John Bogle – The Man

John Bogle’s heritage is heavily Scottish. John’s maternal grandmother immigrated to America in the 1700s to work in farming.  Bogle’s great-grandfather, Philander Banister Armstrong, was John’s “spiritual progenitor”. Philander worked to reform the fire and life insurance industries. John’s family history may explain his thriftiness and two of his characteristics: “stubbornness of an idealist” and “the soul of a street fighter.”

Picture of Bogle

John Bogle was born on May 8, 1929 in Montclair, NJ to William Yates Bogle, Jr, (a WWII aviator) and Josephine Lorraine Hopkins. The Bogle family lost their inheritance in the Depression and they had to sell their home. His father became an alcoholic and his parents divorced.

Bogle attended Manasquan High School at the Jersey Shore. His excellent academic record enabled him to enroll the prestigious Blair Academy, where he excelled in math. John graduated from Blair Academy cum laude in 1947 and then enrolled at Princeton University to study economics and investment.  John was interested in the mutual fund industry – one subject that had not been analyzed before. Bogle’s senior thesis was “The Economic Role of the Investment Company”.

Bogle graduated from Princeton in 1951 and began evening and weekend classes at the University of Pennsylvania.

Walter L. Morgan, founder of Wellington Fund, read Bogle’s thesis and liked it enough to hire him in 1951. Bogle was promoted to assistant manager in 1955

John became chairman of Wellington but was fired for an unwise merger he approved. He considers the merger his biggest mistake and said, “The great thing about that mistake, which was shameful and inexcusable, a reflection of immaturity and confidence beyond what the facts justified, was that I learned a lot.”

In 1974, Bogle launched the Vanguard Company and a year later founded the Vanguard 500 Index Fund (referred to as Bogle’s Folly), the first indexed mutual fund available to the general public. In 1999, Fortune Magazine recognized Bogle’s success and named him “one of the four investment giants of the twentieth century”.

Health concerns in the 1990s forced Bogle to relinquish his role as Vanguard CEO in 1996. He named John J. Brennan as his successor. That same year Bogle had a successful heart transplant, which enabled him to return to Vanguard, this time as senior chairman.

Bogle had a successful heart transplant in 1996 and returned to Vanguard as of senior chairman. Conflicts between Bogle and Brennan resulted in Bogle’s departure in 1999. Bogle started Bogle Financial Markets Research Center, a small research institute, unrelated to Vanguard.

Bogle is a member of the board of trustees at Blair Academy, an advisory board member of the Millstein Center for Corporate Governance and Performance at the Yale School of Management. Bogle received an honorary doctorate from Princeton University in 2005. Bogle also serves on the board of trustees of the National Constitution Center in Philadelphia, a museum dedicated to the U.S. Constitution

 

    The Clash of the Cultures: Investment vs. Speculation (2012) is John Bogle’s last book. In it he highlights how speculating (short-term) agency, mutual and hedge funds, have taken over from the investing long-term ownership culture. We will cover that in the other section.

 

Bogle’s Lessons of Investing

(What investors can do while the

financial system gets fixed)

 

  1. Remember reversion to the mean. The stock market reverts to fundamental returns over the long run.
  2. 2. Time is your friend; impulse is your enemy. Take advantage of compound interest.
  3. Buy right and hold tight.
  4. Have realistic expectations. You are not likely to get rich quickly.
  5. Forget the needle, buy the haystack. Buy the whole market and you can eliminate stock risk, style risk, and manager risk.
  6. Minimize the “croupier’s” take. Beating the stock market and the casino are both zero-sum games, before costs.
  7. There’s no escaping risk. I’ve long searched for high returns without risk; despite the many claims that such investments exist, however, I haven’t found it. And a money market may be the ultimate risk because it will likely lag inflation.
  8. Beware of fighting the last war. What worked in the recent past is not likely to work in the future.
  9. Hedgehog beats the fox. Foxes represent the financial institutions that charge far too much for their artful, complicated advice. The hedgehog, which when threatened, simply curls up into an impregnable spiny ball, represents the index fund with its “price-less” concept.
  10. Stay the course. The secret to investing is – there is no secret. When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond-market index fund, you have the optimal investment strategy. Discipline is best summed up by staying the course.

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…Using Keynes’s idea, I divide stock market returns into two parts: (1) Investment Return (enterprises), consisting of the initial dividend on stocks plus their subsequent earnings growth, which together we call “intrinsic value” and (2) Speculative Return, the impact of changing price/earnings multiples on stock prices. 

