I inherited a small number of common stock shares distributed between six issues. All were purchased at different times in the 1960s. What can we learn about a long-term buy-and-hold strategy from these holdings? In investing, a lot more can change in 50 years than we sometimes fully appreciate.
Here are the six stocks. For clarity I've rounded off the numbers:
|Stock:||Ticker:||Cost Basis:||Price |
|General Electric Co.||GE||0.78||23.37||23||2900%|
|Procter and Gamble Co.||PG||0.99||76.75||76||7700%|
Let's discuss key changes affecting these stocks over the past 50 years.
1. The Impact of Government: Governments drastically alter companies through legal and regulatory changes. When my relatives bought a few shares of AT&T Corp. back in the 1960s, the company was a regulated utility. AT&T enjoyed monopoly status in exchange for government oversight. The Supreme Court ended this arrangement in 1983. It divested AT&T into seven regional companies and forced them to compete. One regional company, Southwestern Bell Corporation, rebuilt much of the AT&T system. It purchased former parent AT&T Corp., assumed its branding, and today trades under the original corporate ticker T. In 2011 the U.S. Department of Justice stopped it from acquiring T-Mobile USA.
The lesson of government power was not lost on AT&T. The company ranks 16th among all federal government lobbyists in the period from 1998 to 2012. General Electric ranks 2nd and Exxon Mobil ranks 10th.
Take-away: In the 1960s, no one dreamed that the courts would force AT&T from regulated utility status into a tooth-and-nail telecom competitor. Social attitudes and government policy on regulation, monopoly, and competition evolve in unpredictable ways that dramatically impact some companies.
When analyzing an investment, do not ignore potential government actions. Their lobbying efforts show that AT&T, GE, and Exxon Mobil don't.
2. Great CEOs Matter: Looking through the histories of these six stocks shows that exceptional CEOs can make a world of difference to a company -- if they're blessed with longevity. For example, Darwin Smith headed Kimberly-Clark from 1971 to 1991, transforming KMB from a mediocre business paper company into a powerhouse consumer products company. John Swearingen, CEO of Standard Oil of Indiana by 1960, built it into the integrated oil major Amoco by the time of his retirement in 1983. (Amoco is today BP.)
Public celebrity does not necessarily indicate a successful CEO. Whether GE CEOs Jack Welch and Jeffrey Immelt were successful is controversial, even though both receive much publicity.
Take-away: Transformative CEOs require longevity to truly reorient companies. Public celebrity does not prove successful tenure.
3. Technological Change: It's commonplace to note how fast technology changes. Yet it is still difficult to appreciate how quickly it can up-end even seemingly stable, blue chip businesses. Take Exxon Mobil and BP, for example. Who would have imagined only a decade ago that fracking would completely remake their competitive landscape? AT&T is another example. Once the purveyor of plain old telephone service (POTS), today the company focuses on wireless, broadband, and optical.
Take-away: While we all understand we live in a technological age, it's difficult to grasp how greatly this impacts the companies in which we invest. Technology completely transforms markets and companies in less than a generation.
4. The Triumph of Consumer Staples: Traced back to the 1960s, the above table shows that the two most successful stocks of my original six are PG and KMB. The tech stocks in my list, T and GE, have the poorest records.
How could two plodding consumer staples stocks outpace the growth stocks? I think the answer is that it's more likely that a company can continue slow but steady growth over the long haul than that a company can continue for decades as a strong growth stock.
Take-away: If you want to maximize total return over generational holding periods, take a close look at dividend-oriented consumer staples companies. Even the most successful growth stocks can't maintain their momentum over decades. Ten years ago, who would have thought that tech darling Microsoft (MSFT) would lose its crown to also-ran Apple (AAPL)?
5. Mergers & Acquisitions: Everyone knows that M&A affect even the biggest companies. Just look at GE's long list of deals.
What is sometimes harder to appreciate is that M&A can totally remake even the largest, most "stable" companies. Take Amoco. Who would have predicted that such a large corporation -- an oil major -- would completely disappear? Today your Amoco stock is a BP ADR. Exxon Mobil similarly evolved from the M&A of dozens of oil companies, including Exxon, Mobil, Socony, Humble, Vacuum, Jersey Standard, Esso, Enco, and more. It took some real detective work to discover which stock my relatives bought in the 1960s to yield up the XOM shares I hold today.
Take-away: You may buy the biggest, most stable of blue-chips, only to find that it entirely disappears into other companies over time. Viewed this way, long-term buy-and-hold investing requires a lot of faith.
6. Big U.S. Companies Are International: Back in the 1960s my six stocks derived almost all of their revenue from the domestic market. Today only AT&T does. In fact, as recently as 2000, less than a third of S&P 500 revenue came from overseas. Today, about half does.
U.S. companies are also offshoring their employees and operations. Big companies cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, according to Commerce Department figures. Among our stocks, GE typifies the trend. In 2010, 46% of its 287,000 employees were Americans, down from 54% in 2000. Only 28% of Procter & Gamble employees are today in the U.S..
Finally, companies use their international status to minimize their taxes. GE famously came in for a drubbing a couple years ago when it paid zero U.S. tax on worldwide profits of $14.2 billion and U.S. profits of $5.1 billion.
Take-away: To analyze U.S. based companies as investments, you must understand their international strategies and markets. Sophisticated investors even consider foreign tax, currency, and regulatory factors.
Conclusion: Everyone understands that technologies, laws, regulations, markets, products, and consumers change over time. Add in macro trends like internationalization, deindustrialization, M&A, and offshoring, and long-term buy-and-hold investing seems in many ways an act of faith.
Additional disclosure: Never make any buying or selling decisions without doing your own research and due diligence. I accept no legal responsibility for the accuracy of the information or opinions expressed in this article.