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4 | FORBES MAY 5, 2014
CONTENTS MAY 5, 2014 VOLUME 193 NUMBER 6
72 | CRUDE CAPITALIST
Harold Hamms vast
North Dakota oilelds are
the grease in the American
economy.
86 | FACTORY TOWN
Does CEO still know
best in 21st-century
America? Cummins
thinks so.
13 | FACT & COMMENT
BY STEVE FORBES
The U.S. Constitution: We can still save it.
LEADERBOARD
16 | CASTLES OF KUKIO
Carved into the lava of the Big Islands Kona coast,
Kukio is Hawaiis most exclusive community.
20 | DEGREES OF HAPPINESS
The business schools with the most
contented M.B.A.s.
22 | WELCOME TO THE CLUB
Meet the 34-year-old founders of software maker
Atlassian, the worlds newest billionaires.
24 | CHRIS BURCHS RETAIL THERAPY
Can he prove his C. Wonder is more than a
Tory Burch knockof?
COVER PHOTOGRAPH BY DAVID YELLEN FOR FORBES

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6 | FORBES MAY 5, 2014
CONTENTS MAY 5, 2014
28 | FROM RAP TO RICHES
A decade ago a hip-hop trio released I Get
Money: Forbes 1-2-3 Billion Dollar Remix.
Now they really are nearing ten-digit fortunes.
30 | FAIREST FOWL
The most expensive piece of Chinese
porcelain ever sold: a cup covered in chickens.
32 | ACTIVE CONVERSATION
Investors have recently body-slammed
WWE shares. Was it something we said?
THOUGHT LEADERS
34 | CURRENT EVENTS
BY PAUL JOHNSON
Is Vladimir Putin another Adolf Hitler?
36 | CURRENT EVENTS
BY DAVID MALPASS
Monetary policy relief: nally adding growth.
38 | CAPITAL FLOWS
BY BJORN LOMBORG
Feeling green with other peoples money.
40 | INNOVATION RULES
BY RICH KARLGAARD
Your companys health: the soft edge.
STRATEGIES
42 | UNFINISHED BUSINESS
As John Chambers turns to go, time is running
out for Cisco to reverse a serious growth slump.
BY CONNIE GUGLIELMO
48 | THE LUCKY DRUG
Smarts and providence made Robert Duggan
a biotech billionaire. Long-term success?
Thats another story.
BY MATTHEW HERPER
TECHNOLOGY
52 | BIG BROTHER INC.
Smart gadgets real value may be in what
they say to your doctor, insurer and utilities.
BY PARMY OLSON AND AARON TILLEY
56 | THE SAME-DAY WAR
Fast grocery delivery was a disaster for
Webvan. Why are so many trying it again?
BY JEFF BERCOVICI
ENTREPRENEURS
58 | THE CALCULUS OF COUCHES
Wayfair.com sells nearly $1 billion
worth of home furnishings.
But its real business is data mining.
BY ABRAM BROWN
INVESTING
62 | DALLAS BUYERS FUND
Money managers Don and Craig Hodges
prefer the sweet taste of home cooking.
BY STEVE SCHAEFER
42 | I SPY CISCOS NEXT CEO
Somewhere in this crowded room is John Chambers
successorand they have their work cut out for them.
48 | ONCE
YOURE
LUCKY ...
Biotech billionaire
Robert Duggan
is desperate to
prove hes not
a ash in the
petri dish.
52 | EYES
ON YOU
Wearables:
singing the
body electric
to save a
few bucks.
58 | SILVERWARE,
SOFAS ... AND
SOFTWARE
Wayfair had
ambitions to be
the Webs Sears,
Roebuck but rst
needed algorithms
to get to know its
customers.


8 | FORBES MAY 5, 2014
CONTENTS MAY 5, 2014
98 | SKY-HIGH
STOCKS
Theyre
baaack! Stock
strategist
James Montier
says you can
kiss growth
good-bye.
106 | HOLLYWOOD
WOODWORK
Frank Pollaro, carpenter to the stars.
102 | PRIVILEGED POSITION
The politically connected
Gautam Adani has
extracted a $5.4 billion
fortune from Indias
special economic zones.
62 | LITTLE IDEAS
Not everybody thinks bigger in Texas. Proof:
small-cap specialists Don and Craig Hodges.
BrandVoice
BY TD AMERITRADE
The Return of the (Virtual)
Investment Club:
Retail Investors Are
Embracing Social Media 63
66 | FINANCIAL STRATEGY
BY A. GARY SHILLING
Bleating sheep and goats.
68 | CAPITAL MARKETS
BY MARILYN COHEN
Teasers that are pleasers.
70 | INTRINSIC VALUE
BY BONNIE BAHA
Apocalypse at the galleria.
REINVENTING AMERICA
72 | THE MAN FUELING AMERICAS
RECOVERY
Harold Hamm has transformed the U.S. oil
industry like no one since John D. Rockefeller.
The great domestic energy boom, he says,
is just beginning.
BY CHRISTOPHER HELMAN
86 | WELCOME TO CUMMINS, U.S.A.
The Indiana enginemaker believes deeply
in the anachronistic idea that investing in its
community is smart business.
BY JOANN MULLER
94 | LEGO HIGH-RISE
The future of afordable housing is being
snapped together in Brooklyn.
BY ERIN CARLYLE
FEATURES
98 | IRRATIONAL EXUBERANCE:
THE SEQUEL
The Shiller P/E signal is ashing warning signs.
What are you doing to defend yourself?
BY WILLIAM BALDWIN
102 | THE BILLIONAIRE AND THE
PRIME MINISTER
The man likely to become Indias
next leader gave one of the countrys
richest men a series of sweetheart deals.
BY MEGHA BAHREE
LIFE
106 | THE WOOD WHISPERER
Frank Pollaro has designed furniture for Larry
Ellison, David Gefen and Jerry Seinfeld. He
also collaborates with his good friend Brad Pitt.
BY RICHARD NALLEY
112 | THOUGHTS
On reinvention.


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10 | FORBES MAY 5, 2014
FORBES
IN BRIEF EDITOR-IN-CHIEF
Steve Forbes
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MAY 5, 2014 VOLUME 193 NUMBER 6
An American
Reinvention
BY DAN BIGMAN
IT WAS A STRANGE SIGHT. There, onstage, were
Steve Forbes and Chicago Mayor Rahm Emanuel, two
men on the absolute opposite ends of the political spec-
trum, doing something stunning. They were agreeing.
The occasion? In late March Forbes gathered more
than 300 innovative business leaders, entrepreneurs,
academics and growth-oriented policymakers in Chicago
for our rst Reinventing America Summit to help foster a
budding industrial revolution in the United States.
Forbes readers are well aware of the phenomenon.
For the past three years, in almost every issue of Forbes,
weve been telling unexpected stories of American re-
invention from places like GEs new locomotive factory
in Fort Worth, and the city of Milwaukee, which is fast
becoming the world capital of water technology.
Fueled by breakthroughs in hydraulic fracturing and
horizontal drilling by men like Harold Hamm, the subject
of this issues cover story, the nation is undergoing the
biggest energy boom in generations. Networked com-
puter systems embedded in everything from rail systems
to roller bearings are forming an industrial Internet of
things, creating unparalleled efciencies. Companies
from around the world are looking to the U.S. as a loca-
tion for the kind of high-quality, high-value manufactur-
ing practiced by Indiana-based Cummins (see story on
p. 86)an idea inconceivable just a short time ago.
There are, of course, challenges: Despite high unem-
ployment more than 600,000 U.S. manufacturing jobs (of
an estimated 17.4 million) are currently unlled as em-
ployers struggle to nd the kind of highly trained workers
necessary to operate in next-generation factories (many
now among the worlds most productive). Decaying
urban centers still seek new purpose and prosperity.
But over two days in Chicago speakers such as
Bill Ford, Sam Zell, Honeywells David Cote, Michigan
Governor Rick Snyder and Indiana Governor Mike Pence
discussed the opportunities they saw springing up.
It was a hopeful gatheringone we plan to repeat
soon. It was also somewhat disorienting. You might
make a good President, Steve Forbes joked with Eman-
uel onstage, discussing the mayors education reforms.
Its not a partisan thing, he explained. As a Republi-
can, it pains but amazes me what the mayor of Chicago is
doing. Strange days indeed. F

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MAY 5, 2014 FORBES | 13
FACT & COMMENT STEVE FORBES
FORBES
THE U.S. CONSTITUTION
WE CAN STILL SAVE IT
BY STEVE FORBES, EDITOR-IN-CHIEF
With all thy getting, get understanding
GOOD NEWS for those who be-
lieve in the rule of law: Theres a
big court case coming up that could
deal a powerfully positive blow for
the Constitution and the idea that
Presidents cannot change lawsor
decree themat their whim. The
Afordable Care Acts language is
explicit: If a state doesnt set up its
own insurance exchange and the
feds have to do it instead, then buy-
ers in that state cannot get subsidies
in purchasing health insurance. The delu-
sional White House was convinced that the
law would be so popular that virtually no state
would pass up the opportunity to build an
exchange. Lo and behold, 34 did.
Its no surprise the federal government is
ignoring the law and paying subsidies in those
states anyway. But there is a case, Halbig v.
Sebelius, thats challenging this arrogant tram-
pling of the rule of law. Its currently at the ap-
pellate level but will surely wend its way to the
Supreme Court, which will then have a unique
opportunity to save our battered Constitution
from becoming a dead letter.
Crucial Read For Execs
How does a company stay ahead in an ever
more competitive world in which great new
products seem to attract cheaper imitators
or, worse, better versionsfaster than ever
before? The rst critical element is to have the
right strategy. If you dont know where youre
going, any road, as the adage goes, will get you
there. As FedEx founder/CEO Fred Smith
told FORBES publisher, Rich Karlgaard, for
his breakthrough new book, The Soft Edge
(Jossey-Bass, $28): You can have
the best operations. You can be the
most adept at whatever it is that
youre doing. But if you have a bad
strategy, its all for naught. Think
Digital Equipment. Think Wang.
Think Lockheed in the commercial
airplane business. There were forks
in the road where these companies
chose the wrong strategy. Absent a
viable strategy, youre in the process
of going out of business.
Another basic, of course, is executionwhat
Rich labels the hard edge. This area includes
speed, cost controls, capital efciency and
managing the supply chain and logistics well.
Karlgaard cites Apple boss Tim Cook, who suc-
ceeded the legendary Steve Jobs upon his death
in 2011, as the ultimate hard-edge executive.
Hard-edge execution is all about managing
exactly to the numbers. [These executives] are
good at making the trains run on time. They
focus on prot. Their language is time, money
and numbers. Every company in the world
needs these employees, these Tim Cook types.
Companies that fail to execute precisely on the
hard edge of business will ultimately fail.
Countless tomes and articles have been penned
on strategy and execution. Karlgaard, however,
homes in on the other, oft-neglected side of the
triangle of long-term success, the so-called soft
edge. And its here that he makes a crucialand
delightfully writtencontribution. Whether
youre a manager or an investor, or both, you
must put this book on your read-right-away list.
The soft edge, argues Rich, is what truly
distinguishes great companies from all the oth-
ers, what enables them to continually innovate
better than current and new competitors and

14 | FORBES MAY 5, 2014
FORBES
FACT & COMMENT STEVE FORBES
Smarts include studying areas
outside your own. Famed San Fran-
cisco 49ers coach Bill Walsh came
up with a revolutionary ofense
that forever changed professional
football by watching a high school
basketball game.
The chapters on teams and taste
are superb. SAP, the software giant,
remade itself into a nimble innova-
tor by setting up highly autonomous
teams of ten to push software de-
velopment. Small teams are efective,
in part because each team mem-
ber is more likely to care about the
others and thus share information.
Karlgaard explains the dynamics of
picking members and combining au-
tonomy and accountability. Taste,
Rich writes, is more than design. Its
a sensibility that appeals to the deep-
est part of ourselves. Steve Jobs was
a true genius at this.
Not many people would think that
stories can be a critical corporate
tool, but they profoundly are. Sto-
ries afrm who we are, that our lives
have meaning.... Stories are a power-
ful leadership tool. Theyre the key to
a strong [corporate] culture. Stories
can turn customers into apostles and
advocates. These days stories are
molded not just by companies but also
by customers. One example of this
phenomenon ispilots who own Cirrus
planes interactingoften cantanker-
ously, and rightly sowith company
management over aircraft-safety issues.
The Soft Edge is a tour de force, an
original work that will be of inesti-
mable value for all enterprises.
of his clients, a young man. The mans
8-year-old daughter said at the service
that she missed her daddy but that she
knew her family would be okay. I
got tears hearing that from an 8-year-
old girl. I suddenly knew that what I
was doing was very important work.
His productivity shot up vefold.
Technology is coming up with
ways to help measure trust within a
company, as well as to build it.
Smarts encompass the ability to
learn new things and solve novel prob-
lems. Smarts really havent so much
to do with IQ as they have to do with
grit, courage and persistence. Karl-
gaard cites the illustrative example of
how Tara VanDerveer developed one
of the most successful coaching careers
in NCAA womens basketball history.
One thing she did was to spend a
season watching every practice and
home game of famous coach Bobby
Knight, when he was at Indiana Uni-
versity. She took copious notes during
practices, while taking care to sit out
of the volcanic Knights line of sight.
Restaurants: Go, Consider, Stop
Edible enlightenment from our eatery experts and colleagues Richard Nalley, Monie Begley, Randall Lane and Chef Jef Lamperti,
as well as brothers Bob, Kip and Tim.
z Cafe Luxembourg
200 West 70th St. (Tel.: 212-873-7411)
This French brasserie still delivers the goods. You
cant go wrong with classic onion soup, mixed
green salad or fried baby artichokes to start.
Youll still have room for the fabulous frites, which
accompany everything from moules to steak tar-
tare, but wont miss them if you order the hearty
cassoulet of pork shoulder, duck cont and garlic
sausage. Finish with the apple tarte tatin.
z Olives
W Hotel Union Square, 201 Park Ave.
South, at 17th St. (Tel.: 212-353-8345)
Poor service and mediocre food leave you feeling
had at this trendy restaurant. Appetizers can
arrive after the entre. Most dishes are presented
on wooden planksnot practical for ravioli or rice.
The price of the iceberg lettuce wedge (omitted
on the menu) is $16; a cup of chamomile tea, $7.
You wouldnt mind if the meals were memorable.
z Allonda
22 East 13th St. (Tel.: 212-231-2236)
The kitchen has hit its stride at this new and totally
transformed space with the bar downstairs and
the handsome dining room one ight up. Try
razor clams with soppressata, diced sardines or
miso-dressed salad; then move on to bucatini
with smoked uni, Hampshire pork with smoked
apples and red cabbage, or skate. Dont pass up
the chocolate cake.
also to better weather the inevitable
storms and mistakes that are part and
parcel of the real world of business.
The big problem is that up to
now the soft edge hasnt lent itself to
spreadsheets and management met-
rics, such as return on investment.
This is why executives, directors and
investors so often ignore it, particu-
larly given the unrelenting pressures
for fast returns. List Karlgaards ve
pillars that constitute the soft edge
and you instantly see the challenge:
trust, smarts, teams, taste, story. Rich
makes it clear hes not talking about
the illustrations that magazines use
for stories on companies that are
great to work for, such as pails of free
candy. The soft edge involves serious,
substantive stuf thats not easy to il-
lustrate or reduce to numbers.
To esh out each of these catego-
ries, Rich uses real-world companies
he has studied and visited, and this is
what makes the book come compel-
lingly alive. We all love stories that
teach and inspire. In the chapter on
trust, for instance, Rich focuses on
unhip Northwestern Mutual, whose
primary product is life insurance. The
company has achieved internal trust
that is, its employees believe in the
companys mission and in the integrity
of the people running it. Earlier in the
book Rich cites the case of a com-
pany salesman who, because of a near
deadly accident, had lost his restau-
rant and took up selling insurance. It
was a tough slog, and the man more
than once nearly threw in the towel.
One day he attended the funeral of one F

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16 | FORBES MAY 5, 2014
CARVED INTO THE LAVA of the Big Islands Kona
coast, Kukio is Hawaiis most exclusive community.
Most of these spreads lie behind its gates. Just to the
north is the adjacent elite neighborhood of Hualalai,
which Michael Dell acquired part ownership of in
2006. Owners in both enclaves have banded together
to form the Kona Shuttle, a private ying club that
whisks them from the Bay Area on Thursdays and
back again on Sundays. Kukio keeps itself so isolated
that you cant even enter without the express permis-
sion of a homeowner.
OWNER: MICHAEL DELL, DELL INC.
ASSESSED VALUE: $64.7 MILLION
The Dell founder and CEOs 18,500-square-foot Raptor Residence
has seven bedrooms, seven full baths and ve half-baths.
OWNER: PAUL HAZEN, KKR
ASSESSED VALUE: $26.7 MILLION
Michael Dells next-door neighbor has shown of his Kukio home,
10,000 square feet of pavilions, in Architectural Digest.
OWNER: GEORGE ROBERTS, KKR
ASSESSED VALUE: $22.1 MILLION
Commands panoramic ocean views unmarred by neighbors.
BIRDS EYE
CASTLES OF KUKIO
LEADERBOARD
KEEPING SCORE ON WEALTH & POWER

B
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C
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L
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L
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OWNER: KEN GRIFFIN, CITADEL
PURCHASE PRICE: $30 MILLION (2010 AND 2011)
The hedge fund operator has both a $17 million Balinese-style
oceanfront home and a $13 million residence 318 feet away.
OWNER: DAVID ROUX, SILVER LAKE
PURCHASE PRICE: $20 MILLION (2007)
Rouxs private equity rm helped take Dell private last year.
OWNER: DAVID L. ANDERSON, SUTTER HILL VENTURES
ASSESSED VALUE: $24.2 MILLION
The Silicon Valley tech investors place lies two lots down from Dells
and has ve bedrooms and ve and a half baths.
OWNER: BERTIE BUFFETT
ASSESSED VALUE: $17.3 MILLION
Warrens sister paid only $3.2 million in 1997 for her 6,815-square-foot
home, which overlooks the Jack Nicklaus-designed Hualalai Golf Course.
OWNER: HOWARD MARKS, OAKTREE CAPITAL MANAGEMENT
PURCHASE PRICE: $23.8 MILLION (2009)
The ofcial owner is a business that shares the address of Marks company.
OWNER: BANDEL CARANO, OAK INVESTMENT PARTNERS
ASSESSED VALUE: $19.7 MILLION
This venture capitalists 14,680-square-foot home has seven
bedrooms and 11 baths. He co-owns it with his wife, Paula.
MAY 5, 2014 FORBES | 17
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P
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F
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F
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PROMOTION | LOGISTICS
N
early 12 million fleet vehicles
t r anspor t essent i al goods
across the United States on
most days, according to the U.S.
Department of Transportation. These feets
include everything from heavy-duty trucks
to passenger cars and vans powered by
alternative fuels, all of which operate in a
complex environment defined by thou-
sands of interrelated routes, schedules,
costs, regulations and safety consider-
ations. How efciently these vehicles per-
form directly impacts not only the fortunes
of their companies, but the national econ-
omy as a whole.
There are so many challenges that feet
managers have to consider, says Mark Old-
enburg, Toyotas national feet marketing,
mobility and strategic planning manager.
In addition to the cost and the proftabil-
ity pressures, they must address changing
regulations, insurance, maintenance and
management of the driversall in addition
to identifying and acquiring the vehicles
that will best serve their businesses on a
day-to-day basis.
Strategic Cost Control
The most successful fleet managers look
beyond a vehicles purchase price to con-
sider its total cost of ownership (TCO). A
large part of an efective TCO equation can
be greening the fleet with higher fuel
efficiencymoving from conventional
internal combustion engines to electric
and hybrid vehicles or those using alterna-
tive fuels such as compressed natural gas
(CNG), liquefed petroleum gas (LPG) and,
soon, even hydrogen.
We have over 6 million Prius models on
the roads globally, and we lead all other
manufacturers in high-efciency feet vehi-
cles. So we are uniquely positioned to help
any company thats focused on develop-
ing green feets, says Oldenburg. Toyotas
hydrogen-powered fuel-cell vehicle will
come to market in 2015, pushing green to
new heights, since it will eliminate green-
house gas emissions entirely, producing only
water as the byproduct of its combustion.
Oldenburg notes that todays technolog-
ical advancements are really helping feet
managers: When you go green, you can
do so and actually save money, he points
out. We see a lot of commercial operators
switching to hybrid vehicles, and the sav-
ings in fuel alone more than offsets the
costs they were incurring with less-efcient
vehicles. That is a tremendous help to com-
mercial feet managers.
Assuring Success
For maximum feet management success,
consider these best practices:
Make sure everyone within your organi-
zation understands that the feet is the
lifeblood of any company strategy.
Partner with world-class providers that
can align their services and products with
your strategy.
Spec new vehicles strategically, accord-
ing to their TCO.
Be one of those companies that adds up
all of the costs over the life cycle of the vehi-
cle, from acquisition price to operational
efciencies and ultimately the resale value,
Oldenburg advises. Ask, What will be the
advantages of building a fleet of higher-
mileage vehicles? Can I reduce my insur-
ance costs? Can I reduce my maintenance
expenses? Toyota is very well positioned
for all of those companies that are look-
ing to green their feets and manage them
from a TCO perspective. Q
Fleet Management:
Green Is the Color of Success
For more information, visit
www.feet.toyota.com
BY MI CHAEL RONEY
Toyota Highlander Hybrid
Prototype shown with options. Production model may vary.
When you go
green, you can do so
and actually save money.
That is a tremendous
help to commercial feet
managers.
MARK OLDENBURG
TOYOTA

Prototype shown with options. Production model will vary. 2014 Toyota Motor Sales, U.S.A., Inc.
CUTTING
-
EDGE STYLING CELEBRATED RELIABILITY HISTORY OF LOW COST OF OWNERSHIP
L
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20 | FORBES MAY 5, 2014
LEADERBOARD
Christy
Walton
+$1.6 BILLION
NET WORTH:
$38.5 BILLION
Her Wal-Mart shares climb
and a side investment
in First Solar takes of,
extending her lead in
wealth over the rest of the
Walton family.
Chip
Wilson
+120 MILLION
NET WORTH:
$2.4 BILLION
A parting gift: He promised
to resign as Lululemons
chairman after tumult in
2013; shares rebound on
strong sales two months
before his departure.
Alfred
Mann
+$110 MILLION
NET WORTH:
$1.2 BILLION
Stock in his pharmaceutical
company, MannKind,
jumps 83% in a day after
FDA advisors recommend
approval of its diabetes
drug Afrezza.
Mark
Zuckerberg
-$4.2 BILLION
NET WORTH:
$25.9 BILLION
Facebook plunges as
investors question big
purchases. Jan Koums
shares are down 15% since
February acquisition of his
company, WhatsApp.
Micky
Arison
-$150 MILLION
NET WORTH:
$6.2 BILLION
Carnival announces
a quarterly loss as it
discounts cruise prices and
increases ad spending in
the wake of high-prole
mishaps.
Vince
McMahon
-$360 MILLION
NET WORTH:
$1.2 BILLION
WWEs stock slides
after FORBES quotes an
analyst skeptical about the
companys new streaming
network, which has only
667,000 subscribers.
WINNERS
SCORECARD
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FIGURES REFLECT THE CHANGE IN NET WORTH FROM MAR. 19, 2014 TO APR. 9, 2014.
SOURCES: INTERACTIVE DATA VIA FACTSET RESEARCH SYSTEMS; FORBES.
50
Percentage of Stanford M.B.A. students who receive
nancial aid to help pay for their degree.
BUSINESS SCHOOLS
DEGREES OF
HAPPINESS
THE JOB MARKET for M.B.A.s has slowed
since the recession, but a diploma still pays
of. Graduates of the top 25 programs make
almost $160,000 a year after ve years, two
and a half times what they earned pre-
M.B.A., according to our 2013 Best Business
Schools ranking. But are they happier, too?
We asked 3,500 grads ve years out of the
top 50 schools to rate their satisfaction with
their education, with the preparation it gave
them and with their current job. Weighing
the scores they gave, we found that Stanford,
the nations most selective school, also has
the most satised graduates.
LOSERS
Stanford
SCHOOL / SATISFACTION
OVERALL JOB EDUCATION PREPARATION
STANFORD
1 1 4 1
UC BERKELEY (HAAS)
2 9 1 19
CARNEGIE MELLON (TEPPER)
3 8 15 6
MICHIGAN STATE (BROAD)
4 3 6 22
INDIANA (KELLEY)
5 4 36 2
DARTMOUTH (TUCK)
6 2 38 4
DUKE (FUQUA)
7 5 18 9
RICE (JONES)
8 23 3 21
WISCONSIN-MADISON
9 13 10 12
CHICAGO (BOOTH)
10 6 40 3
RANKS ARE BASED ON SATISFACTION SCORES FROM THE 50 SCHOOLS WITH
THE HIGHEST RESPONSE RATES.
SOURCE: FORBES SURVEY OF BUSINESS SCHOOL ALUMNI.

create tailor-made
medicine, could we stay
healthier for longer?
Personalized healthcare
a dream our software could bring to life.
It takes a special kind of compass to understand
the present and navigate the future.
3DS.COM/LIFE-SCIENCES
Innovative thinkers everywhere use
INDUSTRY SOLUTION EXPERIENCES
from Dassault Systmes to explore
the true impact of their ideas. Insights
from the 3D virtual world allow
health professionals to gain a precise
understanding of their patients medical
SUROH DQG WR WDLORU KHDOWKFDUH WR PDWFK
them perfectly. How long before kite
VXUQJ FDQ EH GRQH DW DQ\ DJH"

LEADERBOARD
22 | FORBES MAY 5, 2014
9,522
Number of backers of Oculus Kickstarter
campaign, which raised nearly ten times
its initial $250,000 goal.
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FORBES MAKEOVER
OCULUS VRS PALMER LUCKEY
He just sold to Facebook for $2 billion. We give him a new look for the big time.
JOSEPH ABBOUD: The award-winning designer and
entrepreneur got his start at Louis Boston before serving
as director of menswear design for Ralph Lauren.
He launched his namesake brand in 1987 and is currently
the chief creative director for Mens Wearhouse.
KATHY IRELAND: The supermodel turned supermogul
is the chief executive and chief designer of kathy ireland
Worldwide, a design and marketing rm she launched
in 1993. Womens Wear Daily has named her one of the
50 most inuential people in fashion.
THE VERDICT
JA: We didnt need him to be a
shirt-and-tie guy; we just needed
to clean him up a bit. Its a neater,
fresher, younger look.
KI: The architecture of the
after look celebrates his powerful
posture beautifully.
Before After
ENSEMBLE
JA: The big baggy jacket
and wrinkled shirt feel
like hes a college student
and someone told him to
put on a jacket. No shape
or form.
KI: The sleeves are clearly
too long. The shoulders are
misshapen.
THE AFTER IMAGE IS A SIMULATED IMAGE OF WHAT PALMER LUCKEY WOULD LOOK LIKE IF HE HAD ACTUALLY PARTICIPATED IN THE FORBES MAKEOVER, WHICH HE DID NOT. NOR DOES HE ENDORSE ANY PRODUCTS PICTURED HERE.
NEW BILLIONAIRES
MIKE CANNON-BROOKES AND SCOTT FARQUHAR
SHIRT
KI: His blue shirt missed its
appointment with an iron.
SHIRT
KI: The shirt tucked in
adds a structured but still
comfortably casual look.
PANTS
JA: Khaki pants are every
young guys uniform.
Wearing those with a belt,
hes buttoned up a little,
but not too buttoned up.
JACKET
JA: The checked jacket looks
youthful and goes great
with khaki trousers. Not too
studied, not too perfect.
KI: The tailoring of the
jacket is gorgeous. The cut
of the sleeves and their
length frame his hands to
say: I am strong.
TWO 34-YEAR-OLD AUSTRALIANS join the ten-gure wealth club after an invest-
ment round valued their software company, Atlassian, at $3.3 billion, making them
worth about $1.1 billion apiece. They met while studying at the University of New
South Wales and began their business in 2002, nancing it on a credit card good for
$10,000. Their project- and workow-management software is now used by 35,000
companies worldwide, including heavyweights like Facebook, Cisco and Citigroup.
The duo has done little marketing. Rather, theyve simply sold their products on their
website. We felt if we could sell something at a reasonable price and sell it on the In-
ternet, then wed be able to nd a market, Farquhar says. When an order came in from
American Airlines their rst year, he says, then we knew we could scale this.