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Bogle wrote a number of books: Bogle on Mutual Funds: New Perspectives for the Intelligent Investor,  (1993),  John Bogle on Investing: The First 50 Years (2000), Character Counts: The Creation and Building of The Vanguard Group ( 2002), The Battle for the Soul of Capitalism  (2005Reflections on Investment Illusions,  and The Clash of the Cultures), The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (2007), Enough : True Measures of Money, Business, and Life (2008), Don’t Count on it!:: Investment vs. Speculation (2012)

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“If you are considering purchasing shares in a firm, you have two broad expectations for that firm: (1) it will pay annual dividends and the amount of those dividends will grow over time; or (2) rather than paying dividends, it will retain earnings so as to build the business.

     While the second expectation suggests that dividends need not always be a critical determinant of the returns on stocks, even when a company does not pay a dividend, investors implicitly value the firm’s stock based on the presumption of future dividends.”  (John Burr Williams’ definition of investment value.)

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Twelve Pillars of Wisdom

 

  1. Investing is not as difficult as it looks

Successful investing involves doing just a few things right and avoiding serious mistakes.

  1. When all else fails, fall back on simplicity

Here is a solution: commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstance change. Occam’s razor—a thesis set forth 600 years ago and often affirmed by experience since then—should encourage you: when there are multiple solutions to a problem, choose the simplest one.

  1. Time marches on

Time dramatically enhances capital accumulation as the magic of compounding accelerates. At an annual rate of return of +10%, that additional capital accumulations on a $10,000 investment is $1,000 in the first year, $2400 by the tenth year, and $10,000 by the twenty-fifth year. At the end of 25 years, the total value of the initial $10,000 investment is $108,000, nearly tenfold increase in value. Give yourself the benefit of all the time you can possibly afford.

  1. Nothing ventured, nothing gained

It pays to take reasonable interim risks in the search for higher long-term rates of return. The magic of compounding accelerates sharply with even modest increases in annual rate of return. While an investment of $10,000, earning an annual rate of return of +10% grows to a value of $108,000 over 25 years, at +12% the final value is $170,000. The difference of $62,000 is more than six times the initial investment itself.

5.Diversify, Diversify, Diversify

By owning a broadly diversified portfolio of stocks and bonds, the only remaining risk is the market. This risk is reflected in the volatility of the total value of your portfolio and should take care of itself over time, as reinvested dividends and interest are compounded.

  1. The eternal triangle

Never forget that risk, return and cost are the three sides of the eternal triangle of investing. Remember also that the cost penalty may sharply erode the risk premium to which the investor is entitled.

  1. The powerful magnetism of the mean

In the world of investing, the mean is a powerful magnet that pulls financial market returns towards it, causing returns to deteriorate after they exceed historical norms by substantial margins and to improve after they fall short.

  1. Do not overestimate your ability to pick

superior mutual funds, nor underestimate your ability to pick superior bond money market funds. In selecting equity funds, no analysis of the past, no matter how painstaking, assures future superiority. Combing several low-cost equity funds to achieve diversification…so is the holding of a single low-cost index fund….

  1. You may have a stable principal value or a stable income stream, but you may not have both.
  2. Beware of “fighting the last war.” Too many investors are constantly making investments based

on long past or recent lessons. You should not ignore the past, but neither should you assume that a particular cyclical trend will last forever. None does.

  1. You rarely, if ever, know something the market does not. The financial markets reflect the knowledge, the hopes, the fears and even the greed of investors everywhere. It is usually unwise to act on insights that you think are your own, but are in fact shared by millions of others.
  2. Think long term

Stocks may remain overvalued, or undervalued, for years. Patience and consistency are valuable assets for the intelligent investor. The best rule is: stay the course.

 

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The central task of a lifetime is to allocate financial resources so to balance the different market risks among three basic classes of liquid assets: (1) Common stocks, which carry the greatest short-term volatility and uncertainty, but—based on the underlying fundamentals of corporate earnings, dividends, and dividend growth—promise the highest expected returns over the long term; bonds, which normally provide lower returns than stocks and, depending on the length of maturity, carry significant risk of principal fluctuation but remarkable stability of income; and money market reserves (or cash), which usually engender minimal risk to capital and thus the lowest returns but, given their short- term nature, create an inevitable risk of income volatility.

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Mark’s Saunder’s Workshop Journal

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Regarding mutual funds, John Bogle wrote, “The principal giant (of an industry) upon whose shoulders I have stood in writing this book is Benjamin Graham…. My objective is to provide the same sort of framework for investing in mutual funds as Benjamin Graham provided for investing in individual stocks and bonds.”

