment service for unusual Digitizes medical records and streamlines
says Billmyer. transactions: vacation rentals and the like. patient-care history for easier retrieval.

THE NEXT BILLION-DOLLAR IDEAS
The Sony Effect Empowering

DON’T WANT YOUR PRECIOUS PROPRIETARY BUSINESS E-MAILS
HACKED BY KIM JONG-UN? SEEK SUCCOR FROM THESE FIVE, AND Underserved
YOU (AND YOUR DATA) CAN FINALLY SLEEP BETTER AT NIGHT.
Communities
CODE42
2014 REVENUE: $65 MILLION THEIR RESIDENTS MIGHT HAVE
GROWTH: 35.7%
Secure access and continuous data protection. LESS DISCRETIONARY INCOME TO
CROWDSTRIKE
SPEND. BUT OPPORTUNITIES ARE
2014 REVENUE: $13.8 MILLION THERE FOR INNOVATORS WILLING
GROWTH: 133.8% TO LOOK FOR WHAT’S OFTEN
Protects against your enemies’ targeted attacks.
RIGHT IN FRONT OF THEM.
EMAILAGE CORP.
AVANT CREDIT CORP.
GROWTH: 252.2%
Determines fraud risk of a given e-mail address.
GROWTH: 227.3%
MALWAREBYTES Loans to $25K for those whom banks ignore.
PANGEA REAL ESTATE
GROWTH: 52.6%
Detects and destroys ne’er-do-well bugs.
GROWTH: 29.2%
CROWDSTRIKE: Not only does Crowd- TELESIGN Housing rehab without locals’ displacement.
strike help businesses respond to data PROGRESO FINANCIERO
GROWTH: 45.2%
attacks, says cofounder George Kurtz, 2014 REVENUE: $120 MILLION
Two-step-verify software for added safety.
GROWTH: 39.7%
it helps prevent them, too. “Malware Lends largely to Hispanic communities.
is a digital bullet someone shoots at lets, rather than the shooter.” Crowd-
you,” he says, “but someone is creat- Strike’s cloud system looks for activity
ing the malware and trying to get into that might signal an impending attack,
the company to steal or destroy data. tracks the activity to a source and starts
Everyone was focused on the bul- blocking the attack before it happens.
Reinventing
Hiring
MOVING BEYOND MONSTER
AND LINKEDIN TO FACILITATE
PETER DAZELEY / GETTY IMAGES ; ANDREW OLNEY / GETTY IMAGES; CREDIT: KIM KARPELES / GETTY IMAGES
PANGEA: It buys, renovates and manages

PRECISION SPECIALIZED HIRES
affordable housing in Chicago, India-
FOR INDUSTRIES OF ALL KINDS. HIRED: After spending a decade and a napolis and Baltimore. When the com-
BUSINESS TALENT GROUP
half working in startups Matt Mickie- pany renovates a property, the goal is to
2014 REVENUE: $30 MILLION wicz was frustrated by the inefficiency improve the apartments while keeping
GROWTH: 39.7% of the recruiting process. That’s the rents low enough—the average is $700 a
Links businesses with top-tier freelancers. problem that Hired, a website designed month for 750 square feet—that the cur-
COLLECTIVE BIAS to connect tech and startup profession- rent residents can stay in their homes.
als with prospective employers, seeks And of course the company also wants
GROWTH: 47.7%
Puts independent bloggers at the service of to solve. On Hired.com, prospective to make a profit. How? Renter retention
companies in need of marketing campaigns. employees upload resumes and create is key. “You can’t underestimate how
CONTENTLY profiles, and the site holds a one-week profitable it is to keep someone happy,”
2014 REVENUE: $7.5 MILLION “auction” that allows some 1,600 em- says cofounder Steve Joung. “The
GROWTH: 64%
ployers—all vetted and funded—to bid cost of a tenant moving out is between
Brands looking for lucid content marketing
will find high-quality writers here. on the employees, who then decide $2,000 and $3,000.” Affordable housing
HIRED
where they want to interview. When is a big market: Joung estimates more
2014 REVENUE: $9.4 MILLION users accept jobs Hired sends them a than half of Greater Chicago’s 9.5 mil-
GROWTH: 111% gift box, a $2,000 bonus and a bottle of lion people make less than $50,000
Eager tech workers, say hi to tech companies.
Dom Pérignon. a year.

A provocateur
says that passive
investing has
become
too much
of a fad.
BY WILLIAM BALDWIN
IS VANGUARD TO
PHOTOGRAPHED BY
MATT FURMAN FOR FORBES

John Bogle, patron
saint of passive
investing, and James
Grant (opposite), with
a contrary view.
OO SUCCESSFUL?

BEST MUTUAL FUNDS
I
t’s a glorious time to be in the business of selling ally. That’s a smart move, Bogle says, and no less smart just
index funds, those robotically assembled portfolios because a lot of other people have come to the same wisdom.
that replicate a stock or bond market. Active manag- Grant, 68, the author of a half-dozen history books,
ers are having a hard time beating the indexes and a displays a long memory for past manias and panics as he
harder time persuading savers to let them try. Van- delivers tips on what obscure stocks to buy and lectures on
guard Group, the leading operator of index funds, is what bonds not to buy. He interlaces the analysis with acerbic
slurping up 57% of the dollars going into the fund industry. commentary. Typical: “[There is] a rare burst of soul-search-
A victory for Vanguard and the man who built it, John C. ing on Wall Street (nothing has turned up yet).”
Bogle. But … is it possible that indexing is being overdone? Groping for a historical analogue to the popularity of in-
That provocative question is asked by James Grant in dexing, he asks, “Is John Bogle today’s Peter Lynch?” Lynch
the pages of his small but influential investment newslet- was the face of growth investing during a 1980s heyday for
ter, Grant’s Interest Rate Observer. Investing theories run in that category. After a swarm of retail investors discovered the
cycles, he argues. A success becomes a fad and a fad becomes Magellan Fund (and Lynch quit running it), the fund’s daz-
a failure. Smart people bet against fads. zling returns wilted.
In 1972 investors overdid their buying of the Nifty Fifty, a Grant’s instinct is to bet against anything popular. “I may
group of glamorous companies, like Avon and Polaroid, that not be a hot investor, but I’m a bloody-minded contrarian,”
would supposedly grow forever. A decade later they overdid he says. In 2006, two years before the collapse of Lehman, he
the flight from Treasury bonds, passing up a chance to lock in urged his mostly professional-investor readers to get out of
double-digit yields. In 1999 they overdid Internet stocks. mortgage-backed bonds and the collateralized debt obliga-
Now, says Grant, the masses may be taking their love tions tied to them. In late 2008 he went even more against
affair with passive investing too far. They are thereby cre- the grain, favoring a move back into those vilified securities.
ating opportunities for active managers to find mispriced Contrarianism doesn’t always work. A year ago Grant was
securities, beat the market and make both themselves and bullish on Gazprom, Putin’s oil company.
their clients rich. Once Vanguard commands a share of new fund dollars
Balderdash, answers Bogle, who remains, 40 years after resembling the share of car sales once held by the doomed
Vanguard’s founding, the world’s most passionate crusader General Motors, then a contrarian just has to bet against it.
for passive investing. Indexed funds, he says, can be kept up Still, translating the popularity of Vanguard’s index funds into
with minute portfolio adjustments, so they reduce not just a theory of which stocks are overbought is not a simple mat-
management fees but the drag of bid/ask spreads, trading ter. Grant suggests that the successor to the Nifty Fifty of yore
commissions and taxes. is the Nifty Five Hundred, the big companies in Standard &
In an article published last year in the Financial Analysts Poor’s best-known index.
Journal, Bogle calculates that the average investor in an active That’s plausible. Last year the S&P 500 beat out the major-
fund loses 2.3% of assets annually to fees and costs. Make that ity of actively managed funds. Naive investors buy yesterday’s
3% if the customer is paying taxes on the account. Anybody winners. We can presume that such people are, at the mo-
can duck those costs with an index fund costing 0.1% annu- ment, too avid in their purchases of S&P 500 index funds.
THE BEST ETFS FOR INVESTORS