LEADERBOARD
$85,000
Total prize money of the Business Idea
Competition at Ithaca Colleges School of
Business, funded by Christopher Burch.
HE BECAME A BILLIONAIRE last year after selling most of his stake in the fashion empire
he built with his ex-wife. Now hes making new investments around the world while working to
prove that his own womens wear chain, C. Wonder, can be more than a Tory Burch knockof.
B
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STARTUP
Born in 1953 on Philadel-
phias Main Line; his father
has a mining equipment
business. Sufers from de-
bilitating ADD but gets into
and graduates from Ithaca
College nonetheless.
BUILDUP AND BREAKUP
The Tory Burch brand hits
the big time in 2006, with
the launch of its best-known
product, Reva $195 leather
ballet ats. The next year the
pair divorces.
WELCOME TO THE CLUB
Sells most of that 28.3% stake
in 2013, putting an end to all the
lawsuits. The sale values Tory
Burch LLC at well over $3 billion
and makes both him and his
ex-wife billionaires, joining the
FORBES list at exactly $1 billion
apiece. Through the breakup and
all the litigation, he says, I tried
to focus as much as I could on
building C. Wonder.
ROUGH PATCH
Sinks millions into Internet Capital Group.
It loses almost all its value in the dot-com
bust in 2001. He also backs the develop-
ment of a $100 million-plus Buenos Aires
hotel just as Argentinas economy collapses
in the early 2000s. At one point I thought
Id lose everything. But he scores a win
getting in on Voss high-end bottled water
in 2002.
GOING GLOBAL
Today he has started buying
resorts in Asia and investing
widely in consumer tech,
with a portfolio that includes
trendy online ofce supplier
Poppin, Jawbone tness
wearables and Ule, a Chinese
e-commerce platform he has
gone in on with Solina Chau,
longtime partner of billionaire
Li Ka-shing.
ON HIS OWN
In 2011 he launches C. Wonder,
a chain store with clothing that
looks like Torys but costs far
less. A volley of lawsuits follows
that the presiding judge calls
a drunken WASP fest. Chris
is forced of the board of Tory
Burch LLC in 2012 but hangs on
to a 28.3% stake in the company.
SPREADING WONDER
Also in 2013 he sells 10%
of C. Wonder to Fidelity
Investments for $35 million,
using the cash to get the store
into more upscale U.S. towns
and the Middle East.
PATH TO SUCCESS
CHRIS BURCHS RETAIL THERAPY
SHARP EYE
In 1976 starts preppy sportswear line
Eagles Eye with only $2,000 and places
ads in the New Yorker and Glamour.
Every piece of merch sold out, he says.
I learned a lot about inventory. It grows
until by 1989 he can sell part of it to
Swire, a Hong Kong group, in a deal valu-
ing the company at $60 million. I was
close to 40, and it was a lot of money.
(Swire buys the rest in 1998.)
HEEERES TORY ... !
In 1996, after a failed marriage, he
weds fellow divorc Tory Robinson.
Together they create womens wear
brand Tory Burch. I didnt know
if itd be a hit, he says, but she
was a visionaryjust unbelievably
creative. And I had experience in
the industry.
24 | FORBES MAY 5, 2014

Is your portfolio TOO LOCAL
for a GLOBAL ECONOMY?
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around the world bringing you smart investing ideas.
Get our full perspective and fund details now.
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800.FIDELITY
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a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
Past performance is no guarantee of future results.
Stock markets are volatile and can decline signicantly in response to adverse issuer, political, regulatory, market, or economic developments.
Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnied in emerging markets.
1
Source: MSCI All Country benchmark returns 19832013.
2
Source: Gross domestic product based on purchasing-power-parity (PPP) share of world total. IMF, Haver Analytics.
3
Source: FactSet as of 11/30/2013. Data presented for the MSCI AC World Index, which represents 44 countries and contains 2,436 stocks. The
index is not intended to represent the entire global universe of tradable securities.
Fidelity Brokerage Services LLC, Member NYSE, SIPC. 2014 FMR LLC. All rights reserved. 675573.1.0
Diversify your portfolio with Fidelity international funds.
of global GDP comes
from non-U.S. countries.
2
of the worlds publicly
traded companies are
based in the U.S.
3
only
26
%

80
%

of the time, over the past
30 years, the top-performing
equity market has been
outside the U.S.
1

100
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and accomplishment. Class and audacity. Power and renement. Perfectly epitomising this exceptional world, the
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LEADERBOARD
2 MILLION
Number of cases of Ciroc vodka
sold annually, up from just 50,000 before Diddy
joined the company in 2007.
28 | FORBES MAY 5, 2014
BACK IN 2007 Sean Diddy Combs teamed with Jay Z and 50 Cent to create a song titled I Get Money: Forbes 1-2-3
Billion Dollar Remix. Less than a decade later rappers are closing in on ten-gure fortunes. Heres how they made it,
and, at bottom, where it would go if they put their money where their mouths are, per the lyrics of their latest albums.
B
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1. Diddy
NET WORTH:
$700 MILLION
2. Dr. Dre
NET WORTH:
$550 MILLION
3. Jay Z
NET WORTH:
$520 MILLION
4. Birdman
NET WORTH:
$160 MILLION
5. 50 Cent
NET WORTH:
$140 MILLION
HIP-HOP HOLDINGS
FROM RAP TO RICHES
Diddys Ciroc vodka line
earns him tens of millions
a year, and his new Revolt
TV music cable network
may one day make him
hip-hops rst billionaire.
The superproducer
leapfrogs Jay Z this year,
fueled by the runaway
success of Beats by Dr. Dre
headphones, a business he
cofounded in 2008.
The bulk of his wealths
growth comes from
Roc Nation entertainment
company, worth over
$100 million after the addi-
tion of Roc Nation Sports.
Cash Money Records,
which he co-owns with
his brother, continues to
expand, and hes adding
a book imprint, a clothing
line and GT Vodka.
He made $100 million of
his fortune in the 2007
sale of vitaminwater.
Now hes building brands
such as SMS Audio and
SK Energy beverages.
32%
18%
18%
4%
21%
7%
35%
12%
35%
6%
12%
41%
25%
17%
7%
6%
4%
CASH
CLOTHES
CARS
JEWELRY
REAL
ESTATE
WINE & SPIRITS
67%
8%
15%
8%
2%
46%
12%
21%
8%
4%
9%


LEADERBOARD
30 | FORBES MAY 5, 2014
463,000
Total square footage of Liu Yiqians two
Long Museum facilities in Shanghai.
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Jesse Vollmar FARMLOGS
He grew up on a midwestern farm, but his passion was always for tech. Vollmar, 25, did a brief West Coast stint participating in
startup incubator Y Combinator before returning to Michigan in 2012 to found FarmLogs, a software platform that helps farm-
ers harness data to make crucial decisions, such as which elds, according to meteorological data, will be too wet to work on a
particular day. FarmLogs exploits the reach of high-speed Internet into remote rural communities to save farmers hours of labor
a day, he says. More than 5% of U.S. farms with row crops now use the technology, which has attracted $5 million in investment.
Naveen Sikka TERVIVA
Despite his M.B.A. from UC Berkeley, Sikka, 35, spends much of his time these days in the eld, literally. He founded Ter-
Viva in 2010. It develops new crops to thrive on land no longer being productively farmed: for example, played out acre-
age in Florida and Hawaii that once grew citrus and sugarcane. Its rst commercialized crop is pongamia, a tree whose
pods can be processed into biofuels, fertilizer or animal feed. Its similar to soy but yields up to eight times the harvest
while requiring less wateran accomplishment that has drawn $5.5 million in private capital and grants to date.
Rob Leclerc AGFUNDER
Leclerc, 41, had a Ph.D. in biology and a background in articial intelligence when he went to work with an African agribusiness
company and became fascinated with the challenge of connecting a winning idea with willing investors. In 2013 he launched
AgFunder, an online investment platform for the global agriculture industry. Handling $1.3 billion worth of projects, AgFunder
connects private and institutional investors with ventures ranging from cattle ranches in Brazil to Hawaiian dairy farms to
cloud-based ag software. He says he wants to make it the nancial infrastructure of farming.
SEED MONEY
UP-AND-COMERS
These innovators are fnding breakthrough ways to improve life on the farm.
Do billionaires pay enough in taxes?
ASK 50 BILLIONAIRES
RICH RETURNS
FAIREST FOWL
ONE OF CHINAS RICHEST MEN, Liu Yiqian, just paid
$36 million for this 3-inch-wide cup covered with chickens,
making it the most expensive piece of Chinese porcelain
ever. It dates back 500 years to the Ming dynasty; there are
fewer than 20 such chicken cups in the world and none in
better condition. If you buy Chinese art, this is the holy
grail, said Sothebys expert Nicolas Chow before the sale.
Liu built a $900 million fortune in real estate and pharma-
ceuticals and is expected to display the cup at Shanghais
Long Museum, which he founded.
62%
YES
22%
NO
16%
NO
RESPONSE
RESPONSES TO AN ANONYMOUS POLL OF
50 MEMBERS OF THE FORBES WORLDS BILLIONAIRES LIST.
TROPHIES

Invest in futures.
Tey come from humble beginnings. But even in the face
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32 | FORBES MAY 5, 2014
LEADERBOARD
POT STOCKS
FORBES, APRIL 14, 2014
63,308 VIEWS ON FORBES.COM
Purported legal pot and
hemp businesses are boom-
ing on the over-the-counter
penny stock market, led by
CannaVest, which senior
writer Nathan Vardi called
the perfect window on
a huge, emerging red ag
for mom-and-pop inves-
tors looking for a way to
cash in on the legalization
of marijuana. Commenter
William Turnage wrote
that he didnt trust Can-
naVest, but Hemp Deposit
& Distribution has more
going for it. CEO Bruce
Perlowin of Hemp, even
though he can be slated as
a felon. What he did in
the past would be in the
near future considered
a successful business.
Granted it was done on
the black market. Ken-
neth Robinson warned,
Regardless of the insight-
ful analysis of this article,
the green rush is on for
the time being. Green pot
stocks will go much, much
higher.
SILICON VALLEYS
SEQUOIA CAPITAL
@KANCHANKUMAR
Heartwarming @sequoia
story. Conrms my belief:
VCs who think and act
like startups have better
chances of success.
@CARLOSDOMINGO
Since when is a VC
an i nnovation factory?
They are investors.
@CYRILEHENRY
Testimony to the upside of a
clear #immigrationreform
policy.
@PMARCA
(MARC ANDREESSEN)
Inside Sequoia Capitalwe
are proud to be partners
with Sequoia in a number of
great companies.
HIGHEST-PAID
BASEBALL PLAYERS
@TYSPITSTRUTHS
Really funny considering
none of those people are
that good anymore.
THE MIDAS LIST OF TOP
TECH INVESTORS
@RONNIE_MATRIX
Peter Fenton coming in at
number three? Should be
ranked second in my view.
LORD OF THE RING
FORBES, APRIL 14, 2014
99,926 VIEWS ON FORBES.COM
Editors Michael Solomon and Daniel Fisher reported on bil-
lionaire Vince McMahons bet that he can remake his $500
million (sales) business, World Wrestling Entertainment, by
launching a paid streaming service on the Internet despite
fears that it could cannibalize his traditional pay-per-view
TV audience. Hell need a million subscribers just to break
even, the authors calculated, and two or three times that to
make real money. One analyst predicted hed get 6 million to 8
million. Commenter Chris Harrington found that preposter-
ous: No serious analyst can even pretend [thats] a serious
number for a company that is averaging less than 4.3 mil-
lion domestic viewers for Monday Night Raw. Tony Pet-
zold saw it diferently: Something approaching that should
prove possible in time as the ability to subscribe to the net-
work expands overseas. The market apparently agreed with
Harrington: The website Wrestling Rumors reported that
shortly after the article came out WWEs stock took a
dramatic fall dropping 2.18, about a 7.34% decrease, and
the stock had dropped another 22% by press time. A. Simon
foresaw trouble even if streaming takes of: Just imagine
WWE is successful with this over-the-top expansion cam-
paign and manages to double and even triple the value of
its shares. Then what? Where to expand next? Not much
left. They can start to raise dividends extremely, which in
turn (coupled with the lack of further really big growth op-
portunities) would greatly reduce the value of the shares
quite a big problem ... depending on how much of a loan
they took out to nance their growth. WWE has come a
long way already, though; it was a modest regional operation
when McMahon took it over in 1982. Now who would have
thought you could grow WWE into a multi-billion-dollar
business, said Pascal Terjanian.
FAVORITE
TWEET
@pmarca (Andreessen on
two ctional companies
in HBOs sitcom Silicon
Valley):
Im still kicking myself
for missing out on Hooli.
Luckily we managed to get
a little money into Aviato. T
O
P
:

G
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Y

M
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N

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T
Y

I
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E
S
ACTIVE CONVERSATION
$3.2 MILLION
Amount of marijuana tax
(both sales and excise) collected
by Colorado in February.

F I N D O U T W H A T C O R N E R S W E D O N O T C U T , E V E R / 8 7 7 J E T 2 8 0 6 / N E T J E T S . C O M
Tr us t cannot be bought ,
B U T I T C A N B E E A R N E D.
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.
Relying on the integrity of
another is something that evolves
over time when theres a good
reason to in the first place. Thats
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34 | FORBES MAY 5, 2014
THOUGHT LEADERS
PAUL JOHNSON CURRENT EVENTS
AS Mein Kampf makes clear, Hitler
sought to unite all the people of Ger-
man speech and culture into one state,
or Reich, preferably by peaceful nego-
tiation, otherwise by war and conquest.
To do this Hitler needed to void the
provisions of the Treaty of Versailles,
which Germany had signed after its
defeat in the Great War of 191418.
First he marched into the Rhineland,
which had been demilitarized under
the treaty, stationing regular army
divisions and tanks there. The Allies
Britain and Francedid nothing.
Next Hitler marched into German-
speaking Austriaan annexation
known as the Anschluss. Having been
stripped of their empire, the Austrians
were glad to become part of a mighty
Reich. Again, the Allies did nothing.
Hitlers next claim was the Sude-
tenland. This was a territory on the
border of Czechoslovakia inhabited by a
German-speaking people who were ab-
sorbed into the new state against their
will. The Allies allowed this landgrab to
stand in an agreement reached at a Sep-
tember 1938 Munich summit meeting.
British Prime Minister Neville Cham-
berlain, who negotiated the agreement,
argued that Hitler was merely assert-
ing the rights of the Sudeten Germans,
who wanted to belong to his Reich.
The falsity of Chamberlains position
and Hitlers deceit were proved within
months. The Sudetenlands annexation
had made the Czech frontier indefen-
sible, and in March 1939 Hitler invaded.
The Czechs put up no resistance, and
the rest of the country fell into Hitlers
hands without a shot being red.
Alarmed, the Allies signed a pro-
tective treaty with Poland. But Hitler
also had claims against the Poles, in
particular the German-speaking port of
Danzig. When he invaded in September
1939, the Allies reluctantly fought.
Had the Allies stopped Hitler at
the beginning, when he was remili-
tarizing the Rhineland, hed have
been overthrown and World War II
avoided. But the only one pointing
this out was Winston Churchilland
his was a lonely voice.
Todays drift toward war with Russia
seems like a replay of the past. Putin is
a Russian nationalist, whose goal is to
reverse the events of 1989the end of
the Soviet state and dissolution of its
enormous empire. He seeks to do this by
using what remains of Russias Stalinist
heritage: the military, a huge stockpile
of nuclear weapons and immense re-
sources of natural gas and other forms of
energypowerful tools to wield against
the various weak states that were part of
the U.S.S.R. None has nuclear weapons,
and most are dependent on the (rela-
tively) cheap energy Russia supplies.
All have ethnic Russian minorities, who
speak the language, boast of their supe-
rior Russian culture and claim to have
been relegated to second-class citizen-
ship. Putin can rely on these minori-
ties to agitate for Russian intervention
whenever he wantsmost importantly
in the Baltic states of Estonia, Latvia and
Lithuania. His successful annexation
of Crimea is greatly encouraging to his
long-term plans, and its clear hell use
everything in his power, including mili-
tary force, to reconstruct his empire.
SHADES OF MUNICH
Whats to stop Putin? The West is led
by the modern equivalents of Cham-
berlain: President Franois Hollande
of France is a political nonentity repu-
diated by his own compatriots; Prime
Minister David Cameron of Britain
and Chancellor Angela Merkel of
Germany have both ruled out the use
of force to stop Putin from annexing
Ukraine; and worst of all, President
Barack Obamathe one man who has
the power to stop Putin in his tracks
does nothing. He makes Neville Cham-
berlain seem like a bellicose activist.
The U.S., thanks to the fracking revo-
lution, has the means to meet the energy
needs of all the former Soviet states.
It could move troops and aircraft into
Ukraine within 24 hours, and its eets
could ensure protection to the Baltic
states in a way that Putin would nd
unanswerable. Yet Obama makes no
decisive moves. What ails the man? Is it
cowardice? Indecision? A kind of exec-
utive paralysis? Clearly theres some-
thing fundamentally wrong with the
U.S. President. Meanwhile, Putin, who
runs what is, in essence, a second-rate
nation, behaves as if he rules the Earth.
Sadly, there is no Churchillian
voice to sound the alarm and call the
democratic world to action.
IS VLADIMIR PUTIN
ANOTHER ADOLF HITLER?
PAUL JOHNSON, EMINENT BRITISH HISTORIAN AND AUTHOR; DAVID MALPASS, GLOBAL ECONOMIST, PRESIDENT OF ENCIMA GLOBAL LLC; AMITY SHLAES, DIRECTOR, THE 4% GROWTH
PROJECT, GEORGE W. BUSH INSTITUTE; AND LEE KUAN YEW, FORMER PRIME MINISTER OF SING APORE, ROTATE IN WRITING THIS COLUMN. TO SEE PAST CURRENT EVENTS COLUMNS,
VISIT OUR WEBSITE AT WWW.FORBES.COM/CURRENTEVENTS.
F

A peerless message.
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Rich Karlgaard is a
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Jossey-Bass is a trademark of John Wiley & Sons, Inc. www.richkarlgaard.com

36 | FORBES MAY 5, 2014
THOUGHT LEADERS
DAVID MALPASS CURRENT EVENTS
THE FEDERAL RESERVE is end-
ing its policy known as quantitative
easing by tapering its bond purchases
and the buildup of idle bank reserves.
This is already helping bank lending.
The prospect of a further gradual
normalization of Fed policy should
lift economic growth above its devas-
tating new normalthe slow GDP
growth and high unemployment that
have prevailed since 2008.
The conventional view was that
the Fed could be stimulative by buying
bonds, setting interest rates near zero
and adding massive bank reserves. Fi-
nancial markets advertised the policy
as easy money, but none of the chan-
nels worked. Instead, growth in GDP,
wages, jobs, credit, the M2 money
supply, bank lending and bank depos-
its were all notably weak, causing a
grinding multiyear decline in middle-
class living standards.
The Feds stated goal with QE was
to lower long-term interest rates, not
increase credit or bank lending. Since
the 2008 economic crisis the regu-
latory goal has been to reduce bank
leverage and risk, restraining growth
in total credit, even as the Fed guided
more credit to upscale bond and se-
curitization markets.
Well-established long-term bor-
rowers that didnt need help got more
credit while riskier new borrowers
saw less credit and created fewer jobs.
The end result was contractionary.
The Fed began winding down
its QE program on Jan. 1, sparking a
surge in commercial and industrial
lending. This type of bank lending is a
critical, traditional source of credit for
small businesses and startups. Growth
was weak in 200913 but jumped to
a 16% annual rate in the rst quarter,
when the taper started.
The 2014 change in the Feds di-
rection is dramatic and should help
growth. After increasing its bond
holdings and bank reserves by $1 tril-
lion in 2013, the Fed plans to limit the
increase to $500 billion in 2014 and
$0 in 2015. This will allow the private
sector to make a pro-growth mirror-
image change in the mix of its lend-
ing. Rather than creating new long-
term loans to replace the Feds huge
demand for long-term high-quality
debt, lenders are gearing up to provide
a more normal allocation of loansby
adding short-term oating-rate loans
that help small and new businesses.
BANK RESERVES NOT LINKED
Once the Fed stops buying bonds, its
bank reservesthe IOUs the Fed uses
to pay banks for its bond purchases
will peak at roughly $3 trillion in late
2014. In the past bank reserves were
considered high-powered money,
so changes afected bank lending.
Commercial banks were required to
hold sizable reserves to back their
depositors, so a peak in bank reserves
would have caused restraint on the
banking systems ability to accept
more deposits and make more loans.
In recent decades U.S. regulators
have moved away from using bank
reserves to control bank lending, pre-
ferring direct regulation of banks. At
his Apr. 3 press conference European
Central Bank President Mario Draghi
delinked bank reserves from mon-
etary policy, instead emphasizing the
importance of the euro exchange rate
in evaluating monetary policy.
In addition to its bond-buying, the
Fed has hoped that near-zero interest
rates would be stimulative. Rate cuts
may work when rates are close to nor-
mal and reductions encourage borrow-
ers, but for more than ve years the
Fed has been imposing near-zero rates.
Thats a level suitable only for extreme
nancial emergencies and is so far
below a market-based rate that it acts
more like a price control on credit than
a stimulus policy. One of the clearest
precepts of economics is that price
controls distort markets andreduce
supply, thereby hurting new entrants,
while removing price controls repairs
the damage.
The next step in the policy recov-
ery may come if real GDP growth
pushes convincingly above 3.5% for
two quarters, as I expect it will.This
should force the Fed to relent on its
policy of near-zero interest rates.Wall
Street wont like it, but small increases
in interest rates would allow interbank
markets to rebuild and market-driven
credit allocation to gradually reassert
itself, helping small businesses and the
middle class nally make progress.
MONETARY POLICY RELIEF
FINALLY ADDING GROWTH
DAVID MALPASS, GLOBAL ECONOMIST, PRESIDENT OF ENCIMA GLOBAL LLC; PAUL JOHNSON, EMINENT BRITISH HISTORIAN AND AUTHOR;
AMITY SHLAES, DIRECTOR, THE 4% GROWTH PROJECT, GEORGE W. BUSH INSTITUTE; AND LEE KUAN YEW, FORMER PRIME MINISTER OF SING APORE,
ROTATE IN WRITING THIS COLUMN. TO SEE PAST CURRENT EVENTS COLUMNS, VISIT OUR WEBSITE AT WWW.FORBES.COM/CURRENTEVENTS.
F


38 | FORBES MAY 5, 2014
THOUGHT LEADERS
BJRN LOMBORG CAPITAL FLOWS
A LOT OF well-meaning people
argue that to tackle global warming
we need to stop investing in fossil
fuels.
World Bank President Jim Yong
Kim tells us that because of global
warming, pension funds should drop
fossil fuels and instead invest in
green assets for the sake of future
pension holders.
Yes, global warming is a problem,
caused by CO
2
emissions from fossil
fuels. But divestment puts the cart
in front of the horse and misses the
real solutions. In the meantime, it is
simply a great way to feel good with
other peoples money.
We dont burn fossil fuels to
annoy environmentalists but be-
cause these fuels power almost ev-
erything we like about modern life:
They feed us, warm us, transport us
and keep the lights on while power-
ing industry and the Internet.
Today we get 82% of our energy
from fossil fuelsand even in 2035
fossil fuels are expected to provide
80% of a much higher amount of en-
ergy consumption.
Cheap power is an amazing way
to improve living standards. Over
the past 35 years China has lifted
500 million people out of poverty
not through inefcient wind tur-
bines but with lots of cheap (and
polluting) coal.
Since the 1970s we have been
told that soon, very soon, renew-
ables will be protable. Yet they are
still not generally competitive and
wont be anytime soon. We spent
$101 billion in green
subsidies in 2012, and
the International En-
ergy Agency estimates
that well be spending
$220 billion per year
in 2035.
Wishful thinking
does not make these
realities go away.
Instead of campaign-
ing for unrealistic
divestment from fossil
fuels, we should focus
on increasing public
investment in green
R&D to ensure the
next generations of green technolo-
gies will eventually become so cheap
that everyone, including China and
India, will switch.
Take a look at how fossil-fuel
stocks have performed over the past
12 years, in comparison with renew-
able energy securities. The STOXX
Global 1800 Oil & Gas Index includes
traditional oil companies like Exxon
Mobil and Chevron. The RENIXX
Renewable Energy Industrial Index,
created in 2002, is the worlds oldest
green energy stock index, includ-
ing electric car maker Tesla Motors
and wind turbine bellwether Vestas.
Based on these indexes, $100 invest-
ed in 2002 in fossil fuels would be
worth about $252 today, whereas the
same $100 invested in renewables
would be worth about $34.
Shrewd green campaigners claim
divestment can actually increase
your returns. Invariably, they rely
on favorable dates of comparison
and include in the green energy
bucket conglomerates like Siemens,
Honeywell, ABB and Philips, which
allocate a minority of their eforts to
renewables.
Bottom line, as the graphs show:
Over most time periods you would
have lost money had you switched
out your fossil-fuel stocks for renew-
able energy ones. The diference is
especially striking during the cur-
rent bull market, which began in
March 2009.
So the real question for the
would-be divesters remains: When
you look at the performance of the
two stock indexes, where would
you rather have had your pension
money placed?
FEELING GREEN WITH
OTHER PEOPLES MONEY
BJRNLOMBORG IS PRESIDENT OF THE COPENHAGEN CONSENSUS CENTER AND AUTHOR OF THE SKEPTICAL ENVIRONMENTALIST.
F
10
02 04 06 08 10 12 14
20
30
40
50
100
200
300
GREENS RETURNS ARE IN THE RED
Performance of fossil-fuel stocks has exceeded that of
renewable energy stocks.
1/1/02=100
STOXX Global Oil & Gas
RENIXX Renewable Energy