Bogle promoted the idea of low cost index funds as a good way for investors, who seldom “beat the market,” to grow their assets. Investors can’t control their greed and fear so they jump in and out of the market at the wrong times. Institutions didn’t beat the markets because they were charging unreasonably high fees for the services and they busy trying to gather assets, rather than follow Ben Graham’s value principles that managed the emotionalism of “Mr. Market” (Graham’s name for the market).

Ben Graham’s shared his thoughts about developing a simple set of rules later in life with a university. The school said they weren’t interested because they couldn’t make as much money using simple rules. They weren’t following Bogle’s rules about-high fees and complexity.

The other fundamental investment giant is John Burr Williams, who believed in compounding and future incomes for dividend or interest. Williams would be appalled at the waste by corporate management, which is also a Bogle crusade.

 

Three Ways to Invest

 

  • The value methods of Ben Graham and John Burr Williams (from the 1930s) (investment based view)

 

  • Modern Portfolio Theory-for risk adverse investors (from the 1950s) (investor based view)

 

  • Low cost Index funds that Bogle pioneered (in 1976). This is an investor bad habit based view.

 

Bogle was influenced by the Efficient Market Theory of Eugene Fama, the Random Walk Theory of Burton Malkiel and Paul Samuelson, his economics professor. The two theories researched price movements and made a case for owning passive index funds over actively managed funds.

Index funds still have portfolio turnover. The important points are low fees, reasonable turnover and managers owning the fund. Look for those three points when choosing a fund.

  1. Why are investors supposed to “beat the market?”
  2. Benjamin Graham said, “The majority of investors should be satisfied with the reasonably good return obtainable from a defensive portfolio.”

 

Q: In these Twelve Pillars, where is it that investor risk tolerance is important?

A: Most important is the risk (amount of value) level in the market. Good market value increases the chances and amounts of gain. No value (distribution like today) increases chances of losses and lessens chance for much gain.

There are two ways to measure value that have proven themselves over at least the last 130 years-dividend yield and a price/earnings ratio (P-E).

 

Summary and Comments on the 12 Pillars

  • Keep it simple-and understandable (Pillar 2).
  • Compounding- increasing dollars and/or shares is the objective, not percentages or ignoring risks and feeling comfortable (Pillar 3).

Notes: An important part of compounding is limiting losses, not beating the market (Pillar 3).

  • Compounding requires regularly reinvested interest, dividends and capital gains, rather than unrealized appreciation or depreciation of asset values (Pillar 3).
  • Great and Good Value are the way to build profits; little or no value are the way to hurting returns (Pillar 4).
  • Only market risk remains. Manage it with value measures or be prepared to lose when there are

major corrections (Pillar 5).

  • Should implies it may never happen. When markets are highly over-valued or manipulated (i.e., the Fed’s low rates), investors are likely to face a major price correction that can significantly hurt their compounding efforts (Pillar 5).
  • Risk premiums on stocks and bonds can change over decades (Pillar 6).

 

    Balanced funds include stocks and bonds. Bogle’s Vanguard includes the Wellington Fund and was picked by Money magazine as the only fund you need if you had to make a choice. VWELX is an example of a fund for a simple investment plan. It has reasonable long-term returns with reasonable portfolio turnover.

 

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The Less Stressed Investor

In this issue, we present checklists for new and old investors to help them review their financial and investing game plans to make sure they are not overlooking or forgetting things that make extra profits or lessen losses. Better investors are healthy, have good clear minds and control their emotions and have less stress.

Good investing starts with common everyday concepts. Common sense, discipline and a plan can get investors started. As one better understands the influences on investment prices, they gains confidence and can address more adventurous investing.

We want to show readers how investing is closer to everyday life than many people think.

 

General Concepts

  • It is not what you make, it’s what you save. Pay yourself first!
  • Compound interest is the eighth wonder of the world; use it to your advantage!
  • The System is the solution-have a financial plan.
  • Buy straw hats in December- don’t pay retail, buy good values.

 

  • Know when to hold them, know when to fold them – you have to sell stocks to see capital gains.
  • Life is not fair; it is what you make of it.
  • Control your destiny or somebody else will.
  • Look to the past for events or fads that could affect future changes.
  • Know what you can change and accept/ adapt to what you can’t.
  • Just do it!

 

You have likely heard many of these quotes before and investors have used them to gain comfort with investing and minimize stress.

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Areas of investing

 The Investor

 The Investment

 The Investing environment

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Each area has its own considerations and skill sets. Let’s address each area separately.

 

The Investor

    The investor is the emotional part of the investment equation. This is the area where a person can determine how much time, money and effort he is willing to put into his financial and investing plan for retirement and other financial needs.

Some people are happy just to have certificate of deposits (CDs); some want their money to grow more in mutual funds or with a money manager; still, others like to do their own research.