These are the cheapest broadly diversified exchange-traded funds in their categories. The cost represents the cumulative effect of
expense ratios, bid/ask trading spreads and the cost offset (sometimes very large) from securities lending fees. It assumes a $10,000
investment held for a decade.
ASSETS TEN-YEAR ASSETS TEN-YEAR

($BIL) COST ($BIL) COST
LARGE-COMPANY STOCKS INTERNATIONAL STOCKS

SCHB SCHWAB US BROAD MARKET $4.7 $48 VEA VANGUARD FTSE DEVELOPED MARKETS $23.9 $82
VTI VANGUARD TOTAL STOCK MARKET 50.6 57 VXUS VANGUARD TOTAL INTERNATIONAL STOCK 3.4 120
SCHX SCHWAB US LARGE-CAP 3.8 65 SCHF SCHWAB INTERNATIONAL EQUITY 2.8 126
SMALLER-COMPANY STOCKS TAXABLE BONDS

IWM ISHARES RUSSELL 2000 27.9 -82 SCHZ SCHWAB US AGGREGATE BOND 1.3 94
SCHA SCHWAB US SMALL-CAP 2.3 -35 AGG ISHARES CORE US AGGREGATE BOND 23.9 131
IJR ISHARES CORE S&P SMALL-CAP 14.5 -19 BND VANGUARD TOTAL BOND MARKET 26.8 132
SOURCES: MORNINGSTAR; BLOOMBERG; FORBES; FUND DISTRIBUTORS.

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BEST MUTUAL FUNDS
But is it fair to blame that mistake on the concept of in- Some are privately held, like Fidelity. (Wellington Manage-
dexing? Passive funds are no longer limited to the S&P 500. ment went private not long after the splitup with Vanguard.)
Today Vanguard can sell you a fund that covers the whole Some are publicly traded (BlackRock), and some are subsid-
stock market, with 3,300 smaller companies added to the 500 iaries of insurers (Pimco).
big ones. Or, if you are sure that the 500 are getting too nifty, Vanguard’s customers don’t have any say in the operation,
you could buy everything else but; there are separate index but they enjoy the net income (after an undisclosed addition
funds for medium-size and small companies. to reserves) in the form of fee cuts. The headquarters and
What will save your retirement? An active fund like Ma- most of the 14,200 employees have moved one town over to
gellan? A broad index fund? A narrow one? Malvern, but Vanguard retains Valley Forge, with its revolu-
Consider yourself lucky that the latter two choices are tionary flavor, in its mailing address.
even available. Indexing for the retail investor came about The upsetting of the for-profit fund model was the first
only because John Bogle was fired from his first big job. part of Bogle’s revolution. The other came a year later, when
He had risen to the top of a publicly traded fund manage- he did away with stock pickers altogether for a new fund. It
ment company that ran the Wellington Fund, a conservative would own shares in S&P 500 companies in proportion to the
blend of stocks and bonds. He made a big mistake. Chasing companies’ market values.
after performance, he merged the management company The Vanguard Index 500 was a flop at first. The world had
with the operator of a fund buying speculative stocks. When hundreds of stock funds to pick from, each offering the tanta-
the hot stocks went cold in the 1973–74 crash, the directors of lizing possibility of an outsize return. Who wanted to sign up
Wellington Management Co. voted to throw him out. for guaranteed mediocrity?
At 44, with six children to feed, Bogle was not just out of a But Bogle kept making the pitch for indexing, in
job but sick. His weak heart had begun to send him on what speeches, books, articles and television appearances.
was to be a string of a dozen trips to the hospital. A doctor There is no more fervent a believer than a convert, and
had told him he had only a few years left. He did not take the this preacher was determined to repent for his sin of invit-
doctor’s advice to retire to the seaside. ing those go-go fund managers into Wellington.
Salvation lay in the curious legal structure of investment Indexing is built on the idea of getting a free ride on the
funds. By law, a fund must have its own board of directors, costly stock research done by others. Let the bulls and bears
there to look after the interests of fund shareholders. Most of fight their battle over Netflix. When they are done, the stock
the time these supposedly independent boards apply a rubber trades at $319. You are not assured that you will make money
stamp to the fee schedules and other proposals coming from
the fund management company. But once in a blue moon a
fund board shows its spine.
The day after losing a showdown in the boardroom of MONEY MANAGERS
Wellington Management, Bogle went to the board overseeing These are among the many publicly traded corporations and
partnerships that run portfolios. Italicized firms have gotten bullish
the Wellington funds with a radical proposal. He wanted the
mentions in Grant’s Interest Rate Observer.
directors to hand over fund management to a new company EV/
that would be mutually owned by the funds’ shareholders. TICKER COMPANY PRICE P/E ASSETS1
Bogle didn’t quite get that. But after seven months of ne-
gotiation, he got something: He would be permitted to create AMG AFFILIATED MANAGERS GROUP $202 26 2.2%
APO APOLLO GLOBAL MANAGEMENT2 23 16 NM3
a new entity, called Vanguard, that would handle the back-
BLK BLACKROCK 347 18 1.8
office work—accounting, purchases, redemptions and so on—
BX BLACKSTONE GROUP 34 13 NM3
for the Wellington funds. Wellington Management would
EV EATON VANCE CORP. 39 16 1.7
retain the glamorous work of picking stocks.
FII FEDERATED INVESTORS 4 32 22 1.0
It looked at first as if Vanguard was nothing but a low-level
FNGN FINANCIAL ENGINES 35 52 1.5
paperwork supplier to Wellington. But Bogle had turned the
FIG FORTRESS INVESTMENT GROUP 2 8 5 6.5
tables. Since he controlled the funds, Wellington was the sub- IVZ INVESCO 37 16 2.7
contractor. He used that fact to beat Wellington down on the JNS JANUS CAPITAL GROUP 17 22 1.8
pricing for its stock selection. Bogle boasts that over the years KKR KKR1 23 14 NM3
Vanguard has extracted 104 fee reductions on funds run by TROW T. ROWE PRICE GROUP 83 19 2.7
Wellington and other external managers. WDR WADDELL & REED FINANCIAL 2 45 12 2.5
Vanguard opened its doors in Valley Forge, Pa. in 1975. It WETF WISDOMTREE INVESTMENTS 15 30 4.7
had 28 employees and, at the end of the year, $1.8 billion in
1
ENTERPRISE VALUE TO ASSETS UNDER MANAGEMENT. 2CLASS A SHARES. 3NOT
fund assets. As a mutual institution it was, and is, an odd duck MEANINGFUL; COMPANY PRIMARILY DOES PRIVATE EQUITY. 4CLASS B SHARES.
in the fund industry. Competitors are for-profit ventures. SOURCE: FACTSET.