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THOUGHT LEADERS
RICH KARLGAARD INNOVATION RULES
plied when you read an annual report
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who apply the latest cutting-edge
advantages in big data, cloud, mobile,
social and so forth? Ah, that must be
it! Think again. A technology advan-
tage doesnt last as long as it once
didconsider weeks and months, not
years and decades.
A healthy innovative response
comes from a deeper place within
your company. But it begins some-
where, and that somewhere is what I
call the Soft Edge.
Trust. This may seem like a fuzzy
concept in terms of ROI. But with-
out trust youll never create always-
on innovation. Employees who lack
trust will never share their best ideas.
Without trust customers will drop
you at the rst chance and sharehold-
ers will sell or sue. Heres another
thing to consider: Pollsters report that
trust is in tatters everywhere in the
YOUR COMPANYS HEALTH
THE SOFT EDGE
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 AT WWW.FORBES.COM/KARLGAARD.
ARE YOU healthy? People who
enjoy long-term health dont have
episodic bursts of health. Theyre
healthy nearly all the time. Their im-
mune systems ght of threats. Can
the same be true of companies?
Yesinnovation must be more
than episodic. Dont conne it to a
laboratory, a hackathon, a TED talk
or a building with a pirate ag. Make
it systemic and automatic so that it
occurs always and everywhere inside
your company.
Why do some companies have a
better innovation response than oth-
ers? From where does such vitality
come? From the chief executive? This
might be true in a small percentage of
companies. But even for those rela-
tively few, its worth noting that CEOs
dont stay on the job forever.
From clever strategy? If you think
so, then you must believe your strat-
egy will always be the correct one.
But in all of history youll not nd a
single company that has always had
great strategy. History is littered with
apparently solid companies that were
suddenly undone by wrong strategic
assumptions and bad bets. Eastman
Kodak, anyone?
From awless management? Ab-
bott Laboratories, Digital Equipment
Corp., H.J. Heinz Co., Masco Corp.
and J.P. Morgan & Co. have been cho-
sen by Duns Business Month maga-
zine as the ve best-managed com-
panies of 1986, begins a Los Angeles
Times story on Dec. 1, 1986. Note that
Digital Equipment Corp. is on this
list. But beneath the headlines DECs
immune system was already begin-
ning to fail.
From large bets on research and
development? Thats certainly im-
economy: in the private, public and
nonprot sectors. Trust, therefore, is
more valuable than ever.
Smarts. Silicon Valley and Wall
Street swoon at the sight of geeks who
score 800 on their math SATs. But
these are algorithmic businesses that
require having a few stars with water-
boiling IQs. For entire organizations
smarts come from a diferent place
than IQ. They come from grit, deter-
mination, empathy and purpose.
Teams. The best teams areand
always have beensmall, made up
of 2 to 12 people who complement
one anothers skills. The 4 Beatles.
The 12 disciples. Team Alpha in the
U.S. Armys Special Forces. Amazons
2-pizza rule. The real genius of Steve
Jobs wasnt his own brilliance: It
was the way he sought out his perfect
complements, from Steve Wozniak
to Tim Cook.
Taste. Its the word Steve Jobs used
when he described Apples unique
but universal aesthetic appeal. The
chief designer of Specialized Bi-
cycles, Robert Egger, calls it the elu-
sive sweet spot between data truth
and human truth. If you dont want
to sell at the commodity levelwho
does?you need taste. Hint: Taste
doesnt come from market surveys
and predictive analytics.
Story. Durably great companies
tell an enduringly appealing story.
What hasnt changed: The best sto-
ries are of awed people who meet
huge challenges. (Dont hide all your
aws!) What has changed: Custom-
ers can talk back on social media.
What to do? Make customers part of
your heros journey.
F

Power does not come in a one-size-fits-all package,
and at Forbes we are redefining what power
means. Whether its leading a multinational firm,
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Chair,
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Founder and Chief
Creative Ofcer,
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Tory Burch
Founder & Chief
Executive Ofcer,
Tory Burch
Dr. Faraz Farzin
Research Scientist,
Lumosity
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Founding Partner,
Aspect Ventures
Felicity Huffman
Founder,
WhatTeFlicka.com
Kathy Ireland
Founder,
Kathy Ireland Worldwide
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Vice President &
General Manager,
Lockheed Martin
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Model & App Developer
Debbie Sterling
Founder,
GoldieBox
Dr. Cori Bargmann
HHMI Investigator
& Professsor,
Te Rockafeller University
Diane von Furstenberg
Designer,
DVF
Vice Admiral
Michelle Howard
Deputy Chief of Naval
Operations for Operations,
Plans and Strategy, U.S. Navy
Padmasree Warrior
Chief Technology &
Strategy Ofcer,
Cisco Systems
Goldie Hawn
Founder,
Te Hawn Foundation
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next two to four years. Chambers is the fth-
longest-serving CEO in tech. Its remarkable
hes held on to the job given that Ciscos shares
havent broken $35 since 2001.
In November Chambers, known for his
knack for forecasting uctuations, ofered a
disappointing forecast and said it was hard to
read the economic environment. In Decem-
ber Cisco cut the low end of its sales growth
estimates for the next three to ve years from
5% to 3%. The last time it cut its long-term
outlook was in 2011, when it projected growth
of 12% to 15%. In February the company re-
ported a 7.8% drop in quarterly sales and a
product gross margin of 58.8%, the lowest in
more than a decade.
Were not a perfect company, nor am I the
P
opping open a can of Diet Coke,
John Chambers sits down to talk
in his tiny, windowless confer-
ence room just of his rather mod-
est ofce. Behind him on the wall
are 13 framed posters signed by the engineers
who created some of Ciscos billion-dollar busi-
nesses (a litany of three-letter acronyms that
only a geek could love). Its been 19 years that
hes been running Cisco Systems, the worlds
largest maker of data networking gear. Cham-
bers would like nothing more than to add a few
more posters to the wall before hes gone.
Time is running out. The consummate
salesman with a rapid-re West Virginia
twang nally announced in November a fuzzy
timetable for his retirement: sometime in the
Unfnished Business
BY CONNIE GUGLIELMO
As John Chambers turns to go, time is running out for Cisco to
reverse a serious growth slump.
WHOS GOT NEXT?
Someone in this photo
will succeed Cisco CEO
John Chambers.
From left: Rebecca
Jacoby, CIO; Pankaj Patel,
head of engineering; Wim
Elfrink, EVP, industry
solutions; Gary Moore,
president and COO;
Padmasree Warrior, chief
technology and strategy
ofcer; Chuck Robbins,
head of sales; Chambers;
Edzard Overbeek, SVP,
services; Rob Lloyd,
president, development
and sales; Blair Christie,
SVP, CMO. Not shown:
Frank Calderoni, CFO.
STRATEGIES
42 | FORBES MAY 5, 2014
TURNAROUNDS
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I
C

M
I
L
L
E
T
T
E

F
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R

F
O
R
B
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S

IMPORTANT SAFETY INFORMATION:
Do not stop taking ELIQUIS without talking to the doctor
who prescribed it for you. Stopping ELIQUIS increases your
risk of having a stroke. ELIQUIS may need to be stopped,
prior to surgery or a medical or dental procedure. Your
doctor will tell you when you should stop taking ELIQUIS
and when you may start taking it again. If you have to
stop taking ELIQUIS, your doctor may prescribe another
medicine to help prevent a blood clot from forming.
ELIQUIS can cause bleeding which can be serious, and
rarely may lead to death.
You may have a higher risk of bleeding if you take ELIQUIS
and take other medicines that increase your risk of bleeding,
such as aspirin, NSAIDs, warfarin (COUMADIN

), heparin,
SSRIs or SNRIs, and other blood thinners. Tell your doctor
about all medicines, vitamins and supplements you take.
While taking ELIQUIS, you may bruise more easily and it
may take longer than usual for any bleeding to stop.
Get medical help right away if you have any of these signs or
symptoms of bleeding:
- unexpected bleeding, or bleeding that lasts a long
time, such as unusual bleeding from the gums;
nosebleeds that happen often, or menstrual or
vaginal bleeding that is heavier than normal
- bleeding that is severe or you cannot control
- red, pink, or brown urine; red or black stools (looks like tar)
- coughing up or vomiting blood or vomit that looks like
coffee grounds
- unexpected pain, swelling, or joint pain; headaches,
feeling dizzy or weak
ELIQUIS is not for patients with articial heart valves.
Before you take ELIQUIS, tell your doctor if you have:
kidney or liver problems, any other medical
condition, or ever had bleeding
problems.
Tell your doctor if you are pregnant or breastfeeding, or
plan to become pregnant or breastfeed.
Do not take ELIQUIS if you currently have certain types
of abnormal bleeding or have had a serious 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, have sudden swelling of your face or tongue,
have trouble breathing, wheezing, or feeling dizzy or faint.
You are encouraged to report negative side effects of
prescription drugs to the FDA. Visit www.fda.gov/medwatch,
or call 1-800-FDA-1088.
Please see additional Important Product Information on the
adjacent page.
Individual results may vary.
Visit ELIQUIS.COM
or call 1-855-ELIQUIS
ELIQUIS is a prescription medicine used to reduce the risk of stroke and blood clots in people who have atrial
brillation, a type of irregular heartbeat, not caused by a heart valve problem.
Ask your doctor if ELIQUIS is right for you.
I focused on finding something better
than warfarin.
NOW 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, theres no routine blood testing.

ELIQUIS and other blood thinners increase the risk of bleeding which can be serious,
and rarely may lead to death.
2014 Bristol-Myers Squibb Company
432US14BR00220-01-01 02/14
For people with a higher risk of stroke due to
Atrial Fibrillation (AFib) not caused by
a heart valve problem

What is the most important information
I should know about ELIQUIS (apixaban)?
Do not stop taking ELIQUIS without talking
to the doctor who prescribed it for you.
Stopping ELIQUIS increases your risk of having
a stroke. ELIQUIS may need to be stopped, prior
to surgery or a medical or dental procedure.
Your doctor will tell you when you should stop
taking ELIQUIS and when you may start taking
it again. If you have to stop taking ELIQUIS, your
doctor may prescribe another medicine to help
prevent a blood clot from forming.
ELIQUIS can cause bleeding which can be
serious, and rarely may lead to death. This is
because ELIQUIS is a blood thinner medicine
that reduces blood clotting.
You may have a higher risk of bleeding if you
take ELIQUIS and take other medicines that
increase your risk of bleeding, such as aspirin,
nonsteroidal anti-inammatory drugs (called
NSAIDs), warfarin (COUMADIN

), heparin,
selective serotonin reuptake inhibitors (SSRIs) or
serotonin norepinephrine reuptake inhibitors
(SNRIs), and other medicines to help prevent
or treat blood clots.
Tell your doctor if you take any of these
medicines. Ask your doctor or pharmacist if you
are not sure if your medicine is one listed above.
While taking ELIQUIS:
you may bruise more easily
it may take longer than usual for any bleeding
to stop
Call your doctor or get medical help right
away if you have any of these signs or
symptoms of bleeding when taking ELIQUIS:
unexpected bleeding, or bleeding that lasts
a long time, such as:
unusual bleeding from the gums
nosebleeds that happen often
menstrual bleeding or vaginal bleeding
that is heavier than normal
bleeding that is severe or you cannot control
red, pink, or brown urine
red or black stools (looks like tar)
cough up blood or blood clots
vomit blood or your vomit looks like coffee
grounds
unexpected pain, swelling, or joint pain
headaches, feeling dizzy or weak
ELIQUIS (apixaban) is not for patients with
articial heart valves.
What is ELIQUIS?
ELIQUIS is a prescription medicine used to reduce
the risk of stroke and blood clots in people who
have atrial brillation.
It is not known if ELIQUIS is safe and effective
in children.
Who should not take ELIQUIS?
Do not take ELIQUIS if you:
currently have certain types of abnormal
bleeding
have had a serious allergic reaction to ELIQUIS.
Ask your doctor if you are not sure
What should I tell my doctor before taking
ELIQUIS?
Before you take ELIQUIS, tell your doctor if
you:
have kidney or liver problems
have any other medical condition
have ever had bleeding problems
are pregnant or plan to become pregnant. It
is not known if ELIQUIS will harm your
unborn baby
are breastfeeding or plan to breastfeed. It is
not known if ELIQUIS passes into your breast
milk. You and your doctor should decide if
you will take ELIQUIS or breastfeed. You
should not do both
Tell all of your doctors and dentists that you are
taking ELIQUIS. They should talk to the doctor
who prescribed ELIQUIS for you, before you have
any surgery, medical or dental procedure.
Tell your doctor about all the medicines you
take, including prescription and over-the-
counter medicines, vitamins, and herbal
supplements. Some of your other medicines
may affect the way ELIQUIS works. Certain
medicines may increase your risk of bleeding
or stroke when taken with ELIQUIS.
How should I take ELIQUIS (apixaban)?
Take ELIQUIS exactly as prescribed by your
doctor. Take ELIQUIS twice every day with or
without food, and do not change your dose or
stop taking it unless your doctor tells you to.
If you miss a dose of ELIQUIS, take it as soon
as you remember, and do not take more than
one dose at the same time. Do not run out of
ELIQUIS. Rell your prescription before you
run out. Stopping ELIQUIS may increase your
risk of having a stroke.
What are the possible side effects of
ELIQUIS?
See What is the most important infor-
mation I should know about ELIQUIS?
ELIQUIS can cause a skin rash or severe
allergic reaction. Call your doctor or get
medical help right away if you have any of
the following symptoms:
chest pain or tightness
swelling of your face or tongue
trouble breathing or wheezing
feeling dizzy or faint
Tell your doctor if you have any side effect that
bothers you or that does not go away.
These are not all of the possible side effects of
ELIQUIS. For more information, ask your doctor
or pharmacist.
Call your doctor for medical advice about side
effects. You may report side effects to FDA at
1-800-FDA-1088.
This is a brief summary of the most important
information about ELIQUIS. For more infor-
mation, talk with your doctor or pharmacist,
call 1-855-ELIQUIS (1-855-354-7847), or go to
www.ELIQUIS.com.
Manufactured by:
Bristol-Myers Squibb Company
Princeton, New Jersey 08543 USA
Marketed by:
Bristol-Myers Squibb Company
Princeton, New Jersey 08543 USA
and
Pzer Inc
New York, New York 10017 USA
COUMADIN

is a trademark of Bristol-Myers Squibb

Pharma Company.
/
IMPORTANT
FACTS
The information below does not take the place of talking with your healthcare professional. Only your healthcare professional knows
the specics of your condition and how ELIQUIS

may t into your overall therapy. Talk to your healthcare professional if you have any
questions about ELIQUIS (pronounced ELL eh kwiss).
2013 Bristol-Myers Squibb Company
ELIQUIS and the ELIQUIS logo are trademarks of Bristol-Myers Squibb Company.
Based on 1289808 / 1298500 / 1289807 / 1295958
December 2012
432US13CBS03602
This independent, non-prot organization provides assistance to qualifying patients with nancial hardship who
generally have no prescription insurance. Contact 1-800-736-0003 or visit www.bmspaf.org for more information.

MAY 5, 2014 FORBES | 45
TURNAROUNDS STRATEGIES
prices to fend of rivals like Huawei, Alcatel-
Lucent, Juniper Networks and Hewlett-Pack-
ard, sacricing its once unassailable gross
margins. Chambers also jettisoned more than
12,000 workers and ditched poorly perform-
ing businesses, including its consumer for-
ays into things such as Flip video cameras.
In March Cisco announced plans to spend
more than $1 billion over the next two years
to build a global computing cloud to under-
pin its Internet of Everything ambitions. It set
up a $100 million Internet of Everything fund
that has invested in about a dozen companies
in the past year. Cisco, which has always pur-
sued a growth-by-acquisition strategyspend-
ing $71 billion to buy 169 companies over its
historyin 2012 spent $1.2 billion to buy Mer-
aki, a maker of Wi-Fi networking gear, and
in 2013 spent $2.7 billion for security provid-
er Sourcere and $863 million to buy what it
didnt already own of data-center startup In-
sieme Networks, which makes products that
have become Ciscos answer to the software-
dened networking touted by such rivals as
Arista Networks, VMWare, HP and Juniper.
We will monetize [the Internet of Every-
thing] by providing almost all the elements
that connect this together,
Chambers says, from the
virtual data center to the
servers to the technology
to the video to the Web in-
frastructure. And we will
combine it with everybody
elseopenso the sen-
sors companies, the man-
ufacturing companies and
others can be able to inter-
face to it. We will provide
the consultancy, and over
time, if we do everything
right, well bring more and
more applications to it.
The Internet of Every-
thing is far from a boon
yet to Ciscos cofers. The
company has had to revise
downward the growth fore-
cast for its $11 billion (sales)
services arm. Even at 7%
to 10% its still too optimis-
tic, says George Notter at
Jeferies. Most of its ser-
vices revenue comes from
perfect leader, Chambers says. I have to con-
stantly reinvent myself. If you dont do that,
you get left behind.
The problem: Cisco is nally facing the
reckoning that hit the PC and server indus-
tries years ago. Its dominant market share in
routers and switches, the equipment that di-
rects Internet traf c and accounts for almost
half of its sales, is being eroded by network-
ing software and by cheaper, unbranded alter-
natives to Ciscos premium-priced equipment.
Customers are outsourcing their networking
needs to cloud service providers such as Rack-
space and Amazon rather than building their
own data centers. The phone companies, gov-
ernments and large businesses that are Ciscos
biggest customers have dramatically reduced
spending. The question is how quickly Cisco
can supplant its declining businesses with ex-
panding ones.
Chambers calls 2014 the year of architec-
ture, as the $48.6 billion (sales) company pulls
together new technologies that it can sell to
customers instead of just the gear that trans-
mits digital video, voice and e-mail. Cisco is
betting a big part of its future on what it calls
the Internet of Everything, a world where bil-
lions of sensors, phones and
machines can be stitched to-
gether by Cisco and its cus-
tomers. The company teamed
with Major League Baseball
this year to allow fans in a sta-
dium to use their smartphones
to get real-time statistics and
replays, including unique cam-
era angles of the play. Through
a mobile app Cisco helped de-
velop with AT&T and app de-
veloper Meridian, visitors to
the Fernbank Museum of Nat-
ural History in Atlanta have ac-
cess to interactive audio, video,
sketchbook logs and other fea-
tures that pop up as they visit
specic locations in the muse-
um. The city of Barcelona has
worked with Cisco over the
past few years to connect its
citizens through video-enabled
information kiosks tied to city
hall and mobile apps that direct
users to available parking spots.
Cisco has been cutting
1995 2004 2014
1995 2004 2013
1
2
3
4
10
20
30
40
$80
0
10
20
30
40
$50
SOURCE: FACTSET.
NET SALES ($BIL)
STOCK PRICE
NO RESPECT
CISCOS STRONG GROWTH HAS NOT
IMPRESSED WALL STREET MUCH.
A
F
P

/

G
E
T
T
Y

I
M
A
G
E
S

(
L
E
F
T
)
ACADEMIC
ECONOMICS
GRATEFUL
GRADUATES
The ultimate measure of a
colleges value might be its
own ROI: Take the median
annual total donations over
ten years and divide by the
number of undergrads. Give
added weight to the average
share of alumni who give
each year, to balance liberal-
arts types from smaller
schools (Carleton, Amherst)
with those making tech or
nance money with a degree
from, say, Stanford or Penn.
The result: Princetons tiger
roars, with a median private
donation of $29,330 and an
alum participation rate of
46%. Rounding out the top
ve: Dartmouth, Williams,
Claremont McKenna and
Bowdoin. For the full list, go
to forbes.com/gratefulgrads.
Matt Schifrin

46 | FORBES MAY 5, 2014
tom lines. Job cuts have been some of the more
obvious eforts, but Chambers team is eager to
talk about the less obvious internal changes.
Gary Moore, a former EDS executive who
was named Ciscos rst chief operating of cer
in 2011 and charged with cutting $1 billion in
operating costs in his rst year, said his team
dug into the supply chain and found that com-
ponents were being purchased by individual
engineering teams. By having prices negotiat-
ed on behalf of multiple groups, the compa-
ny has been able to add back two percentage
points to an otherwise slipping gross margin.
In one of the biggest changes from how the
company has operated for most of its 30 years,
all Cisco employees are now required to work
together on products and services that solve
customers business problems. It might not
sound like much, but thats a huge departure
for a company where product groups worked
in their own little worlds, rarely interacting
with other parts of the organization.
The openness extends even to the compe-
tition. Tom Georgens, CEO of storagemak-
er NetApp, says he was surprised and im-
pressed with Chambers willingness to work
together to integrate the two companies
data center products, even though Cisco al-
ready had a partnership with NetApp rival
EMC. John was looking for more avenues
of success, Georgens says, recalling that
Chambers told him, Anything we could do
to create value for our customers, were in-
terested in. The companies have sold a
combined $1 billion in products. Billion-
dollar businesses matter.
Chambers gets Wall Streets concerns.
They see new competitive models coming at
us. Theyre concerned can we maintain the
growth in our margins, he says. But Cham-
bers says Cisco has always been in reinven-
tion mode, moving from routers and switch-
es to voice-over-IP to video communications.
Cisco has edged out so many rivals over the
past 20 years, including far bigger rms such
as Lucent and Nortel. We beat them all. If
you look at the big picture, weve rein-
vented ourselves how many times here
at Cisco? Last times the charm.
maintenance contracts tied to hardware sales,
most of which are declining. Ciscos nonser-
vices revenue is forecast to drop 5.7% for 2014.
The math is inexorable, says Alex Hender-
son, who has followed Cisco for years as an ana-
lyst for Needham & Co. Theyre a big, branded
IT company in a world thats shifting away from
branded IT.
Former Yahoo chief executive Carol Bartz,
who has served on Ciscos board since 1996
and has watched the company grow from
$400 million in sales, says transitions are
good. It gets all the complacency out of the
system, says Bartz. People get energized.
Theres a new battle to win. Thats when
teams come together.
Chambers, who turns 65 in August, has an-
nounced his departure before, but this time
he says he means it. It was very deliberate,
Chambers says of his retirement announce-
ment. Ive got next-generation leaders that
can lead, that are getting ready.
At least ve executives could plausibly take
over as CEO, though Chambers doesnt call
out any favorites. The likeliest front-runner
is Robert Lloyd, president, development and
sales, but solid candidates also include Pad-
masree Warrior, chief technology and strategy
of cer; Chuck Robbins, senior vice president
of worldwide eld operations; Pankaj Patel,
chief development of cer; and Edzard Over-
beek, senior vice president of Cisco Services.
Chambers acknowledges the company is
still working on getting the lighthouse cli-
ents it needs as proof of concept around In-
ternet of Everything. He expects to have those
reference accounts up, running and talking
in the next year. In the meantime hes shar-
ing Ciscos vision with everyone from Israeli
Prime Minister Benjamin Netanyahu to South
Korean President Park Geun-hye, whom he
pitched at the World Economic Forum in
Davos in January. Shes an engineer by back-
ground, so that helped a little bit.
Over the past few years, Cisco executives
say, theyve been rethinking all aspects of the
business, including setting up a formal pro-
gram called the Accelerated Cisco Transforma-
tion to consider ways to boost the top and bot-
TURNAROUNDS STRATEGIES
NOTICED
THE PUNCH LIST
More than a few people reacted
seriously to the news that
Forbes Releases 2014 List of
Most Punchable CEOs, failing
to grasp that the story came
via the satirical newspaper
The Onion: Based on criteria
such as their scope of inuence,
public image, annual income and
general physical appearance,
the 2014 list provides readers
with a numbered ranking of
top corporate executives from
around the world rated by how
gratifying it would be to nail
them with a solid kidney shot or
a stif jab to the mouth. Oracle
head Larry Ellison topped the
list (adorning a pretty decent
mock cover), with BPs Bob
Dudley and Amazons Jef Bezos
rounding out the top three.
FORBES Editor Randall Lane
was quoted as saying, This
years list features pioneering
and inuential executives
all of whom are pretty much
asking to be slugged, slapped,
shoved or tripped right as they
walk into an important board
meetingthough consideration
for readers tender sensibilities
prevents us from repeating most
of the rest. Lanes defense?
A few of these quotes, he
parried on Twitter, were taken
slightly out of context. As satire
has replaced imitation as the
sincerest form of attery, we
consider ourselves fully blushed.
Opportunities come infrequently. When it rains
gold, put out the bucket, not the thimble. WARREN BUFFETT
FINAL THOUGHT

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As individuals, we have an innate desire to put our personal mark on the world around us. For more than 30 years,
Autodesk has transformed design, engineering and entertainment, enabling professionals to refect the spirit of the times.
Now, as a leader in accessible design and fabrication technology, and building on its professional expertise, Autodesk is
revolutionizing the way the world is designed and madeby inviting consumers to participate in that creative process.
The Future of How Things Are Made
Autodesk Is Empowering Individuals to Participate in the New Industrial Revolution
BY SUSAN BURNELL
Unlocking Creativity on a
Grand Scale
We believe that everyone has an inherent
need to create and express themselves,
says Mary Hope McQuiston, director of
marketing. Along with that comes a major
shift: Consumers dont want to just con-
sume, they want to actually create.
Attuned to that shift, in 2009 Autodesk
released its SketchBook Pro drawing
applicationhistorically used exclusively
by industrial designersto consumers.
Within the frst 50 days, it logged 1 million
downloads. Further expanding its cus-
tomer oferings, Autodesk then launched
the 123D family of apps, which have made
free 3D design and 3D printing software
more accessible to makers and DIY enthu-
siasts around the world.
What It Means for the Future
Autodesk saw its customer base expand
to 170 million in the three and a half years
after the SketchBook rollout. By contrast, it
took the company 30 years to get its first
12 million professional customers. That
growth caused us to stand back and look
at our business, says McQuiston.
The tradi ti onal product devel op-
ment approach of standardization to
achieve scale is being turned on its head,
because todays consumers prefer goods
they helped create over mass-produced,
generic products, says McQuiston. But
with the introduction of maker apps like
the 123D family and additive manufactur-
ing with 3D printing, brands can capitalize
on this opportunitylarge and small
to deliver a complex, customized, high-
quality product at a reasonable price,
quickly and locally.
Consumers today are empowered.
Theyre connected, theyre mobile, theyre
informed, theyre social and, frankly, theyre
impatient. What this means for U.S. brands
and manufacturers is that those who
embrace this reality will succeed, and those
who dont are at risk of being disrupted. Q

48 | FORBES MAY 5, 2014
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al passion. Since his
son had died from a
brain cancer, I knew
more about brain tu-
mors than the aver-
age guy walking down
the street, because we
had to look for support
in handling his con-
dition. But the brain
cancer drug Xcytrin
never made it to mar-
ket. Duggan has none-
theless made Pharma-
cyclics work, buying
shares when no one
else would, funding it
with $50 million of his
own money and riding
it all the way up.
Theres always a
good deal of luck in-
volved in biotech. In
Duggans case, he had a
sleeper in the pipeline: Imbruvica, which turned
out to be a potent treatment for chronic lympho-
cytic leukemia, shrinking tumors in 58% of pa-
tients failed by all other drugs, and mantle cell
lymphoma, a rarer disease. Johnson & Johnson
inked a $975 million deal to copromote Imbru-
vica in 2011, beating out other Big Pharmas, and
Pharmacyclics stock has risen fortyfold since that
fateful phone call, turning his stake into a $1.4 bil-
lion fortune.
Now Duggan says that he plans to use
Imbruvica as the basis for creating a new suc-
cessful drug company. Pharmacyclics already
boasts 500 employees, and he says its other
experimental drugs have promise, too. This
is the time to be in the business, he says. You
build a company up, and you have resources
R
obert Duggan was enjoying just
your average Tampa vacation
a visit to the headquarters of the
Church of Scientology, to which
hes a major donor, and a double
date with one of the worlds top supermodels
when a board member at Pharmacyclics, a bio-
technology company he had invested in, inter-
rupted the party with some urgent news. The
board was resigning en masse in favor of his slate
of directors. Duggan, who had run a cookie com-
pany and pioneered startups in Ethernet and ro-
botic surgerybut knew zilch about running a
biotech rmwould take the helm.
That was in 2008. Six years later, improba-
bly, Duggan is a billionaire. Duggan had made
the investment in large part because of person-
HEALTH CARE INNOVATION
The Lucky Drug
BY MATTHEW HERPER
A combination of management smarts, providence and a breakthrough treatment
made Robert Duggan a biotech billionaire. Long-term success? Thats another story.
Robert Duggans
bet on a ailing
drugmaker turned into
one of biotechs most
astounding investments.
STRATEGIES

Ranked number one in the nation
for cancer care, seven years in a row,
by U.S. News & World Report.
As the nations top-ranked cancer center, MD Anderson continues to pioneer new approaches in cancer
treatment. Using the latest genetics-based research, we can develop targeted treatments, personalized
to the individual patient. To learn more about how were raising the bar for cancer care worldwide,
call toll free 1-855-894-0145 or visit MakingCancerHistory.com.
At MD Anderson Cancer Center, we are focused on Making Cancer History.