The better you understand yourself, the better financial decisions you can make. Consider the following bullet points:

 

Know Yourself

 

  • Understand/know your interests, strengths and weaknesses.

 

  • Set goals (big and small) and reevaluate them throughout your life.

 

  • Teach yourself to adapt to change – watch for opportunities.

 

  • Disciple yourself and have a life plan.

 

  • Open your mind to see opportunities.

 

  • Imagine things from different perspectives for understanding.

 

  • Learn to enjoy life.

Know You Investor Self

 

  • Know your greed and fear levels and control them

 

  • Know the financial risks you are willing to take

 

  • Know the risks you are not willing to take

 

  • Know your investment goals

 

  • Know your timeframe needed to meet your investment goals.

 

Goal Planning

 

Define your goals and objectives. Make your plan using short and longer timeframes with easy to difficult goals.

 

Review and evaluate your goals and progress in meeting your goals and objectives.

 

Change or adjust your goals as needed.

 

Determine your goals by what you enjoy doing and by what you want out of life.

 

Develop Your Plan

 

Match your risk levels, time frame and investment goals to the investment products you understand and are comfortable with.

 

Make your plan flexible enough to change with market and personal financial conditions,

 

Start working your PLAN!!

 

Review the results of your plan and make any adjustments needed.

 

Know Your Investments

 

Only buy what you understand

 

Be comfortable with what you buy. Stress can cloud your thinking

 

Know how your investments should perform in different market conditions.

 

Know the benefits of diversification and use them in your plan.

 

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 Remember to control your emotions or somebody else will – and that can

be hazardous to your wealth!

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Investments

 

People invest to generate income and hopefully, future profits when they sell (a.k.a. speculation). Common examples are stocks, bonds, CDs, real estate, future contracts, currencies, commodities, and anything else Wall Street and others can sell.

“Experts” (Wall Street, appraisers, colleges, individuals, advisors, newsletters and charlatans) use a variety of methods to evaluate investments.

Consumers can find financial performance reports to calculate a value (or range of values) for their investment. A bond pays a specific amount over a specific time, a stock pays dividends and generates sales and earnings; real estate collects rents.

Stock (equity ownership) investments can produce sales, earnings, cash flow, dividends and risk of default but they do not produce prices.  The investor buyer and the investing environment determine an investment’s value.

Investments perform at different levels that can affect price. Some levels are consistency and quality of earnings, dividend payment record, likelihood of interest and principal being paid and condition of the asset.

There is a third type of investment that goes along with income and hope for capital gains; it is the store of value. Gold, silver, art are examples of store of value assets. They don’t generate any income and can have wide price fluctuations. They are alternative “currencies” to fiat currency when it is not accepted in uncertain times.

Most investments compete with each other on a yield basis. Bonds and CDs pay interest rates and stocks pay dividends and earnings yield. Real estate offers a cash flow yield. Compounding money is the objective of many investors.

There are investments to fill any investor’s or speculator’s objective. The investor needs to know which asset best fits his goals and comfort levels.         

 

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The Investing Environment

The investing environment is when investors, investments, real world activities, history and theory collide to create prices.

Real estate values are determined by local conditions, rate of return on investments and borrowing costs. Other asset classes are typically influenced by supply and demand for that asset, potential rate of return and borrowing costs. Commodity prices are factors of supply and demand and financing costs.

Stocks and bonds are available in small units, which makes it possible for more people to own and benefit from income and potential profits. Let’s look at stocks and bonds.

 

Determining Prices

The foundation for valuing stocks and bonds begins in 1903 with books and academic research. These books include:

 

  • Bonds-The Principles of Bond Investment by Lawrence Chamberlin, 1911

 

  • Stocks Fundamental Security Analysis by Benjamin Graham, 1934
  • The Theory of Investment Value by John Burr Williams, 1938
  • Stocks Technical Analysis-the Dow Theory originated by Charles H. Dow (published in The ABC of Stock Speculation by S. A. Nelson, 1903

 

  • Common Stocks as Long Term Investments by Edgar Lawrence Smith, 1924. Smith “proved” that common stocks have consistently been extremely attractive as long-term investments. Allegedly, this book contributed to the roaring twenties market rally.
  • Modern Portfolio Theory by Harry Markowitz, 1950s and Efficient Market Theory by Eugene Fama, 1960s explain MPT and EMT theories that manage risk/rewards in markets that Fama concluded were too efficient to predict prices.

 

These theories were based on mathematical formulas and academic research that Wall Street used to justify investment risks for return on assets that could be measured and managed by rebalancing asset allocations groups. Individual stock prices aren’t considered for risk/reward. Computer programs and borrowed money (leverage) have become increasingly popular.