A STAMPEDE OF BARGAIN HUNTERS ...ARE ENJOYING ECONOMIES OF SCALE
FUND ASSETS AT VANGUARD HAVE CLIMBED 400-FOLD BEYOND VANGUARD’S EXPENSE BURDEN TODAY IS A FIFTH OF THE LEVEL
INFLATION SINCE JOHN BOGLE’S FIRST YEAR. IT INHERITED IN 1974.
4000 0.8
0.7
1000 ASSETS OF VANGUARD FUNDS1
0.6 AVERAGE EXPENSE RATIO1
0.5
100 0.4
0.3
0.2
10 0.1
4 0
1975 1980 1985 1990 1995 2000 2005 2010 2014 1974 1980 1985 1990 1995 2000 2005 2010 2013
1 1
U.S.-DOMICILED FUNDS, IN BILLIONS OF CONSTANT 2014 DOLLARS; INCLUDES ETF SHARE CLASS. ASSET-WEIGHTED AVERAGE; 1974 NUMBER IS FOR WELLINGTON FUNDS PRE-VANGUARD.
SOURCES: VANGUARD GROUP; BUREAU OF LABOR STATISTICS. SOURCES: WIESENBERGER; LIPPER; VANGUARD.
if you buy it. You can, however, be reasonably confident that Bogle’s eyes, wicked. The people running the show are at once
$319 is a fair price for this lottery ticket on the film business. obliged to maximize fees for the benefit of the management
It is easy for an actively managed fund to beat the market company shareholders and to minimize them to help the fund
in any one year; luck, after all, plays a large role. Over a period shareholders. “You cannot serve two masters,” he says.
of decades, though, the law of averages swamps luck. Costs, With money cascading into Vanguard, Bogle seems to be
meanwhile, do a lot of damage to whatever value managers vindicated. But there are grounds for debate. As business
provide with their skill. drifts away from actively managed funds, Grant theorizes, the
Look at what happened to big-company U.S. stock funds money to pay analysts for the hard work of reading balance
over the past 20 years. Morningstar shows 1,105 choices avail- sheets and evaluating business methods will dry up. Stock
able as of Jan. 1, 1995 (counting each share class separately). markets will become less efficient. Netflix’s price will veer
From this crowd 491 survive, and 151 of the survivors have away from fair value.
beaten the S&P index fund. This does not mean the pickings will be easy for active
Your chance of hitting a win with an active fund over a investors. In the aggregate, they are destined to earn (before
very short period might be 50-50. Over two decades it’s a costs) the market’s average return. The passive players are
1-in-7 long shot. assured of getting the same return (before their much smaller
In time Bogle attracted a cultlike following (the fanatics costs). The identity of the two return numbers holds, no mat-
have a group called Bogleheads, with an online forum and ter how few active investors are left. “That is not a theory.
a conference). The indexing concept has been extended, by That is a mathematical fact,” says Gus Sauter, retired chief
Vanguard and others, to stock sectors and bonds and foreign investment officer at Vanguard.
securities. Vanguard has 20 million customers. Its fund as- Less efficiency does, however, imply that skill will play a
sets are $3 trillion, including a small portion held abroad. larger role, and luck a smaller one, in what goes on among
Two in three of those dollars are indexed. Vanguard’s cheap investors who don’t index. You might have a better chance
funds are saving savers $18 billion a year, Bogle figures, just of finding money managers who capture excess returns. Of
on expense ratios. For the individual saver, cutting costs course, for them to succeed a pool of victims (individual in-
means a lot—potentially hundreds of thousands of dollars at vestors?) must end up with subpar returns.
retirement for someone with a well-funded 401(k). Bogle versus Grant: The two men continue their debate, in
His heart failing, Bogle left the job running Vanguard in person, as a part of Grant’s spring conference for hedge fund
1996 and started a long wait in a Philadelphia hospital for a operators and others with large expense accounts (tickets:
transplant. He got one 19 years ago. “The donor was 26, so $2,150). You can place a bet on each.
I am 45,” he says, with rational exuberance, at age 85. The Put 95% of your money in the cheapest index funds you
preaching continues, as energetic as ever. can find (see “The Best ETFs for Investors,” p. 94). Put 5% in
And as dogmatic. A recent variation on indexing now the shares of money managers, such as the ones on page 96.
being sold (at higher fees, and not by Vanguard) has compa- You don’t have to believe they are doing God’s work to want
nies weighted not by market value but by sales, book value or to own them; you just have to believe that their customers
earnings. Bogle condemns this as heretical. will not go away. Wicked or not, the for-profit money man-
Letting publicly traded corporations operate funds is, in agement business is quite profitable. F

Igor Sechin’s petroleum power play has
left Rosneft drowning in debt.

THE FOUR
HORSEMEN OF
RUSSIA’S
ECONOMIC
APOCALYPSE
Not all Russians are reeling from the effects
of plummeting oil, rampant inflation and
Vladimir Putin’s grand strategy in Ukraine.
BY NATHAN VARDI
IN MARCH 2013 ing: Frankfurt, Germany, continental Europe’s finan-

a group of bank- cial capital. Shareholder representatives insisted that
ers and lawyers they be able to immediately verify, in real time, the
gathered in the transfer of cash and stock certificates into an escrow
Frankfurt offices of account controlled by the billionaires, says a person
Deutsche Bank to familiar with the events. Only after a screenshot was
monitor the trans- taken showing the new balance of $27,778,900,132.16
fer of nearly $28 bil- was the transaction considered final.
lion in U.S. currency Putin was ecstatic. “This is a good big deal, which
from an account controlled by Russia’s state-owned is important not only for Russia’s energy sector but
oil giant, Rosneft, to one controlled by four billion- for the entire Russian economy,” he said as the deal
aire Russian tycoons: Mikhail Fridman, Viktor Vek- was being announced. Rosneft’s $55 billion TNK-
selberg, Len Blavatnik and German Khan. BP purchase transformed it into the world’s biggest
The closing of the sale of TNK-BP, Russia’s third- publicly traded oil company and cemented Sechin’s
biggest oil company, 50% owned by British Petro- position as a global energy czar, with Putin presum-
leum and 50% by the Russian billionaires, marked ably pulling the strings.
MERIDITH KOHUT / BLOOMBERG (L) ; MAXIM SHIPENKOV / AP
another move by Vladimir Putin to centralize power. Sechin and Putin’s mega-energy merger may
Rosneft Chief Executive Igor Sechin, often de- have seemed like a “good” strategic deal for Russia,
scribed as Russia’s second-most-powerful man be- but for Fridman, Vekselberg, Blavatnik and Khan,
hind Putin and sometimes called Darth Vader, was whose combined net worth now hovers around $55
the central figure behind the deal. He sometimes billion, cashing out of Russia’s most oil-dependent
seemed to want to remind the oligarchs of their rank company in the spring of 2013, with West Texas
by tormenting them during the negotiations, arriv- Crude selling at $92 per barrel and Western banks
ing late to their Moscow meetings. pumping loans into Russia, may go down as the most
As if it were being played out in a James Bond brilliantly timed profit-taking of the decade. It also
thriller, a neutral location was selected for the clos- may have set off a chain of events in global financial