50 | FORBES MAY 5, 2014
turned, and Duggan says he wouldnt take him.
Both men are bitter, but Miller is still an Im-
bruvica fan. I actually think it could be the
biggest-selling oncology drug, Miller says.
Once in command Duggan charged a nine-
person committee with advising him on how to
proceed with Xcytrin. The vote came back 90
that Xcytrin was done. Duggan still believes Xcy-
trin would have succeeded if Miller had run the
right trials. It hardly matters. In December 2010
data showing how potent Imbruvica was were
announced at a blood cancer meeting. Pharma-
cyclics shares soared.
Now Wall Street is falling out of love.
Pharmacyclics shares are down 12% year-
to-date, falling behind the iShares Nas-
daq Biotechnology Index, which is down
2%. Duggans eforts to build a medical
team have hit bumps. For instance, he hired
industry veteran Lori Kunkel to head drug
development, calling her a genius, but she
left 19 months later, saying shed done what
she had set out to do by getting Imbruvica
approved.
Investors have been unimpressed with pre-
scriptions of Imbruvica so far, even though
the drug looks likely to beat sell-side fore-
casts. Geofrey Porges, an analyst at Sanford
C. Bernstein with a record of picking the top
for biotech stocks, has been cautioning in-
vestors on the stock. One problem: Anoth-
er lymphoma drug, from Gilead, looks very
similar. Jacqueline Barrientos, a professor at
North Shore-Long Island Jewish hospital who
worked on clinical trials of both drugs, says
that their ef cacy is similar, though Gileads
pill causes more diarrhea.
Kunkel, for one, has faith in Duggan.
He brought the company up to a diferent
level, she says, adding that Bob is a very
astute businessman. And Imbruvica is a
breakthrough drug and still has blockbuster
potentialif it weathers further FDA approv-
als and extends patients lives, increasing the
size of its own market. But to get there it will
take time, workand more than a little luck.
Thats the thing about the drug business:
Overnight success often means youre
just getting started.
and an engine of capacity to execute, because of
its vision, leadership and execution.
He talks of the body harmonious, his idea
that the body can be made to x itself, and of
patient-friendly medicine, a sense cement-
ed at his robotic surgery company, Computer
Motion, sold for $68 million in 2003, that treat-
ments can be made saferfor instance, by using
robots to do heart surgery.
Its a wonderful vision. But can a manag-
er with no experience hunting for drugs build
a drug company? Second acts in the biotech
business are hard: 56% of the drug rms that
received an FDA approval between 1950 and
2011 did so only once.
His track record for drug development is
hardly convincing. When Duggan started buy-
ing up Pharmacyclics shares, his goal was to
build Xcytrin, not bury it. In a 2008 tender
ofer, he said his goal was to use all available
means to encourage and to urge Pharmacyclics
to pursue another trial. Pharmacyclics then
chief executive and
founder, Richard Mil-
ler, had taken up the
strategy of trying to
shame the FDA into
approving Xcytrin, a
plan that was unlikely
to work and was caus-
ing Pharmacyclics
shares to sink.
But internally Mil-
lers attention was
already turning to Im-
bruvica, which he had
bought from Celera
Genomics, the com-
pany known as one of the rst to sequence the
human genome, for only $6.6 million in 2006
as part of a three-compound deal. He hired
Celera scientists who understood the drug and
says he was designing the rst clinical trial to
test the drug himself. When Duggan recom-
mended a new slate of directors, Miller says,
his board, fearing a proxy ght they couldnt
win, made the call to Duggan and resigned.
One board member tried to broach a recon-
ciliation, but Miller says he wouldnt have re-
HEALTH CARE INNOVATION STRATEGIES
Second acts
in the biotech
business are
hard: 56%
of the drug
frms that
received an
FDA approval
between 1950
and 2011 did
so only once.
Medicine is not a science; it is empiricism founded
on a network of blunders. EMMET DENSMORE
FINAL THOUGHT
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What the 60 million
Forbes.com users are talking
about. For a deeper dive go
to FORBES.COM/BUSINESS
TRENDING
PERSON
RICHARD PLEPLER
With record audiences
for Game of Thrones new
season, HBOs CEO shows
everyone from Netix to
Yahoo hes the real king of
original video programming.
COMPANY
WHOLE FOODS
Target and Wal-Mart
announce new organic
and sustainable product
lines. How well can Whole
Paycheck withstand the
coming price war?
IDEA
NEXTGEN ATC
Malaysia Airlines disaster
renews push to transform
Americas aging air-traf c-
control system to a satellite-
based network.

PHOTO CREDIT: ED JAY PHOTOGRAPHY

52 | FORBES MAY 5, 2014
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its rival Jawbone may
be preparing to do the
same.
These companies
are capitalizing on the
terabytes of data they
collect from consum-
ers and, to an extent,
on the largesse of tax-
payers. State govern-
ments have increased
the moneyfrom
$1.3 billion in 2003 to
$6 billion in 2012
allocated to helping
utilities manage en-
ergy demand, accord-
ing to the U.S. Energy
Information Adminis-
tration. In health, new
rules under Obama-
Care broaden the in-
centives employers
can give their staf,
boosting cash rewards
on premiums or deductibles from 20% to 30%.
Small businesses can apply to a pot of $200
million in grants to set up such programs.
Nest founder Tony Fadell says revenue
from his utility services will eventually out-
weigh what he makes from selling thermo-
stats, and fatten his margins: Well get more
and more services revenue because the hard-
ware sits on the wall for a decade, he said
during an interview in December in Nests
Palo Alto ofce. Nest launched its energy-
services programs in April 2013 and has 12
partners in the program, including Chica-
gos ComEd and Southern California Edison.
Honeywell, considered the biggest U.S. ther-
mostat maker by sales, has demand-response
L
ast year Karl Dalal walked more
than 1.5 million steps around
Houston, each step tracked by
the Fitbit wrapped snugly around
his wrist. I wear it religious-
ly, he says. And so does my wife. A big rea-
son he cared enough to keep it on was that
someone else was tracking those steps, too:
his employer, BP.
All that walking helped Dalal, 51, opt for a
lower health care premium from the self-
insured oil giant. The corporate wellness
program that he also oversees just brought
BP Americas health care costs below the
U.S. average growth rate of 6%. Around
14,000 other employees, 6,000 spouses and
4,000 retirees got free Fitbits like Dalal in
2013, and this year a few thousand more
have signed up for his program.
Smart, connected devices have been pitched
to consumers as agents of life improvement.
Every company that makes a gadget for our
shoes, wrists, cars or walls produces a torrent
of data that can be directed at helping us lose
weight, run faster, drive more carefully and use
less energy. Theres a tinge of narcissism to the
quantied-self movement, but the industry is
realizing there may be more value in the quan-
tied other. Your data combined with those
of thousands of other people can tackle big-
ger problems such as cutting your companys
health care budget or sparing the nearby utility
from building another power plant.
Smart-thermostat maker Nest Labs (which
is being acquired by Google for $3.2 billion)
has quietly built a side business managing the
energy consumption of a slice of its customers
on behalf of electric companies. In wearables,
health tracker Fitbit is selling companies the
tracking bracelets and analytics services to
better manage their health care budgets, and
TECHNOLOGY
HARDWARE
Big Brother Inc.
BY PARMY OLSON AND AARON TILLEY
The real value in smart gadgets may be not in what they tell you but in
what they say to your doctor, insurance company and utilities.

MAY 5, 2014 FORBES | 53
programs with 25 utilities.
For Nest, winning contracts with utilities
is a slog. Nest needs to catch some utilities
between three-year planning cycles and sell
more thermostats. Its in less than 1% of U.S.
households. Nests deals with utilities vary.
In some cases the utility reimburses custom-
ers $30 to $50 a year per thermostat for the
right to turn the air conditioner down on hot
days to ease the load on the grid. In other
deals Nest splits cost savings with the utili-
ty. Its thermostat learns a households activi-
ty over time through multiple sensors that de-
tect things like temperature and movement,
and automatically changes the temperature
accordingly. Honeywells thermostats dont
detect movement, relying more on customer
programming. Also, while Honeywell funnels
all user data to utilities, Nest takes over the
difcult job of parsing it and managing con-
sumption. We dont let utilities control the
thermostat. We dont share the data with the
utility. We wont work with them if they dont
agree, says Nest cofounder Matt Rogers. Util-
ities dene a successful demand-response
program as one that lowers energy usage by
30%. Nests servers and algorithms can reduce
it by 50% to 60% at peak times.
Nests director of energy services, Ben
Bixby, says many utilities are in the pipe-
line, but itll likely be years before the real
revenue kicks in.
Nests Matt Rogers in
front of his $249 smart
thermostat. It can
also generate service
revenue for years.

54 | FORBES MAY 5, 2014
comes lucrative. For now both have free and
open APIs (application programming inter-
faces) that link their smartphone apps with
insurers, employers and tness apps like
RunKeeper, with a users permission. Jaw-
bone vice president of product management
Travis Bogard says Jawbone may ape Fitbit
and provide analytics software to employers.
It might also take a revenue cut from third-
party services like Sleepio, which charges in-
somniacs $25 a week for cognitive behavior-
al therapy sessions by tracking them (at no
charge, for now) through the Jawbone UP, or
Wellos $199-a-month online tness classes,
which also draw data from the UP.
This time last year Jawbone spent $100
million on BodyMedia, a maker of high-tech
armbands that could track sweat, activity and
temperature and that had just started a test
project with Cigna. The bands tracked sever-
al thousand people deemed at risk of diabe-
tes, and Cigna provided remote coaches to en-
courage them to become more active. Early
anecdotal evidence shows a double-digit im-
provement in users risk proles from cate-
gories like chronic to at risk, according to
Cigna spokesman Joe Mondy.
Cigna wants to eventually reach millions
of employees and estimates the right con-
sumer-oriented product could lead to a 13%
year-over-year reduction in medical trend,
what insurers charge employers based on the
risk proles of their employees, Mondy says.
We can literally bend the cost curve.
Part of the outcome will rest on what new
conveniences consumers will share in ex-
change for their increasingly personal data. It
will denitely be about the data as we move
forward, says Jawbones Bogard. The quan-
tied self was just a rst step, he adds. Most
people dont really care about how many steps
theyve taken each day, but they do care about
their insurance and energy bills.
Once all these data are mined and shared
across a growing web of connected things
and entities, Karl Dalals Fitbit will not only
inform his insurer hes running a
feveritll tell his Nest thermostat to
turn down the heat.
Till then Fadell and Rogers are trying to
avoid the fate of other smart utility projects
that ended up on the scrap heap. An earli-
er generation popped up in 2008 after federal
stimulus money helped utilities upgrade their
power grids to produce real-time energy data
they could share with third parties. Google
and Microsoft responded with software
called PowerMeter and Hohmthat let con-
sumers better understand their energy usage.
The software was free, but both programs
were shut down in 2011 due to a lack of user
interest. Cisco also tried and failed to main-
tain an energy management system for util-
ities. Analysts say its hard to independently
verify savings claims with smart thermostats
because of the complex web of variables. We
know intuitively there is a conservation efect,
but its not yet measured, says Debbie Kim-
berly, the vice president of energy ef ciency
programs at Austin Energy, a Nest utility part-
ner. Were in the process of looking into that.
Fitbit, a wearable device that counts your
steps, began working with employers after
several approached the tiny startup in 2010 to
use its bands in their corporate wellness pro-
grams. Today Fitbit sells its trackers in bulk to
thousands of employers at a discount, along
with sophisticated tracking software that can,
for instance, get one of ce competing against
another or see how active certain employees
are, assuming the employees have given their
permission to expose their personal data. Its
one of the fastest-growing parts of Fitbits
business, says CEO James Park. For privacy
reasons both self-insured employers and those
with group insurance have to bring on a pop-
ulation-management rm such as StayWell or
Welltok to manage the data as a neutral third
party. Amy McDonough, who oversees Fit-
bits employer program, wouldnt comment on
how Fitbit data would afect pricing negotia-
tions between employers and health care pro-
viders, though health insurer Cigna said t-
ness trackers may have an impact on future
group insurance pricing. The data are still
being tested.
Itll take a few years of scaling up before
Jawbones and Fitbits enterprise play be-
HARDWARE TECHNOLOGY
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TRENDING
What the 60 million
Forbes.com users
are talking about.
For a deeper dive go to
FORBES.COM/TECHNOLOGY
PERSON
BRENDAN EICH
Mozillas ten-day CEO steps
down after howls of protest
over his support of Californias
anti-gay-marriage Prop 8.
Donor disclosure, whether
leaked or mandated, is a
Pandoras box.
COMPANY
MICROSOFT
The debut of Of ce for iPad
has won raves and shows a
new willingness to work with
former enemies. With Steve
Ballmer gone, is Microsoft
getting its groove back?
IDEA
PASSWORDS AS
HIEROGLYPHICS
Sinister Heartbleed security
bug endangers data for
hundreds of millions of Web
users. K3bwD/*+~f$x6 never
looked so goodif you could
possibly remember or keep
track of it.
There will come a time when it isnt Theyre spying on me through my
phone anymore. Eventually, it will be My phone is spying on me. PHILIP K. DICK
FINAL THOUGHT


56 | FORBES MAY 5, 2014
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Forrester predicts 10% of U.S. sales will be via
e-commerce by 2017the $600 billion gro-
cery industry has been slow to follow. Pro-
duce and dairy spoil fast, and delivery win-
dows are narrow. As of yet GSE doesnt sell
perishable groceries, but its something
were in the advanced stages of working
on, says Tom Fallows, director of product
management.
That caution is typical of the new genera-
tion of online grocers. Amazon tested Fresh
for six years in Seattle before taking it on the
road, whereas Webvan blasted through more
than $800 million in two years in a fran-
tic landgrab. They hadnt gured out the
economics in one city before they were in
ten cities, says Apoorva Mehta, Instacarts
founder and CEO. He should know: His lead
investor, Sequoia Capitals Michael Moritz,
was also on the board of Webvan.
Compared with its massive rivals, Meh-
tas company is expanding at a breakneck
pace. It can afford to do so because it trav-
els light. Unlike Amazon and Walmart,
which source and store inventory, Insta-
cart handles only delivery, relying on 1,000
freelance shoppers. A smartphone app
navigates them through aisles and streets
with maximum efficiency. The app is pow-
ered by an algorithm not unlike the one
that steers Amazons associates around
warehouse floors. As an engineer Mehta
worked in fulfillment at Amazon before
striking out on his own.
Instacart typically charges $3.99 per
delivery plus markups on products (some-
thing Google and Walmart swear not to do)
and collects fees from merchants. But even
with a three-legged revenue stool, route den-
sity is crucial, says RetailNet Group ana-
lyst Justin Bomberowitz. If [your shoppers]
are not delivering three-plus orders an hour,
youre going to lose money.
Instacarts growth has been amazing. In
the short term theyre denitely winning,
says Bill Bishop of consultancy Brick Meets
Click. But with its relatively high fees he pre-
dicts a tough road ahead against the
bigger players. A price war will have at
least one winner: consumers.
SAME-DAY HOME deliv-
ery of groceries is to retail-
ers what Mount Everest is
to climbers: The lure is ob-
vious, the logistics fearsome,
and tackling either without
the right plan is suicide. Nev-
ertheless, 13 years after the
spectacular collapse of Web-
van made it a lasting symbol
of dot-com-era hubris, simi-
lar services are cropping up
in cities and suburbs across
America. Operating them are
the biggest names in tech and
retail, along with a bevy of
more specialized startups.
AmazonFresh recently ex-
panded from Seattle to Los
Angeles and San Francis-
co, where it ofers new cus-
tomers free same-day deliv-
ery on orders over $35. In the
Bay Area Google is working with stores such
as Walgreens to provide rapid delivery of food
and other products through Google Shop-
ping Express; a test with Google employees
in Los Angeles is under way. Promising low
prices and fees, Walmart to Go colonized its
second market, Denver, in October after two
years in San Francisco. Two-year-old Insta-
cart is already live in six cities, providing su-
perfast deliveries from Whole Foods, Costco
and other chains. (Its home base: San Francis-
co, of course.)
While retail in general is moving online
TECHNOLOGY
E-COMMERCE
The Same-Day War
BY JEFF BERCOVICI
Fast grocery delivery was a disaster for
Webvan. Why are so many trying it again?
Instacart CEO Apoorva
Mehta is going
nationwide quickly and
is even backed by the
people behind Webvan.
Innovation is an evolutionary process, so its not
necessary to be radical all the time. MARC JACOBS
FINAL THOUGHT

Try it free for 30 days
Start your own innovation story with
GoToMeeting. Download your free
trial today at gotomeeting.com.
Investors Business Daily CMO
John Becker
I believe that GoToMeeting with
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Stories of Innovation

58 | FORBES MAY 5, 2014
womenvisit Wayfair.com to browse its mas-
sive housewares catalog, an online direc-
tory hundreds of times larger than any Sears,
Roebuck ever produced. Shipping is free for
orders over $49; assembly is usually up to you.
Wayfair doesnt make anything. Many of its
goods are produced by mom-and-pop opera-
tions, and the site will carry a product even if it
sells it only once.
The key to this enterprise is a series of
algorithms that fullls orderswith a 98%
success rate thats improving all the time.
Deployed to manage 7,000 vendors and a
head-spinningly convoluted supply chain,
that secret sauce makes shopping a virtually
frictionless experience. Wayfair is as much
a data miner as it is a retailer. It constantly
probes and processes information about its
W
ayfair is an e-commerce
site selling home fur-
nishings. But with 1,600
employees, its physical
presence is rapidly out-
growing its space in an obelisklike skyscraper
in Bostons Back Baywhich happens to be a
former hub of the Christian Science church.
Long gone are the white shag carpets, wood
paneling and executive-oor elevators that
once allowed church higher-ups to avoid hoi
polloi. Flat-panel TVs on each of 12 oors beam
not messages of faith healing but maps of the
U.S. and Europe that light up whenever theres
a sale. Within seconds Katherine from Deca-
tur, Tex. buys a $49 tungsten wedding ring, Jen
adds a $94 cherrywood bar stool to her lounge
in upstate New York, and Jenna in Connecticut
picks up a $102 gray Parsons kitchen chair.
We installed those TVs so we dont forget
what were doing, explains Niraj Shah, the
dapper, bald 40-year-old CEO and cofounder
of Wayfair. Hes passing through the 24th
oor with cofounder and Chairman Steve
Conine, 41, a more hirsute, if less buttoned-
down, counterpart. Were selling people
things to put in their homes.
A lot of thingsmore than 10 million tables,
sofas, patio chairs, cat playgrounds and so
forth, just last year. If its margins are in line
with other e-commerce sites, Wayfair net-
ted an estimated $18 million on $915 million
in 2013, up 55% from the year before. It sells
goods to customers across the U.S., Canada,
Germany and the U.K. Each month more than
11 million peoplemostly 35- to 65-year-old
E-COMMERCE
The Calculus
Of Couches
BY ABRAM BROWN
Wayfair.com sells nearly $1 billion
worth of sofas, chairs and
cat playgrounds. But its real
business is data mining.
In the early days
customer service
was an oxymoron for
cofounders Niraj Shah
and Steve Conine.
ENTREPRENEURS

MAY 5, 2014 FORBES | 59
customers to interact with them, anticipate
their wishful thinking, personalize their home
pages and turn search into a form of enter-
tainment. We probably have the perfect
product, Shah says.
Its hard to reconcile this well-tempered
machine with the mess Wayfair was just a
few years ago. Back then it went by the head-
scratching acronym CSN Stores, 200 disparate
e-commerce sites like Cookware.com and
EveryGrandfatherClock.com. We used to
throw things up on the site, recalls Conine.
If you bought it from us, wed then have to
nd out whether we had it. Result: incom-
plete orders 15% to 20% of the time and lots of
complaints about late shipments.
What do you expect from a couple of engi-
neers with no background in merchandising
or sales? Buddies since their freshman year
at Cornell, Conine and Shah teamed up soon
after graduation in 1995 to launch Spinners,
which built websites and software for Merrill
Lynch, the New York Times Co. and others
struggling with the early digital age. Spinners
was sold in 1998. The guys left two years later
and launched Simplify Mobile, which tried to
resell network services at bulk rates. No tak-
ers; the company folded.
The duo shrugged and moved on. Poring
over search data, they found a multitude of sites
for a pastiche of sought-after items like strollers,
Adirondack chairs and TV stands. Why not
jump in? With RacksAndStands.com, launched
in 2002, CSN was born in the nursery room of
Conines home in Bostons South End.
New sites piled up haphazardly. Sales were
on the rise, but CSN approached them
as one-time transactions. The company
spent a lot of time on the phone with
unhappy customers, who sometimes
complained to the Better Business
Bureau. Typical gripe: Of all the years
of online shopping I have never dealt
with such incompetency in a company
before. (Today Wayfair maintains an A+
rating from the bureau.)
By 2011 CSN was pulling in $500
million in revenue. But Shah and Co-
nine recognized they needed a radical
reboot to bring dozens and dozens of
sites under one electronic roof, cre-
ate a brandand focus on customers.
That called for a big investment, and
for the rst time the company took
on outside funding. Battery Ventures,
HarbourVest Partners, Great Hill Part-
ners and Spark Capital contributed a
colossal $165 million in a rst round in
June 2011. They all knew that CSN was
morphing into Wayfairand that the
guys had novel algorithms.
They gured out how to man-
age 7,000 vendors and the drop-ship
process so the vendors go directly to
the consumer, says Battery Ventures
Neeraj Agrawal, who knew the duo
at Cornell. Thats never been on the
Internet before. Technically true,
since Amazon often takes possession
of goods and ships out of its own ware-
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60 | FORBES MAY 5, 2014
becomes one stop for them. They often come
to the site through SEO . Theyre just bump-
ing around for the best price, says Conine.
They typically spend ve minutes or so on
Wayfair.com, rack up 50 page views and
check out quickly. Prices for items they
frequently view may have to be adjusted to
compete more aggressively with the likes of
Amazon.com.
Gatherers are more like window-shoppers.
They often return to Wayfair, sometimes
spending tens of minutes, even hours, on
the site, racking up hundreds of page views.
These browsers , too, arrive via search, but
unlike hunters, they also ock to Wayfair.com
directly. They enjoy browsing topics like bed-
room sets and are less brand-driven. Wayfair
caters to this group with its photo-rich Ideas
& Advice section, designed to set up a sale. But
thats about as far as the company is willing to
snap the trap.
There are still complaints from shop-
pers, mostly focused on slow shipping. To
address the gripes Wayfair ofers customer
service out of of ces in Utah and Boston.
E-mails get answered within four business
hours. There are Q&A pages that encour-
age customers to post queries and concerns.
Even engineers are told to answer com-
plaints directly if theres a problem with the
site. Employees who go the extra mile get
reward dollars; customer service reps who
score high on follow-up questionnaires get a
monthly bonus.
One set of customers may soon get more
attention: Wayfairs investors. In three equity
roundsthe latest one brought in $157 mil-
lion last monththe company has raised $358
million for an estimated valuation of $2 bil-
lion. (Shah and Conine still hold an estimated
50%.) A potential initial ofering this year is a
poorly kept secret. Wayfair may have tipped
its hand last year when Michael Fleisher, who
took Warner Music public in 2005, was hired
as its new CFO. There are IPO suspicions,
says Spark Capitals Alex Finkelstein,
who can barely suppress his glee. But
I cant say too much about them.
houses; Wayfair has minimal facilities and
doesnt touch most products.
Heres how the system works. Suppliers
upload data on current stock to Wayfair serv-
ers (less technically advanced shops e-mail
their info). The algorithm sifts through the
data, looking for red ags (example: delays
in a vendors inventory update) and storing
information on whats in stock and where it is.
Every time a customer browses a page, the al-
gorithm checks to see whether an item is still
available and how long shipping might take.
Once an order is placed, software kicks
in to notify the supplier. The system then
decides how to ship the itema Quoizel
lamp might mean a small package via UPS or
FedEx; an area rug requires a delivery compa-
ny Wayfair contracts with. Once the item is en
route, the platform pulls in updates from the
delivery team and displays an ETA through
the customers Track My Order page.
Wayfair constantly tries to learn more
about its shoppers and potential customers.
Cookies track everyone visiting Wayfair.com,
but Shah is wary of pushing too far: We want
to know who you are, but we want you to tell
us about you. Hell encourage you to sign
up for an account, sometimes ofering a 10%
discount code in exchange for your name and
e-mail. Once you have an account and log in,
Wayfair can observe you over time.
What does it learn? When a customer
browses bar stools marked as, say, modern
and swiveling, Wayfairs algorithm serves
up other examples on your search page and
suggests similar modern items that ap-
pear at the bottom in a frequently browsed
section. The more you click, the more the
algorithm senses your preferences. Wayfair
is experimenting with this inferential ap-
proach to create a bespoke home page for
each customer. Its also teaching its algo-
rithm to tailor daily deals and ash sales to
the e-mails it sends.
Wayfair has learned to divide shoppers
into two groups: hunters and gatherers.
Hunters are looking for something specic
maybe a Kohler faucetand Wayfair.com
ENTREPRENEURS
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TRENDING
What the 60 million
Forbes.com users
are talking about.
For a deeper dive go to
FORBES.COM/ENTREPRENEURS
IDEA
THE WEB IN 2039
In 25 years the Internet will
afect all aspects of life, including
health care (hospice robots),
surveillance, telepresence and
the manufacture of prosthetics
and auto parts.
PERSON
DANA WHITE
The boxer left the mean streets
of Boston for Vegas, teamed
up with the Fertitta brothers
and bought Ultimate Fighting
Championship, the worlds
biggest promoter of mixed
martial arts.
COMPANY
XIAN FAMOUS FOODS
P.F. Changs its notyet. The
New York City-based Chinese
specialty food shop is looking
to take its foodie-enticing lamb
ofal and hand-ripped spicy
noodles to scale.
Modern man, if he dared to be articulate about his concept
of heaven, would describe a vision which would look like the bigest
department store in the world. ERICH FROMM
FINAL THOUGHT