 

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MPT is now the Prudent Investor Rule superseding the Prudent Man Rule of 1830. Fiduciaries no longer seem to have to be concerned with return OF assets or Compounding benefits with MPT. The Rule also tells the Prudent Man how to think.

 

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When investors have strong confidence in their formulas, they often borrow a lot of money leaving no margin of error.

Throughout the 1900s, theories and formulas have measured price movements and have created value ranges. When prices rise above the top range average, they become over-valued and eventually fall. The reverse is true on the downside.

Below are a few of the basics that cause price changes regardless of what the formulas, governments or opinion makers say. As these basics go to extremes or shift in a long lasting correlation, prices will change daily and over time.

 

Basic economic facts:

Compound Interest • Supply and Demand •

Competition • Marketing

 

Basic Human nature:

Greed • Fear • Jealousy • Envy • Hope

 

Basic Market Movers:

Expectations • Perceptions • Illusions

 

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In time, excesses correct, which forces change, creates risks, uncertainty

and unexpected opportunities.

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Economic Environments

The economy is where the influences converge. Economic indicators gauge the health and direction of the economy. The stock market is a leading indicator of the economy; it leads the economy up or down by six to nine months.

“Mr. Market” eventually reflects economic growth and direction but may be distracted by the games speculators play when there is extra money and credit is flowing.

A few areas that can change economic relationships for years, or even decades include government fiscal policies, taxes and regulations that have a major impact on the growth of the economy. If government wants to grow the economy, they can cut taxes, pass legislation encouraging growth and cut regulations.

When a government has a political agenda as a greater priority, the economy may stagnate or grow depending on the issues.

In 1913, Congress created the Federal Reserve (Fed) to do its bidding by managing the country’s money and credit. Congress no longer wanted to be responsible for a political football. In addition to managing the currency, Congress mandated the Fed to manage employment, which can create conflicting policies.

The Fed can increase or decrease money supply and credit as it sees fit. The Fed’s actions are not always in tune with the economic cycle and can cause unintended consequences in the stock, bond and other markets. Providing more money than the economy needs means extra money for speculative ventures. Too little money and credit can slow economic growth.

 

The economic cycle is centuries old. Typically, the cycle moves from boom to bust to boom again in five to seven years. Depending upon events that cause excesses or disruptions, the timeframe of the cycle is longer or shorter.

  • Natural disasters, weather or climate changes can cause major disruptions to an area of the economy for years or decades. Some changes may benefit one area while others hurt.
  • Geo-political events may cause worldwide changes and disruptions that can last for decades or centuries.
  • Investor/consumer psychology can change as events occur or as established trends begin to shift. The change in mood can cause markets or the economy to reverse direction.

 

The investing environment has the most influence on price movements.  The markets can only grow as fast as the economy; any gain higher than economic gain is likely to disappear in the long term. Political and geo-political changes may dramatically change your life and finances. Watch for changes and try to understand their consequences to your life.

 

     In this article, we covered many areas to acquaint you with the basics of investing. We want you to consider what factors may affect your situation and we believe that a good plan will help you avoid losses and have less stress.

     Happy investing!

 

 

 

 

 

Edson Gould

Edson Gould was born in 1902 in Newark and died in 1985 in West Reading PA.

Once he graduated from Lehigh University in 1922, he started to work on Wall Street for Moody’s and spent most of the rest of his life researching. He wanted to be an engineer but he became obsessed with finding the one factor beyond economic and monetary conditions that sparked the market.

Edson’s journey lead to forecasts right so frequently that the mere rumor of a change of would cause discernible market reactions. Everybody wanted to know what Gould had to say, but nobody wanted to believe or study his underlying reasons for his forecasts. When he died in 1985, history soon forgot him and his techniques. A quiet and simple man with reasonable simple methods (less profitable for academics and Wall Street) can easily be left to the pages of history.

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       “There are three factors that determine…the level of the stock market and the trend thereof. You can list them as economic, monetary and what I call psychological. Now, the monetary factors are always early, but they’re very important. They give you the early warning of a change. The economic factors are always late….And the so-called psychological factors that I use are concurrent.” Edson Gould

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Gould has been called the dean of technical analysis and the most accurate forecaster ever but he, and his methods, have gone by the wayside-just like the concepts of Charles Dow and his Theory.

Gould’s Senti-meter, calculated on the Dow Industrials dividends, and Dow’s concepts and theory create a great set of indicators for and investor to use for a successful investment program.