ROSNEFT
markets that has contributed to the collapse was suddenly in a pickle. It needed to meet
of Russia’s currency, which plummeted 40% payments related to the bridge loans, but
against the dollar in 2014. Putin’s state has by then Putin’s invasion of Crimea brought
been thrown into recession. on crippling economic sanctions, and Saudi
Arabia’s decision to take on U.S. shale pro-
IN 2003 British Petroleum started working ducers and discipline OPEC members like
with Fridman, his other billionaire partners Iran and other producers like Russia had
and their TNK oil company, creating a 50-50 pushed oil prices into a free fall. Sechin
joint venture called TNK-BP. It would reach and Rosneft were effectively cut off from
$60 billion in annual revenues and pay its Western banks, and there was no easy way
owners dividends in the tens of billions over for Sechin to roll over $7 billion of foreign
a decade. In fact the cash being generated currency-denominated deal loans that were
by TNK-BP helped make the four Russians coming due in December. So Sechin got
some of the richest men in the world and backing from Russia’s central bank and or-
kept BP secure as an oil power, accounting chestrated a bond sale to raise rubles.
for 27% of its reserves. Rosneft placed $10.8 billion worth of
But it was a rocky partnership. The Rus- ruble-denominated bonds in December, car-
sian billionaires felt that BP was treating rying rates below yields on similarly dated
TNK-BP as a foreign subsidiary, pursuing Russian government bonds. It was a myste-
capital expenditures that would build re- rious transaction with almost no disclosures
serves as opposed to other things like paying to date. The Russian central bank said it
extra dividends. At the same time, BP’s staff would accept the bonds as collateral from
in Russia became embroiled in police actions, Russian banks seeking to borrow at prefer-
and its then Russia chief, Robert Dudley, left ential rates, essentially providing commer-
the country at one point and ran TNK-BP cial banks a window of liquidity. No bond
from a secret outpost after he and other BP buyers were ever disclosed, and it’s not yet
employees could not renew their visas. Dud- clear how much money was raised. Rosneft
ley is currently BP’s chief executive officer. has yet to make significant disclosures, and
After several other setbacks, including now Sechin has taken the position that “the
losing a deal to drill in the Kara Sea to Exxon ruble bond option was not exercised.”
MICHAEL BUCKNER / GETTY IMAGES; ALEXANDER ZEMLIANICHENKO / AP; ANDREY RUDAKOV / BLOOMBERG; CHRIS RATCLIFFE / BLOOMBERG
Mobil in 2011, BP entered into a transac- Still the murky bond issue took market
tion with Sechin to sell its TNK-BP stake to players by surprise, causing speculation
Rosneft. In return BP got $12.5 billion and a that Rosneft would sell the rubles it had just
19.75% stake in Rosneft, which was impor- raised in the open market to buy up U.S. dol-
tant to BP because the structure allowed lars to pay back its debt. The ruble plunged
BP to continue including some of Rosneft’s to record lows in response, even while oil
reserves on BP’s books. prices appeared to be firming up.
For BP’s billionaire partners the best “There was suspicion that those rubles
option was to sell their entire 50% stake to could go to the foreign exchange market,”
Sechin, a close Putin ally and former Russian says Sergey Romanchuk, head of forex at
deputy prime minister eager to build a mas- Metallinvestbank in Moscow. “This trade
sive national oil company. A cash buyout was was like a trigger because people were
key because the Russian billionaires did not Cash czars Len Blavatnik, Mikhail scared that this would be a new instrument
want to become minority shareholders in a Fridman, German Khan and that would be used for other companies.”
Sechin-controlled Rosneft. Likewise Sechin Viktor Vekselberg put their trust Putin’s critics called the Rosneft bond issue
didn’t want to risk diluting control through in the U.S. dollar. a bailout. Sechin described the attack as a
the issuance of more shares to this shrewd “provocation.” Rosneft went on record stating
investor quartet. Sechin’s big problem was that he didn’t ac- that not a single ruble raised in the bond issue would be used to
tually have the money to buy them out. So he borrowed about buy foreign currencies. Its revenues mostly come from exports
$40 billion in cash to close the deal, partly by using short- denominated in foreign currencies, and in a statement Rosneft
term foreign-denominated bridge loans. Banks from all over says it “generates enough cash flow in foreign currencies in
the world participated in the financings, including JPMorgan order to meet its loan repayment obligations.” Where were the
Chase, Barclays, BNP Paribas and Unicredit. rubles going? Rosneft would only say the proceeds would be
But little more than a year later, in the fall of 2014, Rosneft used for “financing its project in the Russian Federation.”

RUBLE ROILING
Sechin & Putin’s economic nightmare began not long after they
made four savvy billionaires very rich.
03/21/13=100 CRUDE OIL BRENT ($/BBL)

Dec. 22,
2014 Rosneft
100
makes
$7 billion
TNK-BP debt
90 Mar. 18, 2014 Russia payment.
reclaims Crimea.
RUB/USD Dec. 23,
80 Apr. 28, 2014 U.S. government
targets Igor Sechin with sanctions. 2014 Putin
tells Russian
Mar. 21, 2013 July 16, 2014 U.S. government exporters to
Rosneft targets Rosneft with sanctions. sell foreign
70 closes its
currency.
$55 billion Sept. 12, 2014 EU targets Rosneft
purchase of with sanctions.
TNK-BP.
60 Oct. 9, 2014 Saudi Arabian oil officials
indicate they will not cut production.
Nov. 27, 2014 OPEC decides not to
cut oil production.
50 Dec. 11, 2014 Rosneft places $10.8 billion of