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62 | FORBES MAY 5, 2014
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York Times a few months earlier, arguing that
the owners of businesses and productive assets
had always been rewarded over time. Found-
er Don was, after all, a long-only buy-and-hold
stock investor in the Bufett tradition.
Dons impassioned plea to fellow Texans
was smart p.r., but what really saved the com-
pany was a seed it had planted more than a
year earlier.
Back in 2007, when the rm was racking
up performance awards, Craig decided to do
some mutual fund soul-searching. He analyzed
the funds returns and discovered that most
of Hodges alpha was being generated by its
small-cap picks. Indeed, he was tapping into
something that Yale professor Roger Ibbot-
son has observed for many years. Small stocks,
while more risky, tend to outperform large
stocks over the long run12.3% versus 10.1%
on average per year from 1926 to 2013, accord-
ing to Morningstar/Ibbotsons annual study.
So the rm quietly launched Hodges Small
Cap Fund using a growth-at-a-reasonable-price
strategy. The fund was seeded with a mere
$5 million in capital in December 2007.
T
he years leading up to the -
nancial crisis were like a dream
for Don and Craig Hodges, the
father-and-son money manage-
ment team running Dallas mutual
fund manager Hodges Capital. The familys ag-
ship Hodges Fund, founded in 1992 by father
Don, was up 201% from 2003 to 2007 versus a
83% total return for the S&P 500. Hodges Fund
had won ve Lipper Awardsthe equivalent
of Oscars among mutual fund managersfor
best multicap core fund. Assets poured in, swell-
ing the fund from $50 million in 2002 to $750
million by the end of 2007.
Then the bottom dropped out of the mar-
ket, and like other stock funds, Hodges fell hard,
down 50% in 2008 versus 37% for the market.
We didnt see the liquidity part coming, re-
calls Craig Hodges, the rms 50-year-old CEO
and chief investment ofcer. Even though
company fundamentals werent changing that
fast, people were selling whatever they could.
General ugliness ensued as the familys bread
and butter business went into crisis mode.
My dad is an old-school kind of guy, says
Craig. In fact, it was Don, 80, who chose a
15,000-square-foot historic American Four-
square mansion, with wood-paneled rooms and
four marble replaces, for company headquar-
ters. We had a tendency to let our winners run
and not take anything of the table.
But the 2008 declines were stunning, and
when some of Hodges best longtime clients
called to pull their money out of equities in
early 2009, Don felt something had to be said.
So he called the Dallas Morning News and
placed an announcement that read, Were
down ... but were not out by a long shot!!!
Fortunately in the stock market there are no
fourth quarters no last play. His advertise-
ment touched on themes similar to Warren Buf-
fetts famous Buy American op-ed in the New
MUTUAL FUNDS
Dallas Buyers Fund
BY STEVE SCHAEFER
Meet Don and Craig Hodges, owners of a mutual fund
family that prefers the sweet taste of home cooking.
Fund managers Don and
Craig Hodges small-cap
ofering has been hot,
but six other funds are
waiting in the wings.
INVESTING

Good thing. Because while Hodges
Fund assets continued to decline
postcrisis (Hodges was down 13% in
2011 versus a 2% return for the S&P
500), its small-cap spinof was post-
ing stellar returns. In fact, over the
last ve years it has trounced the
Russell 2000, up 35% on average ver-
sus 25% for the index. Last year the
fund posted a total return of 48%,
and assets, now at $1.1 billion, have
far surpassed the agship fund.
If the Hodges family has a knack
for picking winning small stocks, it
comes in part from a commitment to
serious tire-kicking. It also bends the
rules of most small-cap mutual funds,
in that it is under no compulsion to
sell stocks whose market capitaliza-
tion rises above the traditional $2 bil-
lion market cap limit.
One example is $4.4 billion (sales)
railcar maker Trinity Industries, a for-
mer steel company run by the Wallace
family of Dallas. Having owned Bur-
FORBES
The Return of the (Virtual) Investment Club:
Retail Investors Are Embracing Social Media
STEVE QUIRK
SENIOR VICE PRESIDENT, TRADER GROUP
TD AMERITRADE
Quirk then dropped in on MarketCast,
where 420 people were discussing
natural gas. Thats been all over the
map lately, he says.
The point of this and other rooms like
Swim Lessons, where several thou-
sand people gather, is that nobody
has to go it alone, says Quirk.
On Wednesday nights, he adds,
well have a special guest, like entre-
preneur and commodity trading
advisor John Carter or trading vet-
eran and author John Person, talk to
6,000 or 7,000 people.
Its a far cry from the trading oor
days of the 80s, when Quirk was a
professional trader. Back then, says
Quirk, I knew a lot more about what
was going on than retail clients did,
because they just didnt have access
to the information. Now its trans-
parent, and retail investors can get
the information they need on their
desktop or mobile devices.
People are always connected
socially, from a news standpoint, and
to the market. The whole playing
eld has been leveled.
Quirks mother might recognize the
intensity of conversations found in
MarketCast or Shadow Trader
minus the expensive dinner.
We get good crowds online, and
theyre very engaged, says Quirk. It
gives us a chance to do some valuable
education and answer retail investors
questions, as well as encourage them
to interact as a community.
F
or more than two decades, Joanne Quirk
of Oconomowoc, Wisconsin, has been a
member of the same investment club. All
the members are married women, and they
compete with their husbands, who have their own
investment club. The rules of engagement are
straightforward. Everyone contributes $50 per
month. Whoever is behind at the end
of the year buys dinner at a fancy
restaurant in Milwaukee.
In the fullness of time, the men have
regularly had their clocks cleaned by
the ladies, whove dubbed themselves
LMBLes Money Bags. The men dont
know what LMB stands for, claims Joanne.
(Until now, that is.)
When she lamented to her son Steve that invest-
ment clubs like hers seemed to be vanishing, he
disagreed. Mom, Quirk said, investment clubs
are still heretheyre just virtual now. The apple
doesnt fall far from the tree: Quirk is Senior Vice
President of TD Ameritrades Trader Group.
Quirk recently gave a tour of chat rooms run and
monitored by TD Ameritrade. Each room focuses
on a particular class of assets or transactions.
In Shadow Trader, for example, two technicians
were talking about LinkedIn while 2,300 people
listened in, according to Quirk, who was monitor-
ing the room on his screen.
BrandVoice
BY TD AMERITRADE
Nobody has to go it alone.
STEVE QUIRK
SENIOR VICE PRESIDENT, TRADER GROUP
TD AMERITRADE
TD Ameritrade, Inc., member FINRA/SIPC/NFA. Commentary provided for educational purposes only. Past performance
is no guarantee of future results or investment success.

MUTUAL FUNDS
64 | FORBES MAY 5, 2014
ally everywhere, from small desktop gurines
to a near-2-foot-tall glass sculpture of a bull
on a table in the elegant ground-oor confer-
ence room.
Eagle Materials, which makes cement and
wallboard, is another Dallas company promi-
nent in Hodges funds. The Hodges team dis-
covered the stock while researching compet-
itor Texas Industries. It learned that Eagle
was acquiring land in Illinois, rich in the type
of durable sand used in hydraulic fracturing,
or fracking. The companys frac sand busi-
ness could boost revenues by 60%.
Client Pickens has known Don Hodges for
decades. He compares Hodges to a geologist
who gets to know one area so well that he can
get rich advising oil companies on where to
drill; the only diference is Hodges is mining the
stock market and, more precisely, companies
in his own backyard. Indeed, nine of the rms
top ten holdings are based in Texas and ve in
Dallas itself. Dons in the top 1% of any money
manager Ive dealt with, says Pickens, whose
Hodges account has nearly tripled since 2005.
If there are any lessons the Hodges fami-
ly learned from the rms 2008 reversal, it is to
regularly employ rigorous questioning to port-
folio stalwarts. In this way Craig Hodges avoid-
ed disaster in Tempur Sealy, the mattressmaker
from Lexington, Ky., which he rst purchased
in 2009 (it was then known as Tempur-Pedic).
Hodges took prots as the stock climbed from
$18 to $70 and ultimately sold out completely
in early 2012, when pricing power began to de-
teriorate. Craigs rst clue was a casual remark
from a client who had seen a postcard adver-
tising a 10% discount on the companys Cloud
mattress brand. Hodges analysts started mak-
ing calls to mattress retailers and conrmed the
competition was undercutting Tempur-Pedic
on price. After Hodges sold, the stock continued
up but ultimately plunged 75% by June 2012.
Another bit of postcrisis wisdom comes
from Hodges spinof success. Though only
two funds make up the bulk of the rms $2
billion in assets, Hodges has germinated ve
other tiny funds, including Hodges Equity In-
come, for dividend lovers, and Hodges
Pure Contrarianjust in case the lone
star in its lineup begins to fade.
lington Northern Santa Fe until it was taken
over by Bufetts Berkshire Hathaway and
living close to the Dallas/Fort Worth trans-
portation and logistics hub, the Hodgeses are
intimately familiar with railroads. Back in
2005 the team met with management and be-
came convinced that a rail boom was coming.
They rst got into the stock when Trinity was
a small cap, selling at $22 per share. Today it
trades for $69, up 54% and 27% in 2013 and
2014, respectively. Its market cap is $5.4 bil-
lion. But Hodges isnt sellingits adding to its
position because it believes increased demand
for rail transport of oil and gas and a few high-
ly publicized derailments will trigger a signif-
icant sales boost. These wrecks are going to
require an upgrade of old railcars, says Don,
but its so expensive theyre going to trash a
lot of them and order new tank cars.
The rms four portfolio managers and seven
analysts are zealous about talking to companies,
as well as suppliers and competitors. On aver-
age about 700 companies are contacted each
year. They have a family-style approach to dis-
cussing prospects and holdings. Several times
a week the investing team gathers in the man-
sions attic, which has been converted to a con-
ference room. They discuss the latest news on
portfolio holdings and what theyve learned
from recent company meetings.
On an early April morning the discussion
ranges from a recap of Fort Worths power-
plant component maker AZZ Inc.s earnings
to the forthcoming IPO of Plano, Tex.-based
restaurant chain Zoes Kitchen.
Don Hodges, who spends a good deal of his
time talking to the rms wealthy Texas clients,
including oil tycoons like T. Boone Pickens,
briefs the group on client worries of an over-
heated market. Not once during the meeting is
there any mention of the Federal Reserve, that
mornings release of the monthly jobs report or
the shaky state of emerging markets.
Hodges is a bottom-up stock-picking oper-
ation with little interest in macro trends. Its
hard to pin down either Craig or Don on spe-
cic metrics other than to say they look for
low relative P/E multiples and above-average
growth. And if their stocks for the long run
style werent apparent enough, bulls are liter-
INVESTING
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TRENDING
What the 60 million
Forbes.com users
are talking about.
For a deeper dive go to
FORBES.COM/INVESTING
PERSON
MARY BARRA
GMs new chief feels
the heat as investors
and Congress lambaste
ignition-switch defects.
COMPANY
GRUBHUB
Investors gobble up
IPO of food-delivery
clearinghouse, even at a
lofty valuation.
IDEA
GETTING RICH
SLOWLY
For the rst time
companies paid out
more than $1 trillion in
dividends last yearand
all you had to do to get a
cut was own their stock.
Never confuse a single defeat with a fnal defeat. F. SCOTT FITZGERALD
FINAL THOUGHT

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in any jurisdiction where we are not authorized to do business. TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a
trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. 2014 TD Ameritrade IP Company, Inc.
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66 | FORBES MAY 5, 2014
INVESTING
A. GARY SHILLING FINANCIAL STRATEGY
INVESTORS WHO THOUGHT
emerging markets were the bees knees
have sufered agonizing reappraisals.
After several years of Federal Reserve-
fueled rallies, less developed mar-
kets are now in the doldrums. Emerg-
ing economies depend on exports for
growth. That means Europe and North
America. Unfortunately, as long as
we are still deleveraging, the export-
growth model is no longer viable.
For investors its important to sep-
arate well-managed emerging econ-
omies, the Sheep, from the poorly
run economies, the Goats. My list of
SheepSouth Korea, Malaysia, Tai-
wan and the Philippineshave cur-
rent account surpluses, which mea-
sure the excess of domestic saving
over domestic investment. So they
are exporting that diference, which
gives them the wherewithal to fund
any outows of hot money, as have
occurred in the past year.
The Sheep also have stable cur-
rencies against the U.S. dollar, mod-
erate ination and fairly at stock
markets. With their current account
surpluses, the Sheep havent been
forced to raise interest rates in order
to retain hot money.
By contrast, the Goats have neg-
ative and growing current account
decits. These countries include Bra-
zil, India, Indonesia, South Afri-
ca and Turkey, with basket case Ar-
gentina thrown in. For the most part
they have weak currencies, serious
ination and falling stock markets.
These Goats rely on foreign money
inows to ll their current account
decits. Theyve raised interest rates
in an attempt to retain and attract
foreign funds. Argentina has gone as
far as to set exchange controls.
The Goats are in deep trouble, but
they are better of today than they
were in the late 1990s, when many
had xed exchange rates and bor-
rowed in dollars and other hard cur-
rencies. Back then they didnt want
to devalue because it would have in-
creased the local currency cost of
their foreign debts. But when Thai-
land ran out of foreign currency re-
serves in 1997, the Goats fell like
dominoes. That triggered the 1997
98 Asian crisis, which ultimately
sank Russia, Brazil and Argentina.
Today less foreign borrowing,
more debts in local currencies and
exible exchange rates make adjust-
ments easier. Still, they are in a no-
win situation because sharp currency
drops promote ination, and raising
interest rates to protect currencies
and curb ination depresses econom-
ic growth and exports.
Economics 101 tells us that cur-
rent account balances are a zero-sum
game globally, so if the Goats current
account decits decline, other coun-
tries balances must weaken. This is
a big problem in an era of slow global
growth. Who will volunteer to help
the Goats? Not I, say the Sheep; not I,
says the Fed; and not I, says China.
No help from Japan, either, as the
Abe government is trashing the yen
to spike exports. The only glimmer
of hope is the possibility that a col-
lapse in oil prices would transfer ex-
port earnings from OPEC to energy-
importing Goats.
The Goats also have country -
specic problems. Brazil is promoting
consumer spending to the detriment
of investment in industry and infra-
structure. Its also dependent on raw
materials and agricultural exports.
Turkey is in the midst of a sprawl-
ing corruption probe and a political
power struggle. South Africa sufers
from labor unrest. Energy-dependent
Russia is subject to sanctions.
The securities of most emerg-
ing markets may get beaten down to
the point where they look attractive.
Ill still favor the Sheep. Their econ-
omies are well enough managed to
make it in a world with limited de-
mand for their crucial exports. The
Goats may not collapse and default,
but until they get their houses in
order, my answer is naaah.
BLEATING SHEEP
AND GOATS
A. GARY SHILLING IS PRESIDENT OF A. GARY SHILLING & CO. AND AUTHOR OF THE AGE OF DELEVERAGING: INVESTMENT
STRATEGIES FOR A DECADE OF SLOW GROWTH AND DEFLATION (JOHN WILEY & SONS, 2011). WWW.FORBES.COM/SHILLING.
WHO WILL VOLUNTEER TO HELP THE
GOATS? NOT I, SAY THE FED AND CHINA
T
H
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68 | FORBES MAY 5, 2014
INVESTING
MARILYN COHEN CAPITAL MARKETS
FOR THE LAST FEW YEARS
there has been an inner voice telling
bondholders rates have nowhere
to go but up. Thats why skittish
xed- income investors stampeded
into adjustable-rate-bond funds last
spring when interest rates bumped
up. But there is a smarter strategy
than selling in panic or merely sitting
on the sidelines.
You want bonds with moving
parts. What are they? Theyre bonds
that have some feature that adjusts
with rates or resets at some future
point in time. Examples are bonds
whose yield changes with the slope
of the yield curve, Libor-based bonds
and bonds whose coupons adjust to a
specic Treasury yield. Allocate 10%
to 15% of your portfolio to themand
no more. Theyre all from nancial
institutions, and too much exposure
to any sector is never a good thing.
Citigroup has an attractive yield-
curve steepener (implying that long-
term Treasury yields remain high-
er than short-term yields). Buy the
CITIGROUP 10.50% COUPON BOND MATUR-
ING FEB. 19, 2034 (CUSIP: 1730T0G78), call-
able Feb. 19, 2015 at par. The impres-
sive 10.50% coupon is a teaser rate
that changes in February 2016. This
gives you nearly two years to bank
that double-digit coupon. When the
10.50% coupon resets in 2016, the
formula for computing the new cou-
pon is: 6 x (30-year Treasury Swap
rate) (5-year Treasury Swap rate)
25 basis points.
Institutional investors can access
these rates on data providers (like
the Bloomberg terminals), but an
easier way to get a bead on the new
rate would be to substitute the 30-
year Treasury (now 3.65%) and the
5-year rate (now 1.7%) instead of the
swap rates in the formula. This bond,
priced at 99.12, has a oor of 0%, and
payments and resets are quarterly.
The Bank of Nova Scotia, rated
A+, AA, also ofers curve steepen-
ers with high teaser yields. The BANK
OF NOVA SCOTIA 10.50% COUPON BOND (CUSIP:
064159DF0) is callable Jan. 30, 2015 at
par and is priced at 97. The terms dif-
fer from the Citigroup bond. This
issue resets January 2015 and will
yield 4 x (the 30-year Treasury swap)
(the 2-year Treasury swap) 25
basis points.
Beware: Some of these bonds with
moving parts are small issues with
little liquidity, and that may restrict
a quick and easy exit. Before buy-
ing, search InvestinginBonds.com
by CUSIP to verify that your bonds
trade daily or at least weekly.
For nervous investors I recom-
mend Libor oaters as a securi-
ty blanket to calm your interest rate
angst. Lloyds Bank Plc. rated A2,
A has bonds with a minimum cou-
pon rate of 2%. If three-month Libor
plus 1.25% exceeds the 2% oor, then
thats the new coupon. Lloyds bonds
are shorties, maturing July 20, 2017
(CUSIP: 5394E8BC2) and priced at 100.
For a complete portfolio tranquil-
izer own bonds that move with a spe-
cic Treasury yield. Here are two:
Bank of America has a oating rate
issue linked to the ten-year Trea-
sury yield (CUSIP: 06048WBJ8). Investors
usually demand a spread over Trea-
surys but not in this case. If you think
the ten-year will spike, then scruti-
nize these details. Coupon payments
reset quarterly. These Bank of Amer-
ica bonds have a oating rate equal
to 98% of the Constant Maturity ten-
year Treasury swap. The bond ma-
tures Apr. 23, 2020 and is priced at
101.75. The current coupon is 2.88%
up from its 1.60% low in July 2012.
You wont get rich, but you wont be
left in the dust if rates pop.
Goldman Sachs also has oat-
ers whose coupons pay and reset
quarterly. Bonds mature Nov. 22,
2022 and yield 100% of the ten-year
Treasury with a cap of 12% (CUSIP:
38143UPL9). They are presently priced
at 100.50.
So how was my 2013 perfor-
mance? I recommended six bonds
that generated a total return of 4%.
Not bad in a year where most bonds
went down.
TEASERS
THAT ARE PLEASERS
F
MARILYN COHEN IS PRESIDENT OF ENVISION CAPITAL MANAGEMENT, INC., A LOS ANGELES
FIXED-INCOME MONEY MANAGER. VISIT HER HOME PAGE AT WWW.FORBES.COM/COHEN.
FOR PORTFOLIO TRANQUILITY YOULL
NEED TO OWN BONDS WITH MOVING PARTS
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www. snobar cockt ai l s. com

70 | FORBES MAY 5, 2014
INVESTING
BONNIE BAHA INTRINSIC VALUE
POP CULTURE often reects the
more insidious trends at work be-
neath the surface of society. Take
Americas current fascination with
zombie shows like The Walking Dead.
I manage a large portfolio of corpo-
rate bonds, but when I peer into my
Bloomberg Terminal, I am confront-
ed by the walking dead daily. I am re-
ferring to zombie creditsseemingly
healthy bonds issued by institutions
with dubious economic net worth
and unsustainable business models.
The animator of these corpo-
rate corpses is none other than the
Federal Reserve and its quantitative
easing program. No industry outside
banking has beneted more from the
Feds largesse, and the yield hunger
of investors, than retailers.
Screams and moans. Cries of
despair. The smell of burning cash.
Voracious appetites for capital that
can never be satiated. Those should
be the sounds coming from the
boardrooms of two legacy retailers,
J.C. Penney and Sears Holdings. Yet
these zombies somehow continue to
anchor shopping malls.
Indeed, both retailers have tapped
capital markets post-2008 despite
materially deteriorating nancials. Its
a popular trend among legacy retail-
erslayer on debt to live another day.
Like zombies, these retailers also
have rapacious cravings: for cash.
Moodys currently estimates that
Sears will burn through $1 billion
this year alone. J.C. Penney managed
to post nine consecutive unprotable
quarters prior to eking out a small
gain in the fourth quarter of 2013.
Sears is not far behind, with seven
consecutive unprotable quarters.
There are other zombie retailers.
RadioShack, Best Buy and Barnes &
Noble have all closed stores.
Dont worry, theyre simply too
ush to fail. They represent unin-
tended consequences of our central
banks QE program, which has essen-
tially allowed the U.S. to defer, if not
entirely skip, a normal default cycle in
which troubled companies are culled
from the marketplace.
In and of themselves Sears and J.C.
Penney, with a combined $10 billion
or so in debt, dont make up a signi-
cant part of any major corporate bond
index. Still, they operate sizable busi-
nesses, with more than 350,000 em-
ployees, and have a signicant ripple
efect on the economy. Shopping mall
REITs CBL & Associates Properties
and Simon Properties are landlords to
dozens of their stores.
Both J.C. Penney and Sears carry
debt ratings from Moodys of around
Caa, which is pretty junky. But the
spigot is still open for themve-
year loan obligations trade at a
respectable 6.625% yield.
I have nothing against either J.C.
Penney or Sears. To this day a whif
of caramel corn constitutes a Proust-
ian moment that takes me right back
to the Sears of my youth in Orange
County, Calif. But both of these re-
tailers are doomed. If they have any
value today, its in their real estate.
Sears has regularly engaged in asset
liquidations, and the current invest-
ment thesis for J.C. Penneys senior
bonds depends largely on extracting
value from its real estate, not from
any operating turnaround.
The Internet has rewritten the lo-
gistics of retail and the habits of con-
sumers. So betting on mall real estate
is a risky game. Indeed, Chicagos
ShopperTrak reported that U.S. store
visits fell 21% in the week prior to
Christmas 2013.
Most individuals have exposure to
xed income through ETFs or bond
index funds. With these the most in-
debted issuers typically make up the
largest slice. Thats troubling given that
some of the sickest businesses have
used QE as an opportunity to pile on
debt. For corporate bond investors this
means active management is probably
the best course. Retailers are the most
obvious zombie creditors roaming the
landscape, but others are hidden in
bond portfolios. Quantitative easing is
ending. This could stop walkers dead
in their tracks. Yield-thirsty investors,
take note.
APOCALYPSE
AT THE GALLERIA
MONEY MANAGER BONNIE BAHA IS DIRECTOR OF GLOBAL DEVELOPED CREDIT AT DOUBLELINE CAPITAL LP IN LOS ANGELES.
QUANTITATIVE EASING HAS ALLOWED THE
U.S. TO SKIP THE NORMAL DEFAULT CYCLE
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72 | FORBES MAY 5, 2014

THE MAN FUELING
AMERICAS RECOVERY
Harold Hamm has transformed the U.S. oil industry like no one since John D.
Rockefeller, while helping to keep domestic prices lowand making himself a
$16.9 billion fortune. The great domestic energy boom, he says, is just beginning.
BY CHRISTOPHER HELMAN
MAY 5, 2014 FORBES | 73
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74 | FORBES MAY 5, 2014
given America a cheap energy booster
shot, fueling factories, keeping a lid on
gas prices and adding millions of jobs.
And lest you think anyone with a
lease and drilling rig can strike it rich in
the middle of the country, crane your
neck alongside 68-year-old Hamms. Is
he over there? he asks, peering down
the baseline of the basketball court. Yes,
Aubrey McClendon, the former CEO of
Chesapeake Energy and a part owner of
the Thunder, sits in his usual seat.
So at halftime Hamm saunters
under the hoop to say hi. McClendon
seems surprisedthe two arent friends.
But McClendon, whom FORBES
T
wo Scotches in, with seats
on the oor of Oklahoma
Citys Chesapeake Ener-
gy Arena, Harold Hamm
is feeling good. And why
not? His hometown Thunder is spend-
ing the evening whupping the Philadel-
phia 76ers. Earlier Hamm announced
big bonuses for Continental Resources
employees, courtesy of rec ord oil pro-
duction. And a judges ruling, revealed
that morning, in Hamms divorce case
suggested the energy tycoon would
keep the Continental shares he already
owned when he married soon-to-be-ex
Sue Ann Hamm 26 years ago. With that
chunk of stock, encompassing about
$16 billion out of his $16.9 billion for-
tune, Hamm owns 70% of Continental.
As every wildcatter knows, such is
life in the oil patch when youre on a
hot streak. And Hamms on perhaps the
most epic one in domestic energy his-
tory, perhaps save for John D. Rock e fel-
lers. No one, aside from kings, dictators
and post-Soviet kleptocrats, personal-
ly owns more black goldContinental
has proved reserves of 1 billion barrels,
mostly locked underneath North Dako-
ta. Hamm took the company public in
2007and shares are up 600% since, as
the revolution in horizontal drilling has
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REINVENTING AMERICA HAROLD HAMM
The son of a poor Oklahoma sharecropper, Continental Resources Harold Hamm personally controls more oil than any other American.