Gould was the first to suggest that fundamentals and monetary conditions alone couldn’t explain stock market behavior. Edson read the book “The Crowd” by Gustave Le Bon (see page 4) and after re-reading it he “came to the realization that the action of the stock market is nothing more nor less than a manifestation of mass crowd psychology in action”

      Edson created The Senti-meter to measure crowd psychology. It is described on page 2. The indicator shows how much investors are willing to spend for $1.00 of dividends. Kenneth Fisher has called the Price/Dividend Ratio “the single most powerful indicator of long term stock direction I’ve seen. It’s so simple, but inexplicably powerful”

 

Decennial Pattern

 

Edgar Lawrence Smith pioneered the Decennial Pattern in 1939. Gould used the Decennial Pattern as a cornerstone of his technical analysis.  Larry William in his book The Right Stock at The Right Time, wrote, that after studying Gould’s analysis of “the 10-year pattern for stock prices” he had “been handed, figuratively speaking, the keys to the kingdom of stock market forecasting.” The pattern is shown on page 3.

 

The Utility Barometer

 

In 1974, Edson Gould wrote an article that said he thought utilities were an early stock market indicator. He said they peaked and bottomed before the other indices by a few months.

Gould presented times when the utilities did lead the market down and up by a few weeks or more.

 

The “Gould Standard”

 

An investor should consider only sound companies with consistently strong earnings, they are the “Gould standard.” Avoid poorly managed companies, which regularly miss Wall Street expectations, they are hunks of lead.

Gould said to focus your holdings on proven winners – companies where investor psychology will always tip back in your favor – is the one of the best ways to remove uncertainty and emotion from your portfolio.

Psychology Extras

Henry Howard Harper wrote The Human Element in Stock Market Transactions in 1926. Since 1924, the Dow Industrials had risen 88%. The introduction reads, “Harper’s human behavior material gives us insights into handicapping prejudices that ruin our stock market theories and sound resolutions.”  Since then, securities laws have been enacted to make some actions illegal but somehow human nature tries to find ways around them.

We present a few selected stories for your consideration.

 

There is but one way to beat the stock market; there are many ways of being beaten by it

 

The sagacious financiers admit that the only sure way to make money trading in the stock market is to get in and out at opportune times and to stay out most of the time. Against this are numerous ways of losing money. One method is quite popular among a class of traders who, although too clever and conservative to buy stocks at “top” prices, do not have the patience to wait for “bottom” prices. When values begin to crumble after the top has been reached in a bull market there must be a set of “carriers” (or support), onto which stocks can be dumped on the way down. The market does not collapse like a ten-story house of cards; it generally goes down gradually for a while, one or two flights at a time and finds steadying thrusts every now and then, which sustain it for brief periods.

For instance, a stock paying $5 per share annually, has been hoisted by degrees from $75 to $150 a share. When it descends to $140 a few wise

traders who have been impatiently waiting for a the

reaction, will buy it because it looks cheap at $140 after having sold at $150; then at $130 another lot of traders who are a little wiser and more patient than

The first lot, buy because it looks much cheaper that it did even at $140; and so on down. The stock finds these temporary supports until eventually, it drops back to $75, or perhaps even lower. At that time, it is accumulated by a few shrewd investors and bargain hunters who’s attention has been attracted to the market by front page newspaper headlines, which announce that the stock market is in a state of complete prostration.

Those investors then go on about their business and pay no attention to the market until the price has recovered to appoint where the stock, returning $5 a share is no longer “paying its board.” Then, they sell out at a good profit and stay out while the speculators carry it on up as far as they like.

When the stock was at the bottom price, those who bought it on a scale from $140 down were either so overloaded or pessimistic—probably both—that they were unable to buy more and thus reduce their average to a reasonable cost.

 

Excerpts from The Pernicious

Influence of the Ticker Tape

 

    The individual who trades or invests in stocks will do well to keep away from the stock ticker; for the victim of “tickeritis” is no more capable of reasonable, self-composed action than one who is in the delirium of typhoid fever.

The gyroscopic action of prices recorded on the ticker-tape produces a sort of mental intoxication, which foreshortens the vision by involuntary submissiveness to momentary influences. It also produces on some minds an effect somewhat like  one might feel after standing for a considerable time, intently watching Niagara Falls. Dozens of people without any suicidal intentions, have been drawn into the current and dashed on the rocks below. Every day, thousands are influenced by the stock ticker to commit the most foolish blunders.

As a camera fails to record a true picture if placed too close in juxtaposition to the object, so in studying the ticker tape one is restricted close-up view of conditions, resulting in a distorted gauge of values. The figure recorded often misleads and confuses the attentive observer. In fact, it frequently happens that the price fluctuations result from a wave of hysteria among a coterie of traders and has but little analogy to the true value of the stocks.