ruble-denominated bonds. Bank of Russia
includes Rosneft bonds on list of bonds it
will accept for collateral.
Dec. 15, 2014 Rosneft issues statements saying it
won’t convert any rubles into foreign currency.
40
2013 2014 2015
SOURCE: FACTSET RESEARCH SYSTEMS.
Few dispute Rosneft’s role in roiling the already skittish Fridman, 50, Russia’s third-richest man, collected $5.1
global market for rubles. At 19% of Russia’s $2 trillion GDP, oil billion from the TNK-BP deal. His college buddy Khan, 53,
is Russia’s biggest cash cow, and oil exports are heavily taxed. got $3.3 billion. The duo set up a Luxembourg company, Let-
At $100 an exported barrel, some $70 would go to the govern- terOne, with the TNK-BP cash and are trying to buy an oil
ment. At $50 a barrel, about $22. Rosneft presumably hoarded and gas unit of a German utility for $6 billion. Says a spokes-
foreign currency this fall to make its debt payments. Industry person, “We are committed to reinvesting a significant por-
analysts assert that it would have likely withheld dollars from tion of the proceeds in Russia and hope to identify attractive
the currency market that Rosneft would normally have used opportunities in the near future.”
to purchase rubles to meet its tax obligations. Rosneft also has Ukraine-born Blavatnik, a U.S. citizen since 1984 and worth
a big cap-ex program in Russia funded by rubles. “They were $18 billion, reaped $7 billion from the TNK-BP sale. His biggest
using the proceeds of the bond issue to cover their ruble costs,” assets: a stake in Houston chemicals producer LyondellBasell
says Kirill Tachennikov, an analyst at BCS Financial. and Warner Music. In 2014 he celebrated his Rosneft triumph
Rosneft repaid its $7 billion loan in late December. A few by purchasing Damien Hirst’s gilded sculpture of a woolly
days later the Russian government directed Russia’s big ex- mammoth for $14 million. Blavatnik declined to comment.
porters to support the ruble in currency markets. Rosneft may Vekselberg, 57, known for his art collection, including a
have complied, but with about $20 billion of debt coming due new museum in St. Petersburg featuring his Fabergé eggs,
in 2015 (mostly in dollars and euros) and capital expenditure is now Russia’s second richest, worth $14 billion. He reaped
plans of $20 billion, Rosneft has a $40 billion headache that $7 billion from the deal and used some of it to buy into
worsens with every tick down in the price of oil. According to Schmolz+Bickenbach, a Swiss steel company. “Most of the
its financial statements, Rosneft has $20 billion or so in cash and money Renova [Vekselberg] received from the deal was in-
is on record asking the Russian government to tap its National vested in Russia,” insists spokesperson Andrey Shtorkh.
Wellbeing Fund for assistance. Sechin wants help from Putin, Putin is standing by his man Sechin, despite the 50% de-
but another bond bailout would be disastrous for the ruble. cline (in U.S. dollars) in Rosneft’s stock price during 2014. He
is a “good manager,” says Putin. BP, which still owns 20% of
RUSSIA’S ECONOMY MAY BE SINKING into crisis, but Rosneft, is bracing itself for a fourth-quarter earnings hit and
flush billionaires Fridman, Khan, Vekselberg and Blavatnik may be forced to write down its Rosneft equity.
have shown few signs of rushing to Mother Russia’s aid with “The TNK-BP deal has been an expensive decision [for
significant investments or capital expenditures—despite Russia],” says Sergei Guriev, a Russian economist who fled to
pleas from Putin. France in 2013. “TNK’s owners did a very good deal.” F

DAUGHTER
KNOWS BEST
Every family goes through messy moments.
Few do so with billions on the line.
The saga surrounding 84 Lumber stars
a reformed party girl, an unreformed “prick”—
and one of the great turnarounds of the decade.
BY DAN ALEXANDER
PHOTOGRAPHS BY LUKE COPPING FOR FORBES

A brush with bankruptcy
forced Maggie Magerko to
learn when to turn away
from her father, Joe Hardy.
IN MARCH 2009 Maggie Magerko sat in her office,

ignoring her dad’s phone calls. When she finally picked
up, things went downhill fast: He told her she was
thinking irrationally. She let out a stream of expletives
and hung up.
The stakes surrounding this father-daughter clash
could hardly have been bigger. The housing market was
collapsing, taking construction down with it. And that
meant 84 Lumber, the housing supply chain, was facing
a crisis. Founder Joe Hardy had turned the company
over to his daughter Maggie in 1992, and by 2006 she
was worth $2 billion. Now he was telling her, amid the
two-way invective, to file for bankruptcy protection. So
were her friends, colleagues and advisors.
Magerko decided to buck them all and bet ev-
erything she had, from her jewelry collection to her
personal checking account, on her ability to turn 84
Lumber around.
“It was such a dark, dark, dark time,” she says, wear-
ing a pullover windbreaker and her signature diamond
earrings in a drab boardroom at 84’s rural headquar-
ters in Eighty Four, Pa. (the business is named after
the town, which changed its name from Smithville in
1884). If 84 Lumber’s revenue had teetered the wrong
way by $500,000 during the worst of it, a six-month
stretch from late 2008 through May 2009, she would
have been forced into not just corporate but personal
bankruptcy. On paper she was basically broke. Six years

84 LUMBER
later she’s back, with a smarter, leaner 84 Lumber and a net
worth estimated at $1.2 billion.
A big part of her comeback is tied to the return of the
home building market, which is still below historic highs
but up 50% since the depths of the recession. But it has just
as much to do with her transformation from doting daugh-
ter to tough manager. The brush with bankruptcy gave her
the courage to finally go against her larger-than-life father,
Joe Hardy, now 92, and find her own way. He had been a
masterful entrepreneur who sold vegetables in college at the
University of Pittsburgh and opened his first lumberyard
in 1956, but he’d gotten sloppy in the twilight of his career.
While reclining on his private jet, he would demand to see a
map of the country and tell everyone, in his characteristically
loud voice, that he wanted to pick 84’s next store location.
“He’d have a couple of martinis and go like this,” says Mag-
gie, 49, closing her eyes and twirling her index finger over
an imaginary map, before planting it down in Who-Knows-
Where, USA. “That’s how strategic we were. I swear to God.”
Worse than poor site selection, both father and daughter
spent indiscriminately, opening stores too quickly, pouring
profits into a high-end resort and eventually burying the
lumber company in massive debt that they could pay off in
good times but nearly doomed them when things turned for
the worse.
To stave off disaster, Magerko shuttered half of the 500
stores and laid off 6,000 of 9,600 employees. She leveraged
everything she possibly could and sold off company real es-
tate to help pay down the debt. To boost sales she bet on new
lines of business, creating a division of contractors who install
doors, paint houses and lay roofing, and investing in special- “If a psychiatrist were to interview
ized saws that chop up boards in seconds, never missing their
lines by more than one-sixteenth of an inch. The company, our family and ask what are the
which does business in 30 states and competes more with
building suppliers like ProBuild than retailers like Home underlying demons, it would
Depot, still has a long way to reach its prerecession sales of
$3.8 billion. But sales were up 27% to $2.1 billion in 2013, the be that my father always put 84
last year on the books, and were expected to increase about
10% to $2.3 billion in 2014. Operating profits swung from a before anyone, including his kids.”
loss of $42 million in 2009 to a profit of $101 million in 2013.
“It has been a phenomenal turnaround,” says Larry Forte, could cover a 10-mile radius, Hardy would drive 20 miles
senior vice president of Wells Fargo Capital Finance, one of away from the most profitable stores and start hunting for
84’s biggest lenders since the crisis. “The company certainly new locations.
was forced to take a real deep look into itself and how its The company’s early strategy was simple and effective.
practices could get better.” Hardy charged low prices and kept costs down, refusing to
install air-conditioning or heat. He never took out any debt to
MAGERKO BEGAN HER CAREER AT 84 LUMBER finance the company’s growth. By the time Magerko was 16,
when she was 5 years old and later skipped school to ride in 1981, Hardy had expanded to 339 stores, 283 of which had
shotgun in her dad’s sedan, as he taught her the only subject opened within the past ten years, and was hauling in rev-
that mattered to him: business. Bouncing along on the road, enues of $478 million.
she scoured financial documents when in elementary school, School didn’t come as naturally. Magerko inherited both
searching for his best-performing stores. If one location was dyslexia and a distaste for the classroom from her father. “My
particularly profitable, she would tell her dad, who would homeroom was the principal’s office,” she says. She made it
then consider expanding near there. Figuring each store to West Virginia University, though not to many classes there.