PROMOTI ON
THEY DESIGNED DRAINS to trap storm water polluting their
river; built a solar-powered lighting system to improve safety near
their school; grew vegetables in aquaponic beds to provide nutri-
tion for the homeless; and reduced the severity of the European
green crab infestation wreaking havoc on their coastal town.
They reached out to civic groups, government offcials, engineers
and academics. They gathered samples, conducted tests, analyzed
results, created prototypes and built websites.
They are the Samsung 15middle- and high-school teams
chosen from a feld of more than 2,300 applicantsand they are
fnalists in the Solve for Tomorrow competition. Samsung created
the contest, which is in its fourth year, to raise enthusiasm for
science, technology, engineering and math (STEM) education by
challenging students to apply classroom learning to solve real-
world issues in their local communities.
Earlier this spring, these young innovators and their teachers
presented their projects at SXSWedu in Austin, Texas.
Ultimately, fve winning schools were chosenthree by a panel
of judges, one by Samsung employees and one by an online poll.
In total, each school received more than $140,000 in technology
from Samsung and their program partners.
Cooling Off
a Region
East Valley High School,
Washington
Motivated to reduce the amount of electrical
energy the average local household consumed
each summer, the team from East Valley High
School designed, built and tested a prototype
of a hydro-chill unitan easy-to-use, energy-
effcient air-conditioning system that utilizes
irrigation water readily available in their region.
Guarding the
Water Supply
Oliver Street School,
New Jersey
To combat the problem of storm runoff polluting
their local waterways, the Oliver Street School
team studied the system to identify sources.
They discovered three overfow chambers
dumping garbage into the river, and then
set out to design a storm drain to catch the
garbage before it entered the system. They built
a computer model, and then bought materials
and constructed a life-size prototype, which
they tested successfully out in the feld.
Braving the Storms
El Reno High School,
Oklahoma
The students of El Reno High School wanted to
determine the best location for building one or
more community storm shelters in the city of El
Reno, Oklahoma, which had recently been hit
by an F3 tornado. Community shelters would
help those who lacked shelters in their own
homes, reducing their risk. The students mined
historical storm data from the National Weather
Service and Oklahoma Climatological Survey to
determine the probability and paths of future
tornados. They used the information to map out
ideal shelter locations throughout the area and
presented their fndings to local city offcials.
THE SAMSUNG SOLVE FOR
TOMORROW
15
NATIONAL FINALISTS
Indicates
the winners

PROMOTI ON / THE SAMSUNG SOLVE FOR TOMORROW 15
Earthquake Protection
Sandcreek Middle School, Idaho
The students from Sandcreek Middle School,
located in the shadow of the Yellowstone
supervolcano, wanted to know the risk of
catastrophic earthquakes in their area as
well as ways to mitigate their effects. They
conducted research to identify faults, looked
up building codes and considerations in
engineering and architecture, and built simple
monitors to record ground motion. To apply
what they learned, the students constructed a
building model and tested it on an earthquake
table to demonstrate how modifcations might
reduce damage from an earthquake.
Reducing Carbon
Footprints
Bailey STEM Magnet
Middle School, Tennessee
The students from Bailey STEM Magnet
Middle School wanted to help families in their
community reduce monthly electric bills as well
as their carbon footprint. They researched simple,
inexpensive, energy-saving improvements
and learned how to calculate kilowatt-hours.
Then they tested their fndings in a real house
to see how much electricity they could save
by applying weather stripping, replacing
power strips, changing light bulbs and so on.
Afterward the students developed an app for
the community showing how people could save
money, presented their fndings to the public
and appeared on a national news show.
Blowing Away
Alkali
Sunburst Junior High,
Montana
The students at Sunburst Junior High tackled
an issue plaguing local motorists: alkali
from nearby salt fats was blowing across
the interstate highway, causing dangerous
visibility problems. The students examined
the area, dug and tested soil samples, and
then created an elevation model of the
adjoining farmland, which they determined
was contributing to the problem. To help stop
the water runoff, which was causing alkali to
blow, they met with plant specialists, grew
and tested different varieties, and made
recommendations to convert the surrounding
farmland to alfalfa, making it safer for drivers
living inand traveling throughthe area.
Finding the
Safest Route
Academy at Palumbo,
Pennsylvania
The Academy at Palumbo team focused on
mitigating the risk to students who must walk
through dangerous neighborhoods to get to
and from school, and they set out to create
a system to determine the safest possible
routes. The team developed a survey to
measure student travel patterns, mapped
out the information they collected, plotted
points correlating to real crime data, and
created an algorithm to rate the safety of
each route. At the end they created a website
to communicate the most effcient and safest
options to the community at large.
East Valley High School
Washington
Bailey STEM Magnet Middle School
Tennessee
El Reno High School
Oklahoma
Sandcreek Middle School
Idaho
Sunburst Junior High
Montana
Oliver Street School
New Jersey
Academy at Palumbo
Pennsylvania
H.D. Woodson STEM High School
Washington, D.C.
New Bridge Middle School
North Carolina
Elko Institute for Academic Achievement
Nevada
Frank H. Harrison Middle School
Maine
G.W. Carver Middle School
Florida
Worcester Technical High School
Maryland
Vermillion Middle School
South Dakota
King Science and Technology Magnet School
Nebraska
Solve for Tomorrow National Finalists at a Glance
Winner National Finalist Legend:

THE SAMSUNG SOLVE FOR TOMORROW 15 / PROMOTI ON
Freshening
the Waters
New Bridge Middle School,
North Carolina
The New Bridge Middle School project,
Operation Oyster, focused on the scope
of the devastation to Wilson Bay from a
former wastewater treatment plant that had
dumped unfltered sewage into the water
many years earlier. The students collected
and tested water samples and compared
them to 13-15-year-old samples to see how
the water quality was improving. In addition,
they helped build up an oyster reef around
Wilson Island , adding 200 pounds of
oyster shells to attract fsh and improve
water quality in the bay.
Clearing
the Air
Elko Institute for Academic
Achievement, Nevada
The Elko Institute for Academic Achievement
project aimed to solve the mystery of the
dirty air in the high desert region of Nevada,
where the air is generally crisp and pure.
The students wanted to analyze the chemical
compounds in their precipitation to see if
the dirty air contained dangerous chemicals.
They worked with government agencies,
engineered a prototype of a collection
station, attended a college class on acid
rain, and ultimately conducted a series of
tests on rainwater and snow for acid rain.
They documented their precipitation collection
methods and processes for measuring its
chemical composition.
Growing and
Donating Fresh
Produce
King Science and Technology
Magnet School, Nebraska
The students at King Science and Technology
Magnet School tackled a problem affecting
the food desert in their community an
area where affordable and healthy food is
diffcult to obtain. They developed a plan
to use aquaponics, a form of farming that
utilizes fsh waste to provide nutrients to
a soilless grow bed, which yields harvests
every four to six weeks. Through their work,
the students are able to provide nutrition
to local homeless shelters year-round. They
have helped develop aquaponic systems
throughout their community, including in
schools, where they help teach children
about sustainable agriculture.
Lighting Up a Community
H.D. Woodson STEM High School,
Washington, D.C.
H.D. Woodson STEM High Schools team wanted to
improve the safety of their Northeast Washington,
D.C., community, and help students and their
families feel secure as they traveled through a
neighborhood park to and from the school in the
evenings. The students surveyed the area using
geo-spatial technology and identifed ten locations
where there was a need for light sources. They built
solar cells that could power the lights with a low
carbon footprint, and created a plan for confguring
and building the system.

Taking Care
of Crabbiness
Frank H. Harrison
Middle School, Maine
The Frank H. Harrison Middle School team
focused on mitigating the environmental
impact of an invasive species on their local
ecosystem. The European green crab, which
feeds on juvenile clams, wreaks havoc on the
$11 million-a-year clamming industry, and is
destroying the grass in local tidal marshes.
The students reached out to the Maine
Clammers Association, local lobstermen,
town offcials and university professors. They
collected, organized and analyzed data in
order to come to their own conclusions about
the magnitude of the problem, and then
developed recommendations to share with
their community.
Old Smokeys
Dirty Secret
G.W. Carver Middle School,
Florida
The team from G.W. Carver Middle School took
on a long-standing problem in their community:
Old Smokey, a former garbage incinerator
that had been shut down for decades. The
community was worried about possible risks
posed by toxins in the soilthe facility is only
20 feet from the schools athletic feld, and
every day students play near the site. The
team got to work analyzing the fndings of the
citys soil tests, conducting their own tests
and interviewing researchers, residents and
local offcials. They built a website with all
their dataas well as with links to newspaper
articles and information on toxic chemicalsto
bring attention to the matter and inspire city
offcials to take action.
Diagnosing
a Hospital
Worcester Technical
High School, Maryland
The Worcester Technical High School project
was a partnership between the schools
pre-engineering and biomedical sciences
students, who worked collaboratively with
their local community hospital to create a
redesign of its outpatient and emergency
department waiting area. Antiquated and
ineffcient, it no longer met the needs of
patients, their families and the staff. The
students analyzed the space, met with
hospital offcials and engineers, and then
created a detailed redesign using sustainable
materials. Their plan addressed the need to
improve privacy and confdentiality, infection
control, effciency of patient care and security.
The students had the opportunity to present
their plan to the hospital for consideration.
PROMOTI ON / THE SAMSUNG SOLVE FOR TOMORROW 15
Fishing for
Population Data
Vermillion Middle School,
South Dakota
Vermillion Middle Schools team examined the invasion of Asian
carp in the Missouri National Recreational River and its threat
to this historically and environmentally signifcant waterway.
The students brought in experts, such as fsh biologists, to
learn about the carps impressive appetite and growth rate as
well as control methods, and then they went out and captured,
measured and tagged fsh for future research. The students
helped increase awareness of the problem through social media,
media outlets and educational outreach, and advocated for
research and development.
Samsung is proud to partner with Adobe Youth Voices (AYV), DIRECTV, Forbes, National Environmental Education Foundation (NEEF) and
National PTA. For more information on the Samsung Solve for Tomorrow education contest, please visit www.samsung.com/solve.

MAY 5, 2014 FORBES | 79
He was especially inspired by, of all
things, a local potter. At a school assem-
bly, John Frank of Frankoma Pottery in
nearby Sapulpa brought his wheel on-
stage. He had this lump of clay that he
was slapping like a baby, says Hamm.
It was clear that he did well because
that was his passion, his art, and the
message was that all of us could do well
if we followed our passion in life. Given
his upbringing, Hamms was oil.
Hamm started working at a gas sta-
tion at age 16 to support his family, then
went on to muck out oil tanks at a re-
nery and then start his own trucking
company hauling water to and from the
oilelds. Even today those who respect
Hamm still call him the worlds rich-
est truck driver. Those who dont will
whisper stories about how the cantan-
kerous and bare-knuckled Hamm
may have skimmed of a little bit of his
customers oil when he was pumping
water out of their holding tanks.
By 1971 he was more interested in
accessing oil directly from the ground,
and he had cobbled together enough as-
sets to borrow against and drill his rst
well. For the next 15 years he did well
during the good times (the late 1970s
and early 1980s) and struggled to hold
on during the busts (the late 1980s). A
string of 17 dry holes in a row almost
bankrupted him.
His big breakthrough came literal-
dubbed Americas Most Reckless Bil-
lionaire on its cover in 2011, shakes his
hand and beams a camera-ready smile.
When Hamm begins small-talking
McClendons wife, McClendon him-
self leans over to a FORBES reporter in
a t of pique. I dont get it, he whis-
pers. You write all this bad stuf about
me, while you hold up Harold Hamm
as some paragon of virtue.
Paragon of virtue? Maybe, maybe
not. But whats clear is that Hamm
made money the old-fashioned way: He
stuck with what he knewand innovat-
ed. McClendon bet $13 billion in bor-
rowed money that he could buy mil-
lions of acres of trendy shale gas elds
and ip them at top dollar, but he near-
ly bankrupted Chesapeake (and soon
thereafter lost his job) when prices col-
lapsed from the oversupply he helped
create. Hamm plodded along with a
buy-and-hold plan for less glamor-
ous oil. Convinced that the newly com-
bined recipe of horizontal drilling and
hydraulic fracturing had the potential
to unlock not just gas but also oil from
deep source rock, Hamm instructed
Continental to lease hundreds of thou-
sands of acres while most of the rest of
the industry just scratched their heads.
Today North Dakotas Bakken eld
produces nine times more oil than
it did ve years ago, and Continen-
tal is good for more than 10% of what
comes outsome 100,000 barrels a
day. Sure, there remain legitimate con-
cerns about the environmental impact
of fracking. But you wouldnt want
to see what the American economy
would look like without it.
H
arold Hamms story is actual-
ly the story of postwar domes-
tic energy. Hamm, in fact, was
born just a few months after V-J Day,
the 13th and last child of Okie share-
croppers who moved to the boom-and-
bust oil town of Enid, a place where ev-
eryone had seemingly stepped out of
the James Dean movie Giant. The peo-
ple there were diferent, charismatic,
bigger than life, remembers Hamm.
FORBES
REINVENTING AMERICA HAROLD HAMM
Hamms oil nds in North Dakota set of a 19th-century-style boom in the state, which has the U.S. lowest unemployment rate: 2.7%.
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In March Forbes convened over
300 industrial leaders in Chicago
to help foster a new U.S. industrial
revolution. Throughout this issue
were featuring highlights from the
summits speakers.
Complete coverage and video:
Forbes.com/reinventingamerica

80 | FORBES MAY 5, 2014
PROVED RESERVES
CALIFORNIA
BARRELS
PROVED RESERVES
ALASKA
PROVED RESERVES
TEXAS
8
BILLION
BARRELS
MONTEREY
A
4
VED RESER
3
BILLION
ARREL
1900 1910 1920 1930 1940
CONTINENTAL
BY THE NUMBERS
2013:
NET INCOME
$760 MIL
SALES
$3.6 BIL
TOTAL ASSETS
$12 BIL
LONG-TERM DEBT
$4.7 BIL
NUMBER OF EMPLOYEES
950
BOOM ATLAS
Hamms Continental Resources has
soared thanks to big stakes in the
great American energy games hottest
real estate. But it isnt alone. Natural
gas and oil nds across the U.S. will
keep the domestic fossil fuel revolution
going for decades to come.
BARRELS OF
CRUDE OIL PRODUCED
BY CONTINENTAL
2013:
35 MIL
BARRELS OF CRUDE OIL
FROM BAKKEN:
29 MIL
WELLS CONTINENTAL HAS INTEREST IN:
4,100 GROSS
1,800 NET
JUST BAKKEN:
2,600 GROSS
1,000 NET
2009 2010 2011 2012 2013
257
365
508
785
1,080
ly from the heavens. In the early 1990s,
while scouring rural Oklahoma for
overlooked oil, Hamm came across an
ancient meteor crater, where the rock
had been blasted into the sky and then
settled back as a highly porous, perme-
able layer. Over millions of years this
crater was buried 9,000 feet under-
ground and became saturated with oil.
The eld gushed what Hamm gures
was 17 million barrels of oil and gave
him the nancial security he needed to
take the leap that has dened his career.
Now ush, and steeped in how to
draw oil from a stone, Hamm became
transxed by the potential in North Da-
kota. In the late 1980s oilmen there
had begun experimenting with drill-
ing horizontally to better intersect the
thin layers of oil-bearing rock known
as the Bakken shale. Hamm joined the
party in 1995, drilling his rst wells in
the area. By then, however, interest was
dying: New wells had proved uneco-
nomical, owing at an initial rate of only
150 barrels per day. Yet Hamm, as well
as engineers from Houston-based EOG
Resources, had a vision of what could
be. Down in Texas, George Mitchell and
his Mitchell Energy & Development
had combined horizontal drilling with
hydraulic fracturing to blast open im-
permeable (or tight) rock. This is the
innovation that made all the diference.
Today its common for a Bakken well to
start owing at 1,500 barrels per day.
While other companies, including
EOG and XTO Energy, also had the fore-
sight, no other individuals would wind
up making even a fraction of the for-
tune that Hamm would. True to his
hardscrabble roots, even when tapping
growth capital, he was loath to give up
any equity at all in what he had come
to name Continental Resources. Hed
much rather borrow. Buoyed by prof-
it margins among the industrys best,
with $760 million in net income on
$3.6 billion in revenues last year, Conti-
nental now carries $4.7 billion in long-
term debt against $12 billion in total as-
sets. (Chesapeake, by contrast, has a less
healthy $18 billion in long-term debt and
liabilities against $41 billion in assets.)
FORBES
REINVENTING AMERICA HAROLD HAMM
2009 2008 2010 2011 2012 2013
80
100
200
300
400
500
600
CHESAPEAKE
ENERGY
CONTINENTAL
RESOURCES
EOG
RESOURCES
S&P 500
EXXON MOBIL
STOCK PRICE (4/30/09=100)
STOCK PRICES
TOTAL U.S.
OIL PRODUCTION
(MILLIONS OF BARRELS PER DAY)
CONTINENTALS
PROVED RESERVES
(MILLIONS OF BARRELS)

MAY 5, 2014 FORBES | 81
SAUDI ARABIA
270
KAZAKHSTAN
30
NIGERIA
37
LIBYA
47
U.A.E.
98
IRAQ
143
RUSSIA
60
KUWAIT
100
IRAN
151
VENEZUELA
211
U.S.
27
CANADA
174
OIL RESERVES: TOP 12 COUNTRIES
(IN BILLIONS OF PROVED BARRELS)
3
PROVED RESERVES
MARCELLUS / UTICA
WOODFORD
PERMIAN BASIN
FAYETTEVILLE
TUSCALOOSA
NIOBRARA
HAYNESVILLE
EAGLE FORD
W
A
VED RESER
GULF REGION
5
BILLION
BARRELS
PROVED RESERVES
BAKKEN
BILLION
ARREL
1950 1960 1970 1980 1990 2000 2010 2013
0
1
2
3
4
5
6
7
8
9
10
89 MIL
TOTAL WORLD
OIL PRODUCTION
2012
(BARRELS PER DAY)
CRUDE OIL
IMPORTS TO U.S.
0
2
4
6
8
10
12
14
GASOLINE AND DIESEL
EXPORTS FROM U.S.
(MILLION BBL PER DAY)
1986 1990 2000 2010 2014
10
100
$150 WEST TEXAS
INTERMEDIATE CRUDE
($ PER BBL)
SOURCE: ENERGY INFORMATION AGENCY.
IMPORTS AND EXPORTS
OIL PRICES
TOTAL U.S.
OIL PRODUCTION
(BARRELS PER DAY)
CURRENT SHALE PLAYS
PROSPECTIVE SHALE PLAYS
7.5 MIL

82 | FORBES MAY 5, 2014
ization, at $23 billion, is just a tad under
Devonsand already well ahead of
Chesapeakes. In terms of building the
company poised for Americas new en-
ergy era, Hamm has already won.
T
he benets derived from Amer-
icas $150 billion annual invest-
ment in horizontal drilling carry
many, many zeroes. Domestic oil output
has surged by 50% since 2010, creating
more than 1 million jobs while slashing
some 800 million barrels of of annual
imports. Shale gas production has risen
to more than 10 trillion cubic feet per
year from nothing 15 years ago. Oil prices
have stayed high, but U.S. consumption
has been at for ve years, resulting in
$100 billion a year in petrodollars that
now stay in the U.S. instead of accruing
to the likes of OPEC and Russia.
Natural gas prices, meanwhile, have
halved since 2008 to about $4.50 per
thousand cubic feet. A Yale study g-
ures the direct savings to America
amounts to roughly $125 billion. Re-
searchers at energy consultancy IHS
say the oil and gas boom is contributing
$300 billion a year, or more than 1.7%
of GDP. Take that away and President
Obamas tepid recovery would look
downright anemic.
Which perhaps explains why
Hamm, Mitt Romneys energy advisor
during the 2012 election, lashes out at
anyone who wants to rein in the boom.
Theres another reason hes been able
to keep so much equity and thus wind
up with a disproportionately high in-
dividual stake in the fracking/horizon-
tal drilling boom: spending habits that
would be frugal in an accounting rm,
much less the easy-come, easy-go wild-
catting culture that McClendon person-
ies. Hamms favorite lunch spot is an
Oklahoma City cafeteria called Sweets
& Eats, where this billionaire nishes
a meal of vegetable beef soup by crum-
bling up his corn bread into a styrofoam
cup half-full of whole milk and eating it
with a spoon (lunch for two: $18).
Until 2012 Continental had re-
mained based in Hamms hometown of
Enid, and its only by walking back to his
downtown Oklahoma City headquarters
that the accretive benets of his nancial
discipline become stark. For decades in
Oklahoma the path to success was clear.
Start an oil and gas company. Get big.
Move to Dallas or Houston. Thats what
happened to Phillips Petroleum, Conoco,
Kerr- McGee, even Halliburton.
But thats changed. Devon Ener-
gy could have decamped in 2001 after
it paid $3.5 billion to acquire Mitchell
Energy. But not only did Devon decide
to stay in Oklahoma City, it also recent-
ly completed its shiny 850-foot, $700
million tower, the tallest in the state.
Then theres Chesapeake, which under
McClendons leadership built a stun-
ning 120-acre campus. Both compa-
nies teamed up to help turn an ugly
city drainage canal into a beautiful
rowing venue, replete with high-tech
boathouses for the U.S. Olympic team.
Suddenly Oklahoma City has emerged
as a viable option for a growing public
company, says Mayor Mick Cornett.
Continentals new headquarters?
Devons old hand-me-down ofces,
which Hamm bought for $23 million.
It was already all set up for an oil com-
pany, smiles Hamm. So we havent
had to change a thing. More acutely,
Hamm points out his head count: 950
versus Devons 6,000 and Chesapeakes
11,000. Yet Continentals market capital-
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REINVENTING AMERICA HAROLD HAMM
When it comes to predictions for North Dakota oil, no one is as bullish as Hamm. Hes a little bit over the top, says one rival.
The biggest trouble weve
gotten into in the past is when
were drinking our own
Kool-Aid. ... The scarring that
weve had in the last go-around
will remain with us for a long
time. Part of my role is to be
the institutional memory for
this company.
BILL FORD ON WHAT FORD MOTOR
LEARNED FROM THE GREAT RECESSION
REINVENTING AMERICA SUMMIT

MICHIGAN
comeback
WHAT HAPPENS WHEN
meets
1.888.565.0052
Its a new day for business in Michigan.
Through a series of recent initiatives, Michigan
is once again becoming a preferred place for business.
Starting with a new fat 6% business tax. The pending
elimination of personal property taxes. New right-to-work
legislation. All added to redesigned incentive programs
and streamlined regulatory processes. All to create an
ideal combination of opportunity, resources and passion
for business right here in Michigan.
Michigan Economic Development Corporation michiganbusiness.org/FOR

84 | FORBES MAY 5, 2014
between impermeable layers of shale.
The drillers use explosives to pop
small perforations in the sides of
those horizontal pipes, then blast
down millions of gallons of water
mixed with sand to pulverize the rock
and open up fractures, enabling the
oil to escape. The trick is to position
the laterals directly into the mid-
dle of those rock layers, but just far
enough away from each other that the
fractures dont overlap. If this densi-
ty works, there will ultimately be room
for at least 100,000 total wells in the
Bakken. (Fewer than 7,000 have been
drilled so far.) The implication: If you
assume a conservative average of just
300,000 total barrels per well, the ulti-
mate recovery from the Bakken could
be 30 billion barrels. The U.S. uses 7.5
billion barrels per year. Suddenly, you
see the enormity of what were talking
about here, says Hamm.
The risk, of course, is that if these
wells cant churn out that kind of out-
put, the math of oil extraction is unfor-
giving. Wells that come on line at 800
to 1,000 barrels per day would be lucky,
after a year, to still be doing 400 bar-
rels. With such hyperbolic decline
rates theres no doubt youre ghting the
treadmill efect as you put more of these
wells on line, says Cameron Horwitz at
U.S. Capital Advisors in Houston.
Hubrisalmost inevitable when you
own 70% of a companyis also a con-
cern. Americas richest oil baron has
been catching ak recently for what
appears to be self-dealing, including a
$340 million purchase by Continental
of another North Dakota oil company
he co-owned and a ve-year, $100 mil-
lion contract Continental signed with a
pipeline rm owned by Hamm and his
family. (Hamm says both deals passed
muster with the board and will boost
Continentals performance.)
But such headaches will prove
ephemeral if Hamm wins his bet and
delivers on his promise of unlimited
oil and gas. Such results would surely
make Hamm one of the 20 richest peo-
ple in the world. And just as surely re-
shape America in the process.
Hes happy to provide black binders full
of research on antifracking activists
like Josh Fox, Bill Mc Kib ben and espe-
cially Tom Steyer, the San Francisco bil-
lionaire who founded Farallon Capi-
tal and has now pledged $100 million to
back progressive politicians. To Hamm
hes the worlds biggest hypocrite,
as he rails against the fact that Steyer
made his fortune, in part, by investing in
fossil fuels. Hamm sees the antifracking
crowd in dollar terms, funded by inves-
tors in green energy innovations ren-
dered uneconomical. Thats why these
guys are raising so much hell, because
suddenly they realize that everything
theyve invested in isnt going to work,
says Hamm. They know theyre mis-
leading the public.
Hamm has met Obama, former En-
ergy Secretary Steven Chu and even
Steyer, who says he could not in good
conscience continue investing in fos-
sil fuels. The science is clearthe dan-
ger of climate change is real, and we
must act now to tackle this issue head-
on. And while Hamm is not convinced
the Administration appreciates the dif-
ference he and his peers have made,
he takes some small comfort that there
hasnt been any regulation of fracking at
the federal level. This economy doesnt
need to be sucking air until President
Obama is out of ofce. But thats whats
going to happen until they realize that
green whatever is not creating a lot of
jobs. When Hamm looks at Washing-
ton, at regulation and at the antifrack-
tivists, he sees them as simply out of
step with his idea of America. To him
America is still a place where anyone
can be born with nothing and become
a billionaire. I see these people who
spring out of nowhere with a new app
that theyre selling for a billion dollars,
he marvels. How good is that! Thats
fantastic! Thats what it should all be
about. There shouldnt be any limits.
L
isten to Harold Hamm and you
leave convinced that Americas
great shale energy boom is still
in its infancy. There are enough natu-
ral gas reserves, he says, to allow Amer-
ica self-sufciency for the next 200
years. As for oil, he says North Dako-
tas Bakken eld alone will absolute-
ly double output to 2 million barrels
per day, a bullish prediction no other in-
dustry leader will touch. Hes a little bit
over the top, says Mark Papa, the for-
mer CEO of EOG Resources, the num-
ber four operator in North Dakota.
His forecast tops out at 1.3 million bar-
rels. The nearest bull to Hamm, Wood
Mackenzie analyst Jonathan Garrett,
wont go past 1.7 million by 2020.
Hamm wont be dissuaded. He says
no other company has studied the ge-
ology as carefully as Continental. It
knows where the oil is, he says, so its
simply a challenge of guring how
much it can get out, as quickly as possi-
ble, at the lowest cost.
The technology that may deter-
mine how long and strong the recovery
can get is being tested on a 2-square-
mile plot in the Bakken that Continen-
tal calls the Hawkinson unit. Here Con-
tinental is experimenting with a full
eld techniquedensely packing wells
so that each rig (Hamm has 20 in North
Dakota) can do considerably more than
the current average of 10 wells per year.
On the Hawkinson rig it has already
drilled 14 wells, out of a planned 32. The
wells go down roughly 3 miles, then
curve horizontally for another mile to
intersect one of at least four layers of
oil-lled dolomite rock sandwiched in