To illustrate this point more explicitly, the stock of almost any conservatively capitalized and well managed concern paying $6 in annual dividends has an investment value from $85 to $100/share; but in the ups and downs of the market, the stock gets buffeted about on the exchange in response to the varying sentiments of traders, sometimes selling as low as $50, and at other times as high as $150, without any change whatever in the company’s earnings prospects, or its management. It does not follow that who keeps in touch with the stock market by telephone, or through daily papers, will find his path free from thorns and snares. But, he will at least have a more open perspective than one who submits to the influence of the ticker.

Any intelligent trader may reason out exactly what he ought to do under specific conditions; but in the quickly shifting and uncertain process of determining values, he loses his mental poise. Experience proves that anyone whose reasoning faculties become confounded is apt to be affected by some form of hysteria and will frequently do the opposite of what he would do under normal conditions.

The most unreliable financial writers are the market “tipsters,” who write daily letters of advice to an army of subscribers and claim to have positive knowledge of what certain stocks or groups of stocks are going to do marketwise. They often profess to have definite “inside information,” which any subscriber may receive at a stated price, ranging anywhere from $10/month and up. These false financial prophets, who lead a horde of blind followers, should not be confused with reputable bureaus and statistical experts who base their opinions and their advice to clients on a logical analysis of general conditions.

Henry Fielding wrote an essay to prove that a man can write more informingly on topics of which he has some knowledge than on matters that he knows nothing about. He also believed that mankind is more agreeably entertained by example than by law. Therefore, it is not the purpose of this discourse to teach anyone anything, unless of course, something may be gained by example or suggestion.

There are four subjects on which advice, is generally wasted: politics, stock speculation, religion, and love. In these matters adults rarely follow the advice of others and when they do (if they profit by it) they take all the credit themselves. If they lose, they always blame the advisor. These are the universal laws of human nature.

Still, hundreds of thousands of people continue to play at gambling tables and hundreds of thousands speculate in stocks. Since trading in stocks has the appearance of being an easy way of making money, it is one of the most alluring pursuits of modern times. This very fact, although legalized, is susceptible of becoming one of the most dangerous habits known. It is dangerous for the confirmed addict because he is apt to lose and it distracts his attention from his business in daytime and frequently destroys his rest at night.

 

 

INFO FOR BOX VVV

There are four subjects on which advice, however good, is generally wasted:  politics, stock speculation, religion, and love; for in these matters adults rarely follow the advice of others.

END OF BOX INFO

Since it would be folly to advise people not to embark in commercial pursuits because statistics show that upwards of ninety per cent of business ventures result in failure, it would also be useless to caution people to not trade in stocks because it is a hazardous undertaking in which a peculiar sort of sagacity and self control are the only safeguards against certain disaster.

Prosperity in the stock market seems to encourage optimism, rashness and impatience in about the same degree that adversity discourages enterprise and aspiration. But there is far greater danger in excessive optimism than in excessive pessimism, because optimists are inclined to back their hopeful views by indiscriminate purchases of stock at high prices. Pessimists are seldom disposed to back their views at all.

This leads us to conclude that in stock trading, all speculators, whether experienced or inexperienced, are subject to inscrutable laws of psychology which Nature herself seems to have designed for the discomfort of those who play at the wheel of fortune.

 

INFO FOE BOX VVV

Gamesters and swindlers may play at Wall Street, but the game itself is as straight and legitimate as any business pursuit. As a matter of fact, it is one of the fairest and most open games ever played; a game in which every participant, man or woman, rich or poor, old or young, has an equal chance….

END OF BOX INFO

 

 

Many businessmen who should have learned from experience, still take the business situation as a guide to their stock market operations, although stock exchange history shows that the market turns up long before a period of business depression (recession) has run its course and likewise turns down six months or more before prosperity comes to a cause.

It is never safe to buy good stocks at figures well below their intrinsic worth. The element of gambling does not enter the picture until the market price has risen above the investment value. If the owner refuses to sell, or buys more (as the speculator usually does) he is gambling on the uncertain event that some individual or clique is going to pay him more than the stock is worth.

 

Speculators are Slaves of Sentiment

When the whole country becomes pervaded with an epidemic of bullishness the action of speculators is always directed by sentiment rather than judgment; and a market that is swept along be excited emotions is always dangerous…dangerous to go short and dangerous to be long of Hysterical “bulls” care nothing whatever about the earnings or dividend returns on a stock: the only note to which

they attune their actions is the optimistic slogan, “It’s going up!” And the higher it goes the more they buy, and the more their ranks are swelled by new recruits. A herd of stampeding cattle (cows no less than bulls) will rush blindly into a river, or butt their brains out against stone walls, trees or other obstructions; they also stampede every critter that happens along their path. Anyone who has ever witnessed a panic in a theater or auditorium, or in the stock market, need not to be told that under such circumstances men are only a little more sane than cattle.