Magerko has a different version of the story: Joe Hardy Jr.
had a big ego, which clashed with his father’s bigger ego, and
Paul was too nice to run a lumber business with his dad, a
self-described “first-class prick,” standing over his shoulder.
Hardy says he fired both of them and bought back their stock
for a price he claims he can’t remember. “It was generous,” he
says. “I know that, because they both own about four homes.”
Through a company spokesman, both sons declined inter-
view requests.
In 1990 Hardy wasn’t on speaking terms with either
son. Magerko’s two older sisters were even less inter-
ested in the business. With no one stepping up, he called
a meeting with the lawyers and dragged Magerko into the
boardroom, as he had done since she was a little girl. In
the middle of the meeting cigar-chomping Hardy burst
out crying at the prospect of handing his company over to
outsiders. With the bankers salivating over a potential sale,
Magerko raised her hand. “Hey, give me a chance,” she
said. “What do you have to lose?”
Financially, he actually had hundreds of millions at
stake. But more than the money, Hardy wanted his family
to keep control of the company he’d built from scratch,
and he says the tears were all part of an elaborate plan to
goad his daughter into claiming the business. “That was
Father and daughter still
sort of my last shot to con her a little bit,” he says. “I don’t
work side by side, but think she knew what was happening to her, but it was
Maggie owns the business ‘You’re it, babe. You’re it.’”
and calls the shots. Hardy began transferring virtually all of his ownership in
the company to Magerko that year, leaving next to nothing
She installed a hot tub in her driveway and partied for two for his other children. “You can’t have nonoperating share-
semesters before dropping out in December 1985. holders—oh, my God, no!” he says, his big, gravelly voice
Hardy started showing his reckless side around the same rising. “You have to have your heart and your soul in that
time. Two years after his daughter dropped out, the old man, damn thing.”
once known for his frugality, went out searching for a small The decision tore apart the family. Hardy and his wife
streamside cabin. Instead, he came home with a $3 million divorced. Magerko admits the pain still lingers, though she
receipt for a hunting lodge named Nemacolin in the small talks lovingly of her siblings today. “If a psychiatrist or a psy-
town of Farmington, Pa. choanalyst were to interview our family and ask what are the
That was chump change compared to what he would underlying demons,” she says, “it would probably be that my
ultimately spend on the place. He started pouring money father has always put 84 before anyone—including his wife,
into the lodge, expanding it into a full-service resort with a including his kids, including anyone. Because it’s his love—it’s
conference center, wine cellar, driving range and spa. He put his child.”
his party-girl daughter in charge of running the spa while
another daughter’s husband ran the place. Magerko gave the 84 LUMBER MAY HAVE BEEN HIS FAVORITE CHILD,
spa employees a raise to entice all of the best workers at the but unquestionably Magerko was daddy’s girl. By 1992, when
resort to work for her, ticking off her brother-in-law. They she was 26, Magerko became the company president, set to
got into a spat over her stealing his staff. Magerko told her receive more than 90% of the shares in installments over the
father it was she or her brother-in-law. She won—and got to next six years. Hardy had organized 84 Lumber as an S cor-
run the whole show. poration, with all profits going directly to shareholders.
By that time the family’s succession plan was unravel- Even though she owns 96% today and runs the company,
ing. Hardy had given chunks of 84 stock to his two eldest she still won’t refer to herself as CEO in deference to her
sons, Joe Jr. and Paul, hoping the equity would entice them father, who still sees himself as the top executive despite
to delve into the company. Instead, as Hardy tells it, his sons’ not having any role in the operations or legal control over
wives realized they were rich and told their husbands that the company. Ever since the transfer Hardy has continued
they didn’t have to work for a domineering father anymore. to weigh in constantly, but he has given his daughter final

84 LUMBER
At age 5 Maggie was
already joining her dad
in the field.
“I called it ‘the heroin effect.’ There was no

limit at Nemacolin. I don’t mean to be bragging.
We just had so much money.”
signoff on everything. “It might be a six-month torture cham- colin, too. Never mind that
ber, but at the end of the day he’ll just say, ‘I’ve conveyed my Pennsylvania law didn’t allow
concerns,’” Magerko says. “I’ve been blessed to have a father tourists to pet wild animals,
that is as rough as a son of a bitch but believed in me.” Hardy built a minizoo and
Problem was she doubted herself for a long time. Trying stocked it with nearly 100
to be just like her father, Magerko screamed f-bombs in meet- species, including bison,
ings and basically governed by committee, taking ideas from zebras, wolves and, of course, lions, which still roam behind
her dad and his friends and dutifully implementing them. chain-link fences at the resort today. They added a collec-
“When I raised my hand at that young age, it wasn’t so tion of vintage airplanes and another of old cars, an eques-
much that I was determined to make 84 a better place—I was trian center, a squash court, a five-star restaurant, a casino,
there to make sure my dad didn’t cry anymore,” she says, a a slab of the Berlin Wall and a pool with a swim-up bar in a
photo of her father hanging on the wall in front of her. “I’ve place where it snows half the year. Rooms range from $199
put a lot of internal stress on myself that he was never aware to $869, depending on the time of week and the season. It
of, to please him.” eked out an operational profit last year but is losing money
That included at times making questionable deals and on a net basis. “I called it ‘the heroin effect,’” Magerko says.
overspending not just on the core business but on the resort “There was no limit at Nemacolin. I don’t mean to be brag-
as well. At the height of the housing boom Magerko had ging. We just had so much money.”
more money than she could have ever imagined. She took The same heedless behavior spilled into the lumber
her dad on a father-daughter spending spree, blowing more business. At her father’s behest Magerko abandoned the
than $600 million on the resort. Some $55 million went into company’s early no-debt policy to buy 22 stores of bankrupt
a renovation that added ski slopes and a pair of golf courses, competitor Payless Cashways in 2001, even though her gut
and another $45 million was spent on art. On a trip to Eu- told her it was risky. On a single day in 2002 she opened 22
rope Hardy fell in love with the Ritz in Paris, so he opened a stores. Four years later Magerko had $425 million in unpaid
replica at Nemacolin in 1997 that cost $65 million. During a customer receivables. A financing arm she added in the
visit to Ohio Hardy noticed a long line to pet a baby lion, so boom years had $318 million in outstanding loans to build-
he figured he should start raising some animals at Nema- ers. “I will tell you, personally, we didn’t know what the