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REINVENTING AMERICA HAROLD HAMM
F
How can we bring people to
our state? Dont give Detroit a
bailout. Give us 50,000 green
cards for people with STEM
degrees. Let them come here
and work.
MICHIGAN GOVERNOR RICK SNYDER ON
HOW WASHINGTON CAN HELP DETROIT.
REINVENTING AMERICA SUMMIT


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WELCOME TO
CUMMINS, U.S.A.
The Indiana enginemaker believes deeply in the
anachronistic idea that investing in its community is smart
business. Could it be on to something?
BY JOANN MULLER
86 | FORBES MAY 5, 2014

MAY 5, 2014 FORBES | 87
Cummins longtime CEO Irwin
Miller spent millions turning
Columbus, Ind. into a showcase
for modernist architecture.
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88 | FORBES MAY 5, 2014
does business around the world.
None of which is new for Cum-
mins. In the 1950s longtime chief ex-
ecutive J. Irwin Miller embraced the
trendy postwar notion that a healthy
company cant exist without a healthy
community. Miller created a stake-
holder model that balanced the inter-
ests of employees, shareholders, cus-
tomers, suppliers, regulators and the
community in every decision. Un-
like most other companies, Cummins
stuck with it for the next 60 years.
The result: Cummins, Colum-
bus and Seymour are living laborato-
ries for how business and community
can work together at a time when that
idea is once again very much in vogue.
Attracting, retaining and cultivating
scarce engineering talent is now a core
business concern for many technolo-
gy companies, and that anxiety is pro-
pelling the resurgence of the altruistic
company town.
Quicken Loans billionaire owner
Dan Gilbert is buying up downtown
Detroit in an efort to renovate and re-
vitalize the bankrupt cityand attract
young tech workers there. In Brooklyn,
N.Y. IBM cofounded P-TECH, a public
school aimed at turning students into
IT workersand plans to back 27 more.
J
ust past the factorys lobby,
with its worn, gray chairs
and a safety video droning
on a at-screen TV, through
thick plastic curtains cloud-
ed by age and grime, theres a whirr of
air tools. Cummins Diesel workers are
hunched around stocky engine blocks,
adding crankshafts, pistons and pip-
ing. Every once in a while they look
up, distracted by construction noise at
the other end of the building.
There, bright light bounces of
brilliant white walls. Construction
workers in clean orange vests and
hard hats are bustling, laying new
rail tracks and setting giant turnta-
bles into freshly poured concrete
oors. The newest section of Cum-
mins Seymour, Ind. engine plant is
like another planet.
The expansion is making room for
the Hedgehog: the companys new
high-horsepower engine, one of the
most powerful and efcient diesel en-
gines in the world. With a price tag of
a quarter of a million dollars, its a be-
hemoth16 cylinders, 4,000hp and
the size of a trailer homebut it needs
to be to power the locomotives, oil rigs
and mining equipment that will de-
pend on it.
The Hedgehog is propelling a lot
more than machinery, though. With its
$100 million investment and 200 new
jobs, Cummins CEO Tom Linebarg-
er is making a long-term bet that he
can transform Seymour (pop. 18,000),
where its difcult to nd employees
with high school diplomas, much less
attract engineers from the nations best
universities, in the same way the com-
pany helped Columbus, Ind., Cummins
hometown, 20 miles up the road.
While many of the schools around
Seymour are struggling and literacy lev-
els are low even among adults, Colum-
bus is a pocket of midwestern prosper-
ity, with the highest concentration of
mechanical engineers per capita in the
country (31 per 1,000) and the lowest
unemployment rate in Indiana (5.2%)
not to mention a stunning collection
of world-class architecture that draws
some 50,000 visitors a year. It has new
preschools, a college campus ofering
joint degrees from three Indiana uni-
versities and a training center for ad-
vanced manufacturing. Cummins was
instrumental in all of it, creating an ed-
ucation partnership that has become
a model for tackling the U.S. skills gap.
And it aims to have a similar impact
in every one of the 190 places where it
FORBES
REINVENTING AMERICA CUMMINS
To produce one of the worlds most powerful engines, Cummins CEO Tom Linebarger wants to transform a town.

S
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.
The engineers at SpaceX knew that successfully
launching a rocket was contingent on millions
of things going right. Just a single error could
impact the entire mission to the International
Space Station. To help solve this challenge,
they turned to Siemens industry software. This
played a critical role in enabling the SpaceX
team to design and test products virtually before
constructing them physically optimizing the
chances of a successful launch.
Today, Siemens is helping business leaders
across the U.S. transform the way goods are
manufactured. In industries from automotive to
pharmaceutical, companies look to Siemens for
new ways to do more with less, to raise quality
while lowering costs, and to help factories and
plants be a bit gentler on our environment.
And its working a new era in manufacturing
is beginning to take hold across the country.
Somewhere in America, the people of Siemens
are creating answers that will last for years
to come.
Siemens industry
software helps
innovative companies
increase productivity,
improve accuracy, and
signicantly reduce costs.
siemens.com/answers
Siemens answers are helping leading companies explore new places in new ways.
Turning virtual into real
and skeptics into believers.

90 | FORBES MAY 5, 2014
that was expanded to include all pub-
lic buildings, including the re station,
courthouse, city hall and even the jail.
Private developers followed. Today Co-
lumbus boasts more than 60 modern-
ist buildings designed by masters such
as I.M. Pei, Eero and Eliel Saarinen, and
Cesar Pelli. Six of the buildings were
designated National Historic Land-
marks in 2000. Since 1957 Cummins
has spent $19.2 million on architectural
fees for Columbus.
Born into a family of preachers,
Millers personal beliefs on social jus-
tice and service to others guided many
of his business decisions. As the rst
lay leader of the National Council of
Churches, Miller worked with Martin
Luther King Jr. and Andrew Young to
organize the historic civil rights march
on Washington in 1963. In the 1970s
the company took a substantial nan-
cial hit when it pulled out of South Af-
rica, abandoning a 20% market share
for diesel engines because the apartheid
government wouldnt let Cummins de-
segregate its factories. It has ofered do-
mestic partner benets to employees
since 1999, and in the last few years the
company and its executives have been
lobbying to legalize gay marriage.
Whatever you do in this world,
youve got a responsibility and a privilege
of doing it the very best way you can,
Miller, who died in 2004, said in a com-
pany lm clip. And whether it is archi-
tecture or cooking or drama or music,
the best is none too good for any of us.
B
y the late 1980s, of course, the
idea that the CEO knows best
seemed anachronistic, at best.
The long bull market and the emerging
culture of equity-incented employees
made the idea that companies are run
purely for shareholdersnot manag-
ers and certainly not employeesmain-
stream. Conventional economic wis-
dom remains that maximizing prots is
the only acceptable corporate mission.
The idea of a company town with di-
verse stakeholders was beyond pass
it felt like a throwback to Henry Fords
paternalism, or even to the 19th-centu-
What theyre doing is just tak-
ing an intelligent self-interest in their
community rather than a selsh in-
terest, says Harvard Business School
professor Joseph L. Bower, who has
studied Cummins.
Linebarger agrees. Is it self- inter-
est? Yes, he says. But its easier to
attract people to your company if youre
in an area that has good schools, a clean
environment and opportunity for all.
T
his ideathat the role of a cor-
poration extends to the care of
the community around it and
that the company has a responsibili-
ty to help guide the communityis, of
course, hardly new. With distant roots
in feudal preindustrial Europe, the
company town owered at the turn
of the 20th century as industrial titans
like Henry Ford and Milton Hershey
decided they not only knew what was
best for employees on the factory oor
but of of it as well. From Hershey, Pa.
to Kohler, Wis. the companyand com-
pany townremained the center of life
for millions of postwar American work-
ers. In the Fifties corporations were
supposed to take care of society. That
was the managerial perspective, says
Aneel G. Karnani, associate professor of
strategy at the University of Michigans
Stephen M. Ross School of Business.
In the last few decades theres been a
shift to more of a shareholder perspec-
tive. Managers are agents of the share-
holders. Government is supposed to
take care of the rest.
Cummins has been at the center
of life in Columbus since its founding
in 1919 by a mechanic named Clessie
Cummins and a nancier named Wil-
liam Glanton W. G. Irwin, scion of
a prominent banking family and the
great-uncle of Irwin Miller. A tinker-
er, Clessie Cummins was among the
rst to see the commercial potential
of an unproved engine technology in-
vented two decades earlier by Rudolf
Diesel, and in 1929 he created Ameri-
cas rst diesel-powered automobilea
used Packard limo hed adapted. Almost
a century later Cummins is the worlds
largest supplier of diesel engines and
components to the trucking industry,
with $17 billion in revenues and $1.5 bil-
lion in net income in 2013. More than
half its sales are generated outside the
U.S., especially in China and India,
where it is the market leader.
Millers vision was hatched in the
1950s. To keep up with the baby boom
Columbus gured it would have to build
a new school every two years. Mill-
er, whose company was also growing,
wanted to make sure it was done right.
He fretted that Cummins wouldnt
be able to attract top engineers and
their families to a small town in south-
ern Indiana if the schools were built on
the cheap. He took it upon himself to
guide the development needed to at-
tract them. Mediocrity is expensive,
he often said, according to his son, Will,
president of the Wallace Foundation in
New York and a member of Cummins
board of directors.
Rather than just move the company,
Miller changed the town, indulging his
architectural tastes by using the compa-
ny to subsidize public school construc-
tion. The Cummins Foundation would
pay the design portion of each project
but only if the city used world-class ar-
chitects recommended by Miller. Later
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REINVENTING AMERICA CUMMINS
If you wanted to see the
economy go wild, just cut all
the regulations in half. Were
in a society where we think
all risk can be regulated
out. There are just unending
interpretations, revisions, legal
fees to the skywhen youre
focused on that, youre not
focused on growing and getting
new customers.
SAM ZELL ON THE ECONOMY
REINVENTING AMERICA SUMMIT

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All other trademarks and service marks identied herein are the intellectual property of their respective owners. 2014 Old Dominion Freight Line, Inc., Thomasville, N.C. All rights reserved.

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92 | FORBES MAY 5, 2014
fect answer, says Linebarger. Nor
do we sit back and think, Let the gov-
ernment do it. We think companies
can help. And we can help because we
know what skills people are looking
for. We have skills, thoughts, knowl-
edge, energy, all things that can be pos-
itive. In partnership we can be useful.
We try to nd those areas where Cum-
mins has good things to ofer, and the
community needs it.
The decision to expand in Seymour
wasnt easy for Cummins. The like-
ly choice was Pune, India, where costs
are cheaper and where Cummins al-
ready has a huge manufacturing base.
But for a brand-new productes-
pecially one as sophisticated as the
Hedgehogthere was a clear advan-
tage to manufacturing it close to the
engineers who designed it. Still, it was
hard to justify further investment in
Seymour. The existing plant had been
targeted for closure at least ten times
in the past 15 years because Cummins
has had a hard time nding qualied
employees.
So the company decided to do what
it always has done: Fix the problems.
As in Columbus it teamed up with Sey-
mour educators to begin drafting a
school-improvement plan that would
promote growth. (Its doing the same
thing in Jamestown, N.Y. and Rocky
Mount, N.C., where it has plants.)
Meanwhile the Lilly Endowment, a pri-
vate philanthropic fund that liked what
Cummins was doing in Columbus, gave
$50 million to fund a broader initiative
to create a regional lifelong learning
system for a ten-county area of south-
east Indiana. The goal is to assist each
person in the area to move up at least
one level from an education or career
standpoint, particularly in the elds of
manufacturing and health care.
It may not be everyones cup of cap-
italism, and it may take years to see re-
sults, but to Darren Wildman, manager
of the Seymour plant, it makes perfect
sense. Higher graduation rates mean
more pull for industries, more jobs,
better jobs, more taxes, he says. And
better communities.
ry utopian communities of Oneida, N.Y.
and Amana, Iowa (in both cases, the
businesses they spawnedsilverware
and appliancesoutlived the utopias).
But Cummins stuck with it. As the
companys operations spread across
the globe, so did Millers ideas. In India,
for example, the company opened the
Cummins College of Engineering for
Women to train more female engineers
with degrees in mechanical engineer-
ing. Of the rst class of 65 graduates,
40 received job ofers from Cummins.
Linebarger says the entire institution
cost less than endowing a chair at a U.S.
university and it fullled a critical need:
a well-trained, diverse workforce.
In Columbus the company part-
nered with schools, universities, city
leaders and other businesses to increase
graduation rates and promote econom-
ic growth. It convinced three local col-
leges to open Columbus branches and
then added an Advanced Manufactur-
ing Center of Excellence, where local
high schools and colleges could train
students for careers in manufacturing.
In 2008 Columbus high school grad-
uation rate hovered around 80%just
above the national average of 75%. So
Cummins coordinated an army of vol-
unteers to mentor at-risk students. By
2012 the graduation rate had improved
to 88%. (Cummins says 73% of its
48,000 workers worldwide volunteer in
their communities.)
How much does all this do-gooder-
ism cost? In 2012 Cummins invested
approximately $31 million in corporate
responsibility eforts, including $14 mil-
lion to the Cummins Foundation, which
in turn doled out $8 million in grants.
While its impossible to precisely quan-
tify the benets, the costs are hardly a
drag. Through most of the 2000s the
company enjoyed strong growth, despite
being hit hard by the recession. Sales
fell almost 25% from 2007, to $10.8 bil-
lion, but rebounded by 2010 to $18 bil-
lion. The last three years have been soft-
er, with sales of $17.3 billion on weak de-
mand in key international markets.
Despite those headwinds Cummins
generated record cash ow from oper-
ations in 2013 that allowed it to contin-
ue to invest in its business (and its social
projects) and still increase the cash re-
turned to shareholders by 34% in 2013.
This year the company expects reve-
nues to grow between 4% and 8%, with
earnings expected to grow faster due to
cost controls and other initiatives. Line-
barger says the company expects to re-
turn about half its cash from operations
to shareholders. The stock is up 400%
since 2009, or four times the S&P 500,
to a recent $145 per share. Its market
capitalization now stands at $27 billion.
C
ummins story of better
schools, nice towns and solid
prots makes it easy to forget
the compelling counterargument that
the best way for companies to bene-
t society is for companies to sim-
ply stick to their knitting: maximizing
prots for their owners. Why are you
taking my money to do good things for
society? asks Karnani, who supports
what Cummins does but still ques-
tions the universality of its philoso-
phy. A manager is in no position to
make these tradeofs on what is good
for society. Companies should stick to
making prots.
Cummins managers wave of these
kinds of philosophical arguments. In
an era of cash-strapped governments
and increasing need for well-educat-
ed workers at every level, what theyre
doing is pragmatic, not just altruistic.
We dont think we have the per-
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REINVENTING AMERICA CUMMINS
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This debate about charter
versus traditional is hogwash.
Its about all of the models, and
the child and parent choose
what is best for them.
CHICAGO MAYOR RAHM EMANUEL ON
REFORMING EDUCATION
REINVENTING AMERICA SUMMIT


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The space is divided into
workstations: In receiving,
materials are quickly
organized and routed
by logistics staf; at wall
construction, racks of
precisely cut steel beams
and plates of sheet metal
are loaded on tables and
bound into walls.
At the next station four
walls connect to make
podsthe bathroom
unitswhich are lled
with toilets and tubs and
paneled with engineered
stone that stands ready in
nearby racks.
Apartments are
preassembled at the
factory to ensure they t
before they go to the site.

LEGO
HIGH-RISE
The future of afordable housing is being snapped
together in Brooklyn, one apartment at a time.
BY ERIN CARLYLE
MAY 5, 2014 FORBES | 95
I
nside a warehouse at the Brooklyn Navy Yard steel beams and at metal
sheeting rest atop a workbench. A diagramwhich looks an awful lot like
IKEA furniture assembly instructionsspells out where each beam and
metal screw belongs. On it someone has carefully checked of each compo-
nent, one by one.
The metal may not look like much yet, but its on its way to becoming part of
the worlds tallest modular residential high-rise. Workers will congure these
beams into walls, which will become the scafolding of rooms, which link to-
gether to form entire apartments. Then the mods are loaded onto a truck
and driven 2.5 miles away, lifted by crane and snapped into position like Lin-
coln Logs at the Atlantic Yards complex being built next to the Barclays Cen-
ter (home to the NBAs Brooklyn Nets). Time to load an apartment: 30 minutes.
From the rst cut of metal to placing a mod next to the arena, the entire pro-
cess takes about 20 days. And well get faster, says Susan Jenkins, vice presi-
dent of Skanska, one of the companies behind the mods. This is bringing the
best of manufacturing and construction together.
The rst 32-story tower, dubbed B2, which will include street-level store-
fronts as well as 363 rental apartments, is slated for completion in December.
Build-out of the $4.9 billion project6 million square feet of residential (6,430
apartments, 2,250 of them designated afordable) plus nearly 600,000 square
feet of ofce and retail spread over 22 acres in the heart of Brooklynis sched-
uled to last 20 years.
FCS Modular, a joint venture between New York City real estate develop-
er Forest City Ratner (which was forced to build the afordable housing as part
of its Barclays Center deal) and Swedish construction giant Skanska, is counting
on the new factory approach to urban construction to save on costs and provide
greater quality control. The industry, projected to spend some $108 billion build-
ing multi family units over the next three years, according to real estate consul-
tant Metrostudy, is watching. A 1,000-square-foot apartment in New York costs an
estimated $330,000 to build; FCS estimates it will knock 15% to 20% of that this
go-roundand as much as 30% of with more experience.
If they can show that here, I think it has potential to have a transformative
$150,000
AVERAGE COST TO BUILD
A 1,000-SQUARE-FOOT
APARTMENT UNIT IN THE U.S.
$330,000
COST TO BUILD THE
SAME APARTMENT IN
NEW YORK CITY
$275,000
ESTIMATED COST OF A
SIMILARLY SIZED FCS UNIT.
1.2 MILLION
FORECAST NUMBER OF
NEW-APARTMENT
HOUSEHOLDS BY 2018
700,000
FORECAST NET NEW SUPPLY OF
APARTMENTS BY 2018
200,000
AFFORDABLE APARTMENTS
NEW YORKS NEW MAYOR
WANTS CREATED BY 2024
15,000
TOTAL MARKET-RATE
AND AFFORDABLE UNITS
NEW YORK FINANCES EACH YEAR
BY THE NUMBERS
SOURCES: GREEN STREET ADVISORS; NEW YORK CITY
DEPARTMENT OF HOUSING, PRESERVATION &
DEVELOPMENT; REED CONSTRUCTION DATA.

96 | FORBES MAY 5, 2014
FORBES
REINVENTING AMERICA MODULAR HIGH-RISE
Workers put electrical, drywall and nishes into
the assembled mods, and they begin to look
like real apartments. All this is done safely away
from the elementsno rain or snow to slow the
process or rust the metal beams.
Usually a new buildings
facade must be caulked to
seal it from the elements.
But the mods have self-
sealing facades, eliminating
the need for workers to
dangle of scafolding with
a caulking gun.
Trucks bringing the mods to the tower site
make half their cross-Brooklyn journeys in
the dead of night to avoid trafc.
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MAY 5, 2014 FORBES | 97
the need for grout in the bathroom
pods. FCS buys in big volumeno
middlemen needed.
But by far the most important in-
novation is the construction meth-
od itself. The factory feels like the love
child of Home Depot and a sterile sur-
gical chamber. We believe that in fac-
tory environments the productivity
of the worker is greater, says Roger
Krulak, the Forest City Ratner exec in
charge of modular construction.
Once the mods leave the factory
and are stacked into place, there are
further savings. Precut pipe connec-
tors are loaded into kits inside each
mod so plumbers dont waste time
scrounging for materials. Press-t
pipes, which are quicker and cheap-
er to install than traditional soldered
ones, are added level by level as the
building goes up.
Still, until the building is
complete the jury has to remain
out. If this modular approach to
constructing new housinginclud-
ing afordable housingon this
scale proves successful, says Todd
Trehubenko, senior vice president
of multifamily nance for Bostons
Walker & Dunlop, then Atlantic
Yards can serve as a true model for
afordable housing development
throughout the country.
efect, says Casius Pealer, a professor
of architecture at Tulane. Its of in-
terest both to architecture and to de-
velopers who are interested in build-
ing afordably and fast.
The agreement builders struck with
New York Citys notoriously feisty con-
struction unions is almost as innova-
tive. Because the work is predicted to
last more than two decades, the unions
were willing to accept lower per-hour
rates. Another key component: Rather
than working strictly by trade, plumb-
ers, electricians and carpenters can do
whatever tasks theyre good at. This al-
lows FCS to deploy labor exibly and
attack steps in the order that makes
the most sense. Thats a big departure
from New York City union construc-
tion practices, which mandate ridicu-
lousness like framers nishing all their
work before an electrician can even
tackle the same area.
The labor agreement also led to sav-
ings in building materials. Normally
subcontractors order materialsand
mark them up. Here FCS controls the
entire supply chain. The company di-
rectly purchases some 1,400 compo-
nents. By controlling the process, FCS
has found some great suppliers, includ-
ing a company in China that pro duces
smooth sheets of engineered quartz
scored to look like tile, eliminating
Atlantic Yards 20 years from now, if all goes according to plan.
F

1980 1982 1984 1986 1988 1990 1992 1994 1996
$4,000
$10,000
$7,000
$60,000
98 | FORBES MAY 5, 2014
IRRATIONAL
EXUBERANCE:
THE SEQUEL
The Shiller P/E signal is fashing warning signs.
What are you doing to defend yourself?
BY WILLIAM BALDWIN
T
heyre back: crazy stock
prices. Not as crazy as
they were 14 years ago, but
clearly irrational. A com-
parison of stocks with earnings tells
you that the market is overvalued by
40% to 50%.
What to do? Go to 100% cash? You
probably shouldnt go that far. But you
should lighten up your stock allocation,
says James Montier, an asset allocation
theorist at the Boston money manager
Grantham, Mayo, Van Otterloo, a.k.a.
GMO. You should denitely lower your
expectations. If you were counting on
equities to get you to a comfortable re-
tirement, rethink your nances.
GMO didnt get where it is ($117
billion under management) by making
wrong calls, so its projections, repro-
duced on page 100, are worth a look.
They are very grim. Large U.S. stocks
have an expected real return of minus
1.6% a year over the next seven years,
GMO calculates. Invest in small stocks
and you can look forward to an annual
5.1% shrinkage in your portfolios pur-
chasing power. In U.S. bonds you will
nd small refuge, with returns barely
in positive territory.
Montier, a 43-year-old Brit given
to understatement, does not engage in
the sort of doomsday preaching that
has made celebrities of experts like
Nouriel Roubini. He builds his argu-
ments around an unemotional analysis

1998 2000 2002 2004 2006 2008 2010 2012 2014
MAY 5, 2014 FORBES | 99
of market statistics. In a recent white
paper he came to the defense of the
Shiller ratio, which is signaling that
stock prices are too high. That signal is
dismissed by investors who believe that
stocks will make them rich.
Robert Shiller, Yale economics pro-
fessor and recent Nobel laureate, looks
at average earnings for the S&P 500
Index over a full decade, adjusting for
ination so that 2004 can be blended
with 2013. The Shiller ratio divides
the price of the index by the earnings
number. The ratio is hovering around
25, or 49% above its historical average.
That doesnt mean a crash is immi-
nentcrashes never come on schedule.
It just means that, over the next decade
or so, stocks are highly likely to disap-
point. They might spurt ahead and
then crash, or crash and then partly
recover or just drift slowly down. Mon-
tier isnt trying to predict the markets
path, only where it is likely to end up.
Theres a counterargument to be
made to the GMO thesis, so lets listen
to it. It comes from Jeremy Siegel, a
professor at Wharton who is as reli-
ably bullish as Shiller is bearish. They
both have victories to claim as market
seers. Siegels stock market cheerlead-
ing in the book Stocks for the Long Run
appeared in 1994, a good time to be
going long. Shiller published his text-
book for bears, Irrational Exuberance,
at almost the precise point in 2000
STOCKS:
PRICES AND VALUES
The blue line tells you what a $100 investment in
S&P 500 stocks a century ago would have turned
into, net of ination. The red line shows a fair
value for that portfoliovalue being dened as
a xed multiple of earnings over a rolling 13-year
measurement period. The disparity between the lines
tells you that investors cant keep their emotions in
check. They have lurched from moody pessimism in
the early 1980s to airheaded optimism now.
$60
$100
$1,000
$10,000
$60,000
1914 1930 1940 1950 1960 1970 1980 1990 2000 2014
PRICE
PRICE
VALUE
VALUE
SOURCES: ROBERT SHILLER; S&P DOW JONES INDICES; BUREAU OF LABOR STATISTICS; FORBES.

