This is not a post about a bubble, real or imagined. It’s a lesson from when I was 20 years old.
I showed up at MIT as an eager freshman. I was 17, from Dallas, with a nice pair of cowboy boots and long hair. On my first day, at the freshman picnic, I heard that 50% of us would end up in the bottom half of our class. Fifteen minutes later I was whisked away in a white van to ADP, the fraternity I ended up pledging and living in for four years, next to WILG and across the street from The Mandarin (no longer there), Mary Chung (still there and still awesome), and Toscanini’s (still there and even more awesome.) That night I met Dave Jilk, my first business partner and one of my best friends.
Dave was a senior and I was a freshman. He took me under his wing and we became thick as thieves. He was Course 6 and easily one of the best coders around, even though we didn’t call them coders there. I was pretty good also, but limited to BASIC and Pascal, which were the two languages I used to write the commercial software I was working on for Petcom. Dave was into business, read Forbes cover to cover each time it came out, and hung around with some Sloan people. We’d go to Mandarin, Mary Chung, or somewhere in the North End, eat and drink way too much, and talk about computers and business. Ok – we talked about other things that 18 – 22 year old young men talk about, but there was a lot of computers and business in the mix.
Petcom, the company I worked for, wrote PC-based oil and gas software. They had one competitor – David P. Cook and Associates (which, in a twist of irony, morphed into Blockbuster – if you don’t know the story, Wikipedia has a fun history snippet.) In addition to getting paid $10 / hour (which quickly taught me that if I worked more hours, I got paid more money) I received a 5% royalty on gross sales of the two products I wrote (PC Log and PC Economics).
In 1983 the oil business was booming and Petcom was growing quickly. As a freshman, I’d get a monthly royalty check – sometimes $1,000, sometimes $2,500, and once $11,000. I never knew what it was going to be, so I was always very excited when the blue Petcom check showed up at 351 Massachusetts Avenue in my mail cubby. I’d often grab a bunch of frat brothers for lunch, go to Mandarin, and pay for whatever we ate.
The graph gives away the punch line.
While the price of oil more than doubled between 1978 and 1979, from $14 to $31 / barrel, it had been slowly drifting down from a high of almost $37 in 1980 to $29 in 1983. But that drift was seductive since it was so much higher than the $14 / barrel in 1978 and created this sense that it would once again go much higher.
In the summer of 1985, I was working full time at Petcom. Things for the company were absolutely rocking. We had grown from three people (the two founder + me) when I started to over 20 people. We had fancy offices on the 7th floor of a building across the street in the Dallas from the beautiful Galleria Mall. Software was being sold, my royalty checks were huge (I think I made around $80,000 in 1985, but that’s just a vague guess), and life was grand.
I went back to school in the fall. That’s when I uttered a deeply stupid phrase to Dave.
“Oil Prices Will Go Up Forever”
Dave challenged me. We argued. We probably went out to dinner somewhere in the North End, ate a huge amount of pasta and red wine, and then went to The Parker House in downtown Boston and drank scotch until we eventually stumbled back to 351 Mass Ave.
In December, 1985, Saudi Arabia flooded the market for oil and by the end of 1986 the price of a barrel of oil was around $10.
I didn’t work at Petcom that summer. Their phones stopped ringing. Customers went out of business right and left. The company shrunk back down to the two founders who then started the first CD music store in Dallas, repurposing their software for the CD business, just like David P. Cook had done for the video business. My royalty checks had stopped, but fortunately I had started Feld Technologies and 1986 was the summer of 2430 Denmark in Garland, Texas.
The oil and gas business wasn’t the only one that got slaughtered by this. Texas real estate was booming, until it wasn’t. My dad, a doctor, was a small partner in a bunch of real estate partnerships. By 1990 he was a large partner in a small number of the real estate partnerships that hadn’t failed, as he was one of the few partners who could keep writing checks. I don’t know exactly how it turned out for him, but since he had staying power I expect he broke even or even made some money. But I remember the stress around the dinner table when I was home in the summer and over the phone when we talked as he was fighting through what was likely a very similar mess to the one I would encounter several times later in my life.
I learned a powerful lesson that laid some fundamental groundwork for how I think about business. In the Internet bubble, while I kept this lesson in the back of my mind, I ended up suspending disbelief, like so many others, in 2000 and into the spring of 2001. I learned this lesson again, but in a more profound way.
Through each of these aggressive down cycles, amazing companies were created. Some of the great real estate fortunes emerged from the rubble of Dallas in the 1980s. You don’t have to look very far to see some remarkable companies that survived and transcended the Internet bubble collapsing in 2001. And for many, 2008 and 2009 seems very far in the distant past, even though it still massively impacts others in a very negative way.
Oil prices do not go up forever. Neither does anything else.