hell we were doing,” Magerko says. “Really had no clue. But launched a business to do all of the little jobs indepen-
everything was going right.” dent contractors usually do. Thanks to fewer delays and
And then suddenly the drug was gone. In April 2006 new- improved cost efficiency, that line now brings in $400
home construction fell 11% from the previous year, a startling million in sales a year.
drop in an industry that had been on a 14-year growth binge. Magerko also bet $5.6 million on technology, in the
Magerko got caught with a mountain of debt and a shrink- form of 16 high-tech saws, which take computerized
ing customer base. In April she had been gearing up for her drawings of houses, map out the wooden supports that
best year yet, projecting a record $5 billion in revenue. In need to go into them and figure out the most efficient
May she scrapped the projections and closed 65 stores. By way to cut up a stack of boards while producing the least
late 2007 new construction was down to half the level of its amount of scrap wood possible. They chop boards faster
prerecession highs. Magerko closed more stores and laid off and more precisely than traditional saws and stamp
more workers in chunks, hoping each one would be the last. markers on them to tell builders where each piece goes
Instead the cuts dragged on for years. in the house. That investment has led to another $128
With a plan to close another 50 stores in November 2010 million boost in annual sales from precisely cut wood.
she canceled the company town hall meetings because she Operating profits were up 48% in 2013.
couldn’t bear to look her employees in the eye. “I couldn’t Now that 84 Lumber is back on its feet, her father is
fake it,” she says. “I couldn’t say with any confidence that I already dreaming big at Nemacolin again, laying out plans
actually knew that they were going to have a job or that 84 for a water park, a new hotel and another château—none of
was going to exist.” which will ever happen because Magerko is finally able to
To keep the business afloat, she took out a $195 million say no. “I won’t approve of it, whether he pays for it or I pay
loan with an 18% interest rate from Cerberus Capital Man- for it,” she says. “He’s the only one who really has the balls
agement, a private equity firm that’s named after the three- to challenge me, and I’m the only one who really has the
headed dog that guards the gates of hell and that is most balls to challenge him.”
famous for owning Chrysler during the peak of the credit One project they both agree on is the construction of a se-
crisis (a stake it ceded to the Treasury Department in return ries of 51 new condos on the property that will go for some-
for a bailout). In a move that no board of directors would where between $600,000 and $1.1 million apiece. It could be
have ever approved at a public company, she took another the resort’s first big moneymaker in years. If it’s not, and if
$30 million loan against the resort, which she owned sepa- Nemacolin can’t make enough money for Magerko to pull cash
rately, as well as her house, jewelry and even her personal out in the next five years, she says she might sell the whole
checking account, to keep paying bills. place. Appraisers say it would be worth only about $125 mil-
The things that made life so great in the boom times—the lion, a fraction of the $600 million-plus she and her dad have
pride of her family business, her close connections with em- put into it. For his part, Hardy is doing his best to make sure a
ployees, the joy of carrying on her father’s legacy—only multi- sale won’t happen. Not far from Magerko’s house and his own
plied her anxiety. She started sleepwalking at night. Sleeping on Nemacolin’s property, he built a tomb for himself. “So that
pills did nothing to help. I can watch over the place,” he says, laughing. “I think I have a
statue with a finger up in the air.” Mag-
“He’s the only one who really has erko’s response: “That didn’t just happen
by accident.”
the balls to challenge me, and I’m the only The heated phone calls between father
and daughter continue today, laced with
one who has the balls to challenge him.” swear words. Stressful and exhausting but
packed with devotion, the father-daughter
Her only comfort came from improving financial met- relationship defines both Magerko and Hardy. She would
rics. As she fired workers and closed stores, her selling, never be what she is without her father. He would have lost
general and administrative expenses—a measure of the his legacy without his daughter.
efficiency of a business—dropped from 18% of sales to 13%. “If people are really honest with themselves, at any age,
She cut the company’s debt from $558 million to $200 mil- if your parents are still living or even maybe not living, you
lion today. Thanks to the new lines of business and fewer always want to kind of please your parents,” she says. “I’ve al-
competitors, sales per single-family housing start—the aver- ways done that. But now, after coming out of those horrifying
age amount of money it generates for each new house under years, I now know who I really need to please is me.”
construction across the country—rose steadily, from $2,224 Hardy is fine with that, even if it means he’ll never get to
in 2005 to $3,468 today. “I could tell by those microtidbits build his second château. “She’s keener than she has ever
that it was slow, but we were coming out of the dead zone.” been,” he says. “I recommend this and this. And she can say,
Month by month she chipped away. In 2009 she ‘Go to hell,’ and that’s okay.” F

FORBES LIFE
CARS
Can Lotus
Blossom
Again?
Having been lapped by its rivals
for decades, the famed British
automaker is on a mission to
regain supercar supremacy.
BY MARK EWING
J
ean-Marc Gales, the newly recruited
CEO of Group Lotus Plc., arrived in
Norfolk, England last May with a sim-
ple but daunting mission: to restore
the once mighty British automaker as
a supercar superpower. dealer in Cannes or Milan, Abu Dhabi—no deal- Fast track: New Lotus
For the past few decades Lotus has been ers where there are people with the money to CEO Jean-Marc Gales
(at the headquarters
seriously stalled while its main rivals—Ferrari, buy our cars.” in Norfolk, England)
Porsche, McLaren—have shot past them in auto He signed up 25 new dealers and by year’s expects the company to
racing, production vehicles, engineering ser- end will have another 50. Voting with their own be profitable by 2016.
vices and profit. The past two years alone Lotus money, dealers have agreed to buy vehicles and
has seen nearly $400 million in losses. spare parts for cash, and self-fund build-out of
The 52-year-old Gales began his career lead- their dealerships, boosting Lotus’ cash flow.
ing Volkswagen fleet sales, followed by a stint Why are dealers willing to put up cash for
managing Mercedes global marketing before he a brand few people beyond sports car enthusi-
claimed the presidency of Peugeot in 2009. An asts recognize or understand? A brand that has
acute technocrat steeped in the hard business of swayed from one financial disaster to another
selling large numbers of vehicles, at midcareer most of its existence? The power of mythology,
Gales has a surprising sense for the entrepre- the promise of new products, a changing regula-
neurial. And apparently a fearless heart. tory landscape and a no-nonsense CEO.
Walking the Lotus facility last May, Gales Colin Chapman founded the company in
performed combat triage, asking his engineers 1952, and by 1963 Lotus had soundly beaten
for products to execute and market within a year. Ferrari, Porsche, Cooper and BRM to secure
His goal: to unveil the next generation of Lotus its first of six Formula One World Drivers and
vehicles at the Geneva auto show in March. seven Constructors championships. Lotus also
With the engineers revving, Gales shook the brought rear-engine design to the Indy 500, for-
financials. “It required painful decisions,” he ever changing American motor sports.
admits. “It does not take 1,250 employees to pro- Away from the track, Lotus developed inno-
duce 1,296 cars—an unsustainable condition.” vative but quirky sports cars built on the prin-
He let go of 25% of the workforce. ciples of Colin Chapman: Simplify, then make it
Gales then put on his salesman’s hat. “The lighter. Always diminutive, and with rare excep-
dealer network was extremely spotty. We had tion powered by engines first from Ford, then
no dealer in Paris, no dealer in London, no GM and now Toyota, Lotus cars were all about