0.3
1967 1970 1980 1990 2000 2010 2014
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2.5
2.0
100 | FORBES MAY 5, 2014
FORBES
STOCKS IRRATIONAL EXUBERANCE: THE SEQUEL
ings by goodwill impairments is small,
he says. Most of the time an earnings
disaster reects a genuine reduction
in protability, such as from a charge
for plant shutdowns and layofs, an
increase in a banks provision for loan
losses or an inventory writedown. Its
fair to include AIGs losses in one bad
year if its prots in the other years
boosted the indexs earnings.
What about the acceleration in
earnings per share? Per Siegel that
would be a reason for according stocks
a higher multiple today than they have
enjoyed as a long-term average.
Montier turns this argument on
its head. Earnings are now way above
their long-term trend line, he says, and
are likely to retreat. Todays high level
of corporate protability, that is, may
be just a lucky streak.
Take a look at the ratio of stock
prices to revenues (see chart, above).
Two factors make that ratio high. One
is the high ratio of prices to earnings,
the problem spotlighted by Shiller. The
other is the high ratio of earnings to
revenuesthe prot margin, that is.
Both of these factors could fall back
to historical levels. If they do, then the
contraction in stock prices will be even
worse than what youd get from just a
shrinkage of the P/E. If anything, says
Montier, the Shiller statistic under-
states the degree to which stock prices
are out of line.
place dividend payments with share
buybacks.
The other is that, in lumping 500
companies together to create an earn-
ings gure, the statisticians at S&P
Dow Jones Indices allow losses from
a few big, sick companies to wipe out
the prots from the good companies.
For the fourth quarter of 2008 the
index had $23.25 as its earnings,
thanks in large part to the negative
contributions of Bank of America,
AIG and Citigroup. That disastrous
number gets the same weight in
Shillers ten-year average as the
$28.90 that S&P is anticipating for the
prosperous quarter just ended.
Montier has answers to all of Sie-
gels points. The distortion of earn-
when a great crash was about to start.
The Shiller-Siegel debate has been
going on in one form or another for a
long time. The two 68-year-old econo-
mists met in grad school 47 years ago
and have been friends and intellectual
sparring partners ever since. In the fall
of 2002 they faced of at a Forbes con-
ference, Shiller predictably warning
about the dangers of stocks and Siegel
telling the audience to pile in.
Who was right? For ve years, Sie-
gel. This debate coincided, it turned
out later, with the bottom of the tech-
led crash. Then came the nancial
crisis, and Shiller was vindicated.
The Shiller ratio sank into buy ter-
ritory in 2009. With stocks more than
doubling since then, it is now screaming
sell. But Siegel nds reasons to main-
tain his optimism. Those S&P num-
bers understate corporate protability,
he says, because they include paper
writedowns for goodwill. (A dramatic
example is the $100 billion-plus of
charges to earnings that Time Warner
took to express its regret for the merger
with AOL.) Siegel pays more attention
to operating earnings, the gure before
nonrecurring gains and losses.
Siegel raises two other objec-
tions to the Shiller ratio. One is that it
doesnt account for the acceleration
in earnings per share growth in recent
decades, a phenomenon that reects,
in part, the modern tendency to re-
WHAT ARE YOUR
STOCKS P/S RATIOS?
Two things drive them high: fat prot
margins and giddy price/earnings multiples.
How long will those last?
PROSPECTIVE RETURNS
What to expect when youre investing: not much, says GMO, unless you want to take a chance
on China, India and Brazil. The numbers are guesstimates for real annual returns through 2021.
SOURCE: GMO.
PRICE TO SALES, S&P 500
LARGE U.S. STOCKS
SMALL U.S. STOCKS
EMERGING MARKET STOCKS
U.S. BONDS
6% 4 2 0 2 4 6%
1.6
5.1%
4.1%
0.4%
SOURCE: GMO.
REAL ANNUAL RETURN

MAY 5, 2014 FORBES | 101
Since 1914 stocks have delivered an
annual 6.6% real return (price appre-
ciation plus dividends minus ination).
If they continued to do so, the equity
portion of the 401(k) you have ac-
cumulated by age 55 would double in
value by the time you retire at 66.
To assume that a 6.6% return will
keep falling into your lap is to live dan-
gerously. Insert 0% in your retirement
calculator and see what it tells you.
You probably need to be saving a lot
more.
There are several explanations for
fat prot margins. One is the Federal
Reserves loose money, which arti-
cially lowers the interest that compa-
nies pay on borrowed capital. Next,
corporate America is getting help
from the helplessness of workers,
who arent able to command wage
increases. Lastly, corporate income
taxes are shrinking as a percentage
of GDP. For all the complaints about
the high stated corporate rate (35%),
multinational corporations send small
checks to the IRS. They park their
prots in tax havens.
Will these prot boosters last for-
ever? Maybe not.
The charts on pages 9899 display
the disparity between stock prices and
fair value over the past century, value
being dened as a constant multiple of
a rolling-average earnings gure. Here
we make a few tweaks to the Shiller
earnings average to address some of
the objections to it raised by bulls.
The FORBES numbers are con-
structed for a hypothetical S&P unit in
which dividends are reinvested, ness-
ing the buyback problem. The average
looks back ten years and forward three,
using, for 201416, some very optimis-
tic forecasts. Ours is a weighted average
in which ancient history counts less
than todays results. The $23.25 loss is
in there but with less impact than the
recent $28.90 of earnings.
As for the fair-value multiple, we
picked the number that causes the
value line in our century chart to
come closest to historical prices. The
multiple came to 15.6, which is a tad
lower than the long-term average P/E
of 16.5 used by Shiller.
Despite the concessions to the bulls,
the conclusion is almost as bearish as
Shillers: Stocks are priced 43% higher
than they should be.
What do you do about that? You
can take some defensive measures (see
box). But they will get you only so far.
The most important thing is to lower
your expectations.
Stock skeptic James Montier of GMO (above)
and stock lover Jeremy Siegel of Wharton.
HOW TO BE A BEAR
GO TO CASH. GMO analyst James Montier
is only 30% invested with his own savings.
Thats a bit drastic, but you could lighten
up. You could unload some stocks youre
not fond of.
THIS IS NOT A COSTLESS MOVE. While
youre on the sidelines youll be getting a
real return (interest minus ination) of 1%
to 2%. Also, you might owe capital gain
taxes on the sale of your stock.
BUY AN OPTION. A put contract on the
S&P 500 index with a strike price of 1,800
and an expiration in December 2015 was
recently trading on the Chicago Board
Options Exchange near 160. That means
you shell out $16,000 and collect on
expiration $100 for every point that the
index closes below 1,800.
ITS A RISKY BET. If stocks go sideways or
up, your $16,000 goes down the drain.
OWN DEFENSIVE STOCKS. GMO predicts
that shares of companies with steady
prots and strong balance sheets will hold
up better than other stocks over the next
seven years. In its institutional funds it owns
Microsoft, Google, Chevron and Coca-Cola.
SWITCH TO BONDS. An ination-protected
U.S. Treasury bond due in ten years has a
yield of 0.6%. It could uctuate in price in
the meantime, but if you hold to maturity
you will be assured of that 0.6% real annual
return.
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102 | FORBES MAY 5, 2014
THE BILLIONAIRE
AND THE
PRIME MINIST

MAY 5, 2014 FORBES | 103
W
hen his son was married in the coastal state of Goa last year,
Indian billionaire Gautam Adanis guest list included the
richest man in the country and scores of top executives,
bankers and bureaucrats. Most, however, just stopped by the
night before to bless the happy couple and skipped the actu-
al wedding. One prominent friend, however, stayed through all the ceremonies,
which extended over a couple of days, genial and relaxed like a favorite uncle:
Narendra Modi, chief minister of Adanis home state of Gujaratand almost cer-
tainly the next prime minister of the worlds largest democracy.
Adani had another reason to pamper his guest. With an estimated worth of
$5.4 billion, Adani runs Indias largest port, a power company and a commodities
trading business. A large chunk of his operations are in Gujarat, where the Modi
government, in power since 2001, has been very, very generous to Adani.
Getting ber-rich by hitching yourself to the most powerful political forces is nei-
ther novel nor conned to India (although its getting increasingly common there).
Western plutocrats, dating back to the Borghese and Medici families, perfected the
art. And political ascendance with an assist from the rich is equally tried-and-true:
Mark Hanna got William McKinley elected President, and that tradition continues
today, as candidates from both parties kiss the rings of the likes of Sheldon Adelson.
But the relationship between Adani and Modi seems egregious by any stan-
dard. Adanis crown jewels include Indias busiest private port and a 4,620-mega-
watt coal-red power plant, both of which sit in a coastal area called Mundra and
are part of 18,000 acres leased from the Gujarat government.
And according to copies of the agreements obtained by FORBES, those
leases30 years and renewablecame at staggeringly generous rates. Paying less
than $44 per acre, Adani has sublet the space to other companies, including state-
owned Indian Oil Co., for as much as one thousand times more. Other government
favors are even more troubling. Between 2005 and 2007 at least 2,900 acres of
grazing land used by villagers was leased to Adani under a version of Indian emi-
nent domain that allows the government to conscate land thats in excess. The
villagers say it was signed away without their knowledge. Today its the site of the
port and the power plant.
Preferential treatment? Adani Group disagrees. It will be complete-
ly misleading if we compare the price of the land before development and after
development as an entrepreneur takes risk of investing a large amount to devel-
op this land, and if the commercial venture fails, the consequences are only to the
developer, the company argues in an e-mail.
Thats not how folks on the ground see things. The basic philosophy of a liber-
al economy is to allow market forces to play their role, says Anand Yagnik, a law-
yer representing some Mundra villagers who have sued in the Gujarat High Court
to contest the government actions going back to 2005 and earlier. (Several cases are
still pending.) Why do you have to allocate scarce resources to industrial houses at
throwaway prices when they have suf cient capital to pay market rates?
In theory thats the kind of argument Modi would make. In February he gave
a speech touting the benets of more open business competition in India. He
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NARENDRA MODI IS POISED TO BECOME THE
NEXT LEADER OF INDIA, BASED LARGELY ON HIS
REPUTATION AS AN ECONOMIC FIXER. HOW DOES
THAT SQUARE WITH THE SWEETHEART DEALS
HE GAVE ONE OF THE COUNTRYS RICHEST MEN?
BY MEGHA BAHREE
The basic
philosophy of a
liberal economy
is to allow market
forces to play their
role, says a critic
of Indian mogul
Gautam Adani, who
has proted mightily
from political
patronage in the
state of Gujarat.

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104 | FORBES MAY 5, 2014
FORBES
INVESTIGATION INDIAS ADANI GROUP
acre, he says, well below market value.
Traversing a couple of nearby bar-
ren elds, Jadeja says he had been
growing alternately cotton, millet and
castor there. Now patches of white salt
are easily visible across stretches of
the elds and have become a common
sight across farms. The saline water
ruined the soil, and the poor produc-
and making the soil less fertile, they
insist. For miles at a stretch the chim-
neys of the two power plants are visi-
ble against the horizon. Gajendra Sinh
Jadeja, the 28-year-old head of Navi-
nal village, says the Gujarat govern-
ment took some 230 acres of his vil-
lages grazing land for Adanis eco-
nomic zone. Adani got it for $770 an
has run as the candidate for econom-
ic revival, based largely on his Gu-
jarat record. During his tenure the
state has attracted investment in sec-
tors like auto manufacturing and
solar power and made advances in ir-
rigation and electricity supplies; its
GDP has expanded at a 13.4% com-
pounded annual clip, nearly double
the national rate.
The crux is how hes made that
happen. Launched in 1988, the Adani
Group went public in 1994. But its
real rise happened after Modi came to
power. From 2002 to last March the
groups annual revenue rose from $765
million to $8.8 billion while net prof-
its climbed even faster. During this pe-
riod it constructed its economic zone,
bought mines in Indonesia and Austra-
lia to ensure a steady supply of coal for
its thermal power plants in India and
launched Asias largest coal import ter-
minal, in Mundra. In 2011 it further ex-
panded in Australia, buying for $2 bil-
lion Abbot Point, a coal terminal in
Queensland. It also tacked on a hefty
amount of debt$13 billionmore
than doubling since 2011.
While none of the other com-
panies operating in Gujarat have
received the same kind of largesse on
land rates as Adani, they, too, have
gotten sizable government handouts.
That history makes a mockery of Mo-
dis campaign-trail diatribes against
crony capitalism and speeches on be-
half of the downtrodden. At a politi-
cal rally in distant Lucknow in early
March he claimed he would not
allow anyone to loot the exchequer.
Modi also said that farmers were his
friends and he would stand by them.
But spend time around the vil-
lages here and a vastly diferent pic-
ture emerges. This region was famous
for its crops of sapodilla, a brown,
eshy fruit slightly smaller than a ten-
nis ball, as well as dates, coconuts and
castor. Area farmers say thats no lon-
ger the case. Fly ash and saline water
from Adani Power and a nearby Tata
Power Co. plant are spoiling the crops
INDIAS NEW STRONGMAN
NARENDRA MODI, THE 63-YEAR-OLD HEAD OF THE HINDU NATIONALIST OPPOSITION
(the BJP), would signal a radical change from the current prime minister, the cerebral,
low-key and unpopular Manmohan Singh. As a pugnacious champion of domestic big
business, Modi is expected to push policies to kick-start a lagging economy without giv-
ing a longer leash to ination.
The son of a tea seller from the western Indian state of Gujarat, Modi is a yoga enthusi-
ast and a strict vegetarian. Hes also a divisive and controversial gure. Two decades ago
he was an early strategist for the BJP, whose members have often been accused of nur-
turing hatred toward Indias Muslim minority. Many hold him responsible for failing to con-
trol communal riots in his state in 2002, when rampages killed more than 1,000 people,
mostly Muslims. Modi was never charged, though some of his close associates have been
convicted for inciting the riots.
In 2005 the U.S. revoked Modis visa for his alleged role in the massacre. No one ex-
pects Indian-U.S. relations to improve under a Modi administration. In fact, the BJP has
promised to reverse the current governments mild embrace of foreign partnerships and
will ban companies such as Wal-Mart from opening retail stores. As for Indias neighbors?
He has a tendency to thump his chest and make threatening comments on Pakistan and
India, says longtime Modi observer Aakar Patel, a columnist at Mint newspaper.
Indians expect a big lift economically, given Modis record in Gujarat, the state he has
led since 2001. During his tenure its growth rate has far outstripped the 7.8% compound-
ed annual rate of India. Its a little tougher to perform miracles from New Delhi, where the
government controls perhaps 25% of major investment projects under way. It all depends
on how big a win he racks up. If he wins by a large mandate, says Surjit S. Bhalla, chair-
man of Oxus Investments, then the states will have to fall in line. M.B.

MAY 5, 2014 FORBES | 105
High Court saying the seizure was il-
legal. In January the court declared
the zone illegal and ordered the com-
panies that had set up factories to
stop all work. Reason: Development
had proceeded without environmen-
tal clearance. Under Indian law a proj-
ect of that size needs a nod from the
federal environment ministry before it
can lay a brick. (This judgment is per-
tinent only to the economic zone and
not to the port or the Adani Power
plant. The company applied forand
receivedseparate environmental
clearances for those projects, and that
lets them operate legally.)
Indias Supreme Court has refused
to stay the lower courts decision, al-
though it ruled that existing tenants
could keep operating. With hundreds
of millions of dollars already invested
albeit in a project now in legal limbo
Adanis efort may have become too big
to shut down. The Gujarat High Court
passed the ball on that decision to the
feds, asking if the project could be
granted a belated environmental clear-
ance. New Delhi requested a couple of
months to ponder that decision.
We could see quicker resolution. In-
dias unusual nine-phase general elec-
tions will be wrapped up May 16. If, as
every poll indicates, Modi and his party
win, Adani and his wealthy cohorts will
very likely get a free pass.
tion now is just not worth it, he says.
After years of receiving complaints
of environmental abuse the federal en-
vironment ministry nally, in 2012,
named a panel, known as the Suni-
ta Narain Committee after the woman
chairing the process, to look into them.
In a report last April Narains group
conrmed the villagers complaints
and fears. It said the Adani economic
zone had violated multiple green rules
at diferent points of its mammoth
projectdestroying mangroves, ll-
ing creeks and causing land and water
degradation by dumping y ash.
At the power plant thousands of
gallons of water sucked in from the
sea through one channel are let out
through a pipeline. Once sucked in its
kept in a reservoir, where its pumped
into the turbines to generate electrici-
ty and eventually is pumped back out.
The panel found that the reser-
voir didnt have any lining to protect
the groundwater. The examination
by the committee shows that the soil
in the area is permeable, and with-
out safeguards it will lead to contam-
ination. This is a clear violation of the
environmental clearance condition,
says its report. The committee recom-
mended that Adani create a fund that
was either 1% of the entire project
cost or $37 million, whichever was
higher, to reconstruct the channels
that take in and send back the water
and x the reservoir.
But almost a year after the recom-
mendations the company appears to
have done nothing. Meantime, it has
plans to expand its 18,000-acre eco-
nomic zone to 44,500 acres.
Modi declined to talk with
FORBES for this story. The Adani
Group, however, disputes the ndings
of the Narain committee and insists
its playing by the rules. Any large
development of this scale would not
be without impacting the environ-
ment. However, we are very sure that
the net impact has always been posi-
tive, says the spokeswoman in an e-
mail. We have executed the projects
as per the statutory requirements.
In todays India it is not unusual for
governments to ofer benets to pow-
erful private interests, especially to at-
tract investment in remote areas. And
Adani is not the sole beneciary of
Modis blessings. But what is unusu-
aland where the problem arises
is when you set something up on this
scale without competitive bidding,
says Aakar Patel, a columnist at Indian
newspaper Mint and a longtime Guja-
rat observer.
The social dynamics are much the
same at the 4,000-megawatt power
plant of Tatas wholly owned subsid-
iary Coastal Gujarat Power, a few miles
down the coastline from the Adani
plant. It opened in March 2012 under
a diferent arrangement, this one a fed-
eral initiative to spur big energy plants.
Several of them have been announced,
but this one from Tata is the rst to go
live. Under the deals, the federal gov-
ernment provides the operators with
the land and all clearances. However,
land is a state subject, so it is the state
governmentModis in this casethat
identied and allocated the land.
Back in his adjoining special eco-
nomic zone, things have gotten legal-
ly dicier for Adani of late. In 2013 res-
idents of Navinal Village, who had
lost their grazing land to the econom-
ic zone, led a petition in the Gujarat
V
I
V
E
K

P
R
A
K
A
S
H

/

B
L
O
O
M
B
E
R
G

(
L
E
F
T
)
;

S
A
M

P
A
N
T
H
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K
Y
/
A
F
P

/

G
E
T
T
Y

I
M
A
G
E
S

(
R
I
G
H
T
)
The Adani Group controls Indias busiest private portin a
coastal area called Mundrapart of 18,000 acres leased at
extremely preferential rates from the Gujarat government.
F

106 | FORBES MAY 5, 2014
W
A
L
T
E
R

S
M
I
T
H

F
O
R

F
O
R
B
E
S
best friends), with whom he now collaborates
on a line of furniturePitt-Pollaro (pitt-pollaro
.com)which features high-concept tables and
beds and the rather sensational two-person
Toi et Moi bathtub.
Pollaros good fortune is, literally, the resi-
due of design. The son of a New Jersey demo-
lition contractor, he was swept into the realm
of creative imagination the moment he opened
the door of his junior high shop-class wood
room. I couldnt believe that wood came in
those colors! he remembers. I saw the dark
brown of walnut, the reddish brown of ma-
hogany, the lighter red of cherry. I just couldnt
think about anything else. He was 12 years old.
By high school Pollaro had taken a job with a
cabinetmaker, and with the exception of
a year at the Art Institute of Phil-
adelphia (It wasnt hold-
ing my attention)
he never let up. At
21, eager to launch
his own business, he
had already put in the
10,000 hours the writer
Malcolm Gladwell posits as
F
rank Pollaro, exotic wood whis-
perer, ultra-high-end furniture
maker to everyone from Steinway
& Sons to Larry Ellison, can point
to the moment when his edg-
ling New Jersey company caught a rocket: It
was the day in 1995 when New York architect
Charles Gwathmey introduced him to music
and movie mogul David Gefen.
With Charlie and his clients it was never
Frank would like to bid on your dining
table, Pollaro says of the late Gwathmey. It
was: Meet Frank Pollaro, hes going to build
the table for your dining room.
That seems to have suited Gefen, because
shortly thereafter he began talking up Polla-
ros extraordinary Art Deco-inuenced furni-
ture to his rareed circle of friends, a practice
he continues to this day. David has been like
a father, says Pollaro. He has guided me and
given me 20 to 30 clients you just couldnt get
to in any other way.
Pollaros workshop is very much an artisan
operation, taking on about 150 projects a year.
But the customer list for his pieces, which
can range from $25,000 for a club chair to up-
wards of $500,000 for a dining room table,
packs big-league cachet. His clients include,
by Pollaros estimate, about 30 members of
The Forbes 400, notably Ellison (my second
turning point), Jamie Dimon and Michael
Dell, plus celebrities like Jerry Seinfeld, Rob-
ert De Niro and Alec Baldwin.
Not to mention Brad Pitt (truly one of my
DESIGN
The Wood
Whisperer
BY RICHARD NALLEY
Frank Pollaro has designed
custom furniture for
Larry Ellison, David Gefen
and Jerry Seinfeld. He also
collaborates on a collection
with his good friend Brad Pitt.
Lathe spirit: Frank
Pollaro in his Union, N.J.
furniture studio. Below:
the Pitt-Pollaro Toi et
Moi marble bathtub.
FORBES LIFE

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DESIGN
108 | FORBES MAY 5, 2014
Having access to the kind of customers
who will pay six gures for a 28-foot-long,
single-slab table has put Pollaro Custom
Furniture in an enviable position. And the
47-year-old furniture designer has turned out
to be a tight manager. Though he declines to
give gures, Pollaro says sales at his compa-
ny, now with 28 employees, have grown by
about 20% in each of the past ve years. Pol-
laro carries no debt and owns, not leases, all
its own heavy equipment.
He is also a persuasive salesman. An ad-
miring comment by the shipyard owner who
built Larry Ellisons superyacht Musashien-
tirely furnished with 94 pieces by Pollaro
convinced him that he might be onto a new
line of business. I am in London about four
days a month these days, Pollaro says, bang-
ing on the doors of yacht designers. I see a
large part of our business going there.
The business with Pitt also occupies a lot
of his time. The two have become close since
Pollaro delivered a deska birthday present
for Jolieto the family chateau in the South
of France six years ago and spotted a note-
book of Pitts furniture sketches on a table.
Those sketches became the basis of the Pitt-
Pollaro furniture collaboration.
One early fruit of their labors is a jaw-drop-
ping Long Run Table parked in Pollaros work-
shop. On top is an 18-foot-long, 5-foot-wide sin-
gle slab of African Bubinga, so vividly gured it
is almost kineticlike an aerial photograph of
a river delta in a ood. Underneath is Pitts sur-
prise, a maze-like wooden base, all right an-
gles and tavern-puzzle turns that form, some-
how, a single line. Frank is someone who is
more obsessive than me about details, claims
Pitt, which is saying something: Pitt designed
30 prototypes before he was satised, a process
that put Pollaro through some agita. One of
the things he does is make me crazy, says Pol-
laro. That table weighs 3,000 pounds and has
no vertical supportthere is no member that
bears weight straight down from the tabletop to
the oor. That is a serious physics issue. I some-
times send Brad e-mails, and Im just cursing
him: Why? Why do you have to torture me?
A two-beat pause; the beginning of a
wry smile. He loves that, Pollaro says.
the prerequisite for mastery of a eld.
But it wasnt just his dedication to design
that set Pollaro apart. It was what he had
dedicated himself to. By the time he had set
up shop in 1988 in a 300-square-foot work-
space he was already a pretty unusual guy for
his blue-collar milieu. In the age of Bon Jovi
he had become star-struck by mile-Jacques
Ruhlmann, the exquisite 1920s Parisian high
priest of Art Deco furnishings.
Exasperatingly exacting, Ruhlmann creat-
ed magnicent, one-of-a-kind furniture whose
labor costs and technical subtleties would
seem to make them all but unreproducible
today. Mr. Ruhlmann, meet Mr. Pollaro.
If you want, say, a Ruhlmann-designed
writing desk thats topped with shagreen
ray-skinand requires 1,000 tiny ivory inlays
to be individually inserted by delicate hand-
chiseling, Frank Pollaro is your man.
But Pollaros obsession with Ruhlmann and
other museum-certied mandarins is at the far
end of what may be an even more foundation-
al xation: I am, he says, with the confessional
solemnity of a man entering a 12-step program,
a wood hunter.
Well, yes. Visiting Pollaros studio in a drab
Union, N.J. of ce park, you step from his of ce
into the veneer room, where a million square
feet of wood veneer logs are stackedincluding,
he says, the worlds largest collection of Macas-
sar ebony. (This spring a chair in one corner, up-
holstered in python skin and trimmed in 24-kar-
at-gold gilt, awaited shipment to Angelina Jolie.)
Out back are some 150 massive pieces of exotic
slab wood. All told, he reckons, his wood inven-
tory, which he values at $2 million, is unrivaled.
FORBES LIFE
What the 60 million
Forbes.com users are talking
about. For a deeper dive go to
FORBES.COM/LIFESTYLE
TRENDING
PEOPLE
WU-TANG CLAN
The secret is out: Hip-
hops bards of Staten
Island revealed that
theyll nally release a
new double album, Once
Upon a Time in Shaolin, in
a very limited edition: one
copy. The price is expect-
ed to be in the millions;
the album will come with
a custom-made engraved
silver-and-nickel box.
COMPANY
JAEGER-LECOULTRE
Talk about a smart watch:
Jaeger-LeCoultres new
AMVOX2 Transponder
can lock and unlock the
doors of an Aston Martin.
The cost for the 44mm
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sold separately.
IDEA
BRAIN FITNESS
Will playing Candy Crush
make you smarter? A
new study suggests that
videogames increase
the cortical thickness of
two central brain areas
associated with greater
cognitive functions. But
you knew that.
Trifes make perfection, and perfection is no trife. MICHELANGELO
FINAL THOUGHT
C
O
U
R
T
E
S
Y

O
F

W
U
-
T
A
N
G
Sitting pretty:
an ebony Pollaro
yacht-collection chair.

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THOUGHTS
No individual has exerted a more profound infuence on modern
human productivity than the visionary physicist pictured on our
cover. He is Carver Mead, 53, the California Institute of Technologys
Gordon and Betty Moore Professor of Computer Science. For those
who are discouraged about the future of the U.S., he has a message
of profound comfort. Mead believes that new developments in
electronics are opening, right now, opportunities for entrepreneurial
creativity and invention unprecedented in the history of tech-
nology. And the U.S. is uniquely suited to capitalize on them.
FROM THE APR. 4, 1988 ISSUE OF FORBES
Every answer
given arouses new
questions. The
progress of science
is matched by an
increase in the hidden
and mysterious.
LEO BAECK
An idea can turn to dust or magic, depending
on the talent that rubs against it.
WILLIAM BERNBACH
Thats what Ive always tried to do
keep moving. Otherwise, as Dylan
says, if youre not busy being born,
youre busy dying.
STEVE JOBS
Imagination is the voice
of daring.
HENRY MILLER
Anyone who has invented a better mousetrap,
or the contemporary equivalent, can expect to be
harassed by strangers demanding that you read
their unpublished manuscripts or undergo the
humiliation of public speaking.
BARBARA EHRENREICH
Imagination is always the fabric of social life and
the dynamic of history. The infuence of real needs
and compulsions, of real interests and materials, is
indirect because the crowd is never conscious of it.
SIMONE WEIL
One of the greatest pains to human
nature is the pain of a new idea.
WALTER BAGEHOT
The sight of that to
which one has long
been accustomed
does not produce
such an ardent
desire as of objects
new in form and
character.
MAIMONIDES
FINAL THOUGHT
Better to schlep through life than sleep through it.
MALCOLM FORBES
SOURCES: COLUMBIA DICTIONARY OF QUOTATIONS; GOODREADS.COM; SIMPSONS CONTEMPORARY QUOTATIONS;
READWRITE.COM; STEVE JOBS, BY WALTER ISAACSON; A TREASURY OF JEWISH QUOTATIONS.
ON REINVENTION
THOSE WERE THE DAYS When things are going right, few things you
can legally sell are more protable than magazines. Once past the break-
even point, margins get fatter; as long as advertisers and readers remain
loyal, most of the additional dollars cascade to the bottom line.
SONIC YOUTH Remember Memorex? Its audiotape became one of the
countrys most recognized brands when Ella Fitzgerald shattered a glass in a
recording studio while the announcer asked, Is it live? Or is it Memorex?
OTHER THOUGHTS FROM THAT ISSUE:

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