pany, Proton, appointed former Red Bull and TRENDING
Ferrari executive Dany Bahar as CEO. Bahar re-
cruited a Mercedes-AMG powertrain engineer What the 65 million
and designers from Ferrari. A flashy marketing Forbes.com users
executive accustomed to Red Bull’s outsize are talking about.
For a deeper dive go to
marketing budgets, Bahar had a plan long on
FORBESLIFE.COM
bravado but short of achievable goals. His ten-
ure ended in 2012 with acrimony and a flurry of PERSON
legal battles. Soon after Proton was absorbed by JOAN DIDION
The legendary author,
its Malaysian rival, DRB-HICOM. “The finan-
80, was named the
cial situation was dire for several years,” Gales new face of Céline
admits, “with losses of $255 million in 2012–13 in January; likewise,
and $108 million in 2013–14.” 71-year-old Joni
Giving cheer to sports car purists, Gales is ad- Mitchell was featured
in Saint Laurent’s new
amant that Lotus will remain a rare analog hold-
campaign.
out in a world of computer-controlled supercars
that defy the laws of physics. Like Elise before
it, the Evora engages the driver in an intimate
conversation between car and road. Behind the
wheel, any cyclist or skier will quickly under-
stand Evora’s supple yet tenacious handling.
Though Gales is coy about the vehicles he’ll
announce in Geneva, expect to see an Evora
that’s lighter and more powerful. Gales claims
that Lotus has also reduced build costs by 10%.
“A break-even point depends upon many vari-
brain wave steering and handling. ables, but we definitely have the intention of
Despite some renown in the late 70s with being profitable by producing and selling over
the Lotus Esprit—James Bond’s amphibious 3,000 cars per year in 2016,” Gales says.
vehicle in The Spy Who Loved Me—by 1982 the To boost sales volumes, the new Evora—
COMPANY
company was selling only a few hundred cars which won’t be released in the U.S. until late LILLY PULITZER
a year and was propped up by an IP agreement 2015—might become the basis of a new coupe- The queen of Palm
with Toyota made not long before Chapman’s like CUV. More radical still, there could be a Beach preppy passed
death at age 54. Without the founding entrepre- mid-front-engine, rear-drive four-door sedan, away in 2013, but her
eponymous lifestyle
neur guiding the company, Lotus faded fast. though any such car will be years away. With brand announced a
After seven years of ownership GM sold multiple flavors of Evora, a CUV and a smat- new collection for
its stake in 1993. In do-or-die fashion, Lotus tering of hyper-Lotuses for private racing clubs Target to hit stores
developed Elise, the first production car built of like Thermal in Palm Springs, Gales is confident in April.
bonded aluminum. A form of industrial origami, he can lift Lotus’ global sales to 10,000 by 2018. IDEA
the process results in strong, lightweight cars. When asked why a former president of Peu- RENTING LUXURY
Elise was a lightning bolt 20 years ago, so geot would move to Norfolk to run an advanced WATCHES
stunning that Ford engaged Lotus to develop the engineering firm that also crafts exotically simple Not sure about
committing to that
vertical horizontal (VH) architecture that un- sports cars, Gales is clear: “For the challenge,” Patek Philippe? Try it on
derpins all Aston Martins. But until now Lotus he says. “I see a huge amount of potential for the for a month. That’s the
lacked the resources to mutate its own car, the company, and I know we can realize this poten- premise behind Eleven
mid-engine Evora, into a range of products. tial. Also, I have always loved Lotus, ever since James, which rents
Prior to Gales there was another bold at- I was a child and my father took me to luxe watches—from
Audemars Piquet to
tempt to revive the company, but it quickly the Lotus dealer in Luxembourg. I still Zenith—for an annual
failed. In 2010 Lotus’ Malaysian parent com- have the brochures from that visit.” membership fee.
MICHAEL AUSTEN FOR FORBES
FINAL THOUGHT
“I spent a lot of money on booze, birds and fast cars.

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FINAL THOUGHT
THOUGHTS “The impression drummed into one accustomed to
American ‘gogetiveness’ is that a tragic number
of Britons have been blunted and stunted.”
—B.C. FORBES
ON GREAT BRITAIN
“The history of England is
emphatically the history of progress.”
—LORD MACAULAY
“Remember that you are an Englishman, and have

consequently won first prize in the lottery of life.”
—CECIL RHODES
“Hail, happy Britain! Highly favoured

isle, and Heaven’s peculiar care!”
—WILLIAM SOMERVILLE
“The English winter: ending in July,

to recommence in August.”
—LORD BYRON
“How can what an Englishman believes be

heresy? It is a contradiction in terms.”
—GEORGE BERNARD SHAW
“Living in England, provincial England, must be like

being married to a stupid but exquisitely beautiful wife.”
“Britain moved into the balance-of-payments black early last —MARGARET HALSEY
year, and its usually sluggish economic pulse registered a rare

and healthy beat. Author and consultant Antony Jay: ‘Just wait “I will make you very fruitful; I will make nations of
you, and kings will come from you.”
until we get a few healthy years under our belt and can draw
—GENESIS 17:6
once more on our tremendous fund of arrogance, an arrogance
which no other nation has to the same degree. Take a man with
“An Englishman, “England has two books:
Eton and Oxford behind him and a piece of land in Yorkshire,
even if he is alone, the Bible and Shakespeare.
and by comparison the pharaohs were insecure.’ ” forms an orderly England made Shakespeare,
—FROM THE APRIL 15, 1970 ISSUE OF FORBES queue of one.” but the Bible made England.”
—GEORGE MIKES —VICTOR HUGO
OTHER THOUGHTS FROM THAT ISSUE:
FANS IN HIGH PLACES Sir: I just wanted you to know how
“The Englishman has all the qualities of a
much I appreciate your thoughtful and very encouraging comments
about my relationship with the American people (Fact & Comment, poker except its occasional warmth.”
Feb. 15). Needless to say, I hope I can continue to merit such high —DANIEL O’CONNELL
marks in the months and years ahead. With warmest regards,
Richard M. Nixon, White House, Washington, D.C.”
“I like the English. They have the most rigid code of
TIME TO QUIT “After any man has been chief executive officer for about immorality in the world.”
ten years, he should fire himself. No matter how good he was—and is—the
company will be the better for giving another guy a crack at his job.” —MALCOLM BRADBURY
SOURCES: THE TIMES BOOK OF QUOTATIONS; GOODREADS.COM; LAVENGRO, BY GEORGE BORROW; THE CHASE, BY WILLIAM
SOMERVILLE; EATING PEOPLE IS WRONG, BY MALCOLM BRADBURY; DON JUAN, BY LORD BYRON; WITH MALICE TOWARD SOME,
BY MARGARET HALSEY; HOW TO BE AN ALIEN, BY GEORGE MIKES; SAINT JOAN, BY GEORGE BERNARD SHAW.
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T. Rowe Price Investment Services, Inc., Distributor. IRAR082784

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DOLLAR ACTAVIS CEO

COVER PHOTOGRAPH BY JAMEL TOPPIN FOR FORBES

4 | FORBES FEBRUARY 9, 2015

23 | AMERICA’S RICHEST POLITICIAN

36 | CURRENT EVENTS // DAVID MALPASS

38 | THE APOTHECARY // AVIK ROY

50 | SAVING US FROM THE SNOOPS

58 | PORTFOLIO STRATEGY // KEN FISHER

60 | INVESTMENT STRATEGIES // WILLIAM BALDWIN

6 | FORBES FEBRUARY 9, 2015

92 | IS VANGUARD TOO SUCCESSFUL?

98 | THE FOUR HORSEMEN OF

102 | DAUGHTER KNOWS BEST

8 | FORBES FEBRUARY 9, 2015

Copyright © 2015 Forbes Media LLC. All rights reserved.

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