Speaking of sentiment, it is remarkable to the extent the combined business and financial structures of the country are moved by this giant power. Like the biblical wind that blows, man hears the sound but knows not from where it comes or where it goes, sentiment springs up from comparatively insignificant or unknown sources. After playing havoc, it vanishes as suddenly and mysteriously as it came.

In a bear market, a train wreck, or the death of some financier, or an earthquake in Europe, will put the market off to the aggregate extent of hundreds of millions. However, one of the greatest bull markets in history found its chief impetus in the most universally devastating war the world has ever known.

 

In Conclusion

To sum up the situation, those who would make money speculating in the stock market should first understand that it requires as much caution and business acumen as any other money-making enterprise. It also helps to have some knowledge of the psychological handicaps. It also helps to be able to control one’s impulses, emotions and ambitions under the most heroic tests of human endurance.

All speculations, even the most conservative investments, have some slight element of risk. All lines of business are more or less a gamble; marriage is a gamble; political preferment is a gamble; in fact nearly everything in life, including our very existence is an uncertainly. However, people are not discouraged from entering into these ventures. Those who look only for certainties have far to search and little to find in this world.

 

 

Human nature influences all three areas of investments: the investor, the investment and the investing environment.

The three books below can help you get familiar with your emotions in the computer age.

In his book, Tape Reading and Market Tactics, (1931) Humphrey B. Neill suggests that a way to control your emotions is to have “an investment philosophy that considers fundamentals, technical action and market psychology.”

There are no good ways to curb your emotions but a solution to controlling them is to focus on the process and not the outcome, according to The Little Book of Behavioral Investing (2010) by James Montier

 In his book, Trading for a Living (1993), Alexander Elder suggests that if your emotions are causing losses and you want to control them, call Alcoholics Anonymous for their 12 steps to overcoming addictions.

 

 

 

                          

 

 

 

 

 

 

Investing and Farming

Like farming, when a farmer plants his crop, the investor is buying stocks. Like the farmer who watches his crop and waits for a harvest, the investor watches his stocks from day to day. Neither one knows how good the harvest will be because they are both subject to conditions beyond their control. The farmer must contend with Mother Nature and the investor has to contend with Mr. Market, who can be as fickle as the weather.

     Both the investor and the farmer should be humble and respectful of Mr. Market and Mother Nature because they can override anything a person or a group of people do. Both the investor and the farmer need to look out for various conditions can affect their crops and see how they can maximize their harvest any condition.

Both crops need to be nourished. Markets are hungry for corporate earnings growth, increased sums of money and credit at low interest rates. Markets and the economy normally rise with expanding amounts of money supply and credit.   

     Typically, an increase starts in a recession and continues until the economy and markets begin to overheat. When money and credits contract and interest rates rise too high, it resembles the beginning of a drought and the harvest/profits disappear. Know when to harvest early.

The farmer must contend with hail and wind; the investor has to contend with greed and fear – within both himself and the markets. Fear creates buying opportunities and greed creates selling opportunities. Both can create losses.

     The investor needs to control greed and fear or his harvest will be destroyed. Preserve values and profits by knowing how to control greed and fear to preserve values and profits.

To realize good harvests, learn about compounding, emotional influences, interest rates (and earnings yields), money supply and credit. Use them to your advantage.

Ten Ways to Lose Money in Wall Street

Ten Ways to Lose Money in Wall Street

By the Market Cynic

      After many hours of toil and deep thought, I have compiled a dependable guide for stock traders: Ten Ways to Lose Money in Wall Street.

I won’t attempt to explain or qualify these precepts, because my readers will doubtless follow them regardless of any advice, from any source, to the contrary.

 Put your trust in board-room gossip.

  1. Believe everything you hear, especially tips.
  2. If you don’t know, guess.
  3. Follow the public.
  4. Be impatient.
  5. Greedily hang on for the top eighth.
  6. Trade on margins.
  7. Hold to your own opinion, right or wrong.
  8. Never stay out of the market.
  9. Accept small profits and large losses.

(source: Tape Reading & Market Tactics by Humphrey B. Neill, 1931)

 

The opinions of past U.S. Presidents on the Federal Reserve

 

If congress has the right under the Constitution to issue paper money, it was given them to use themselves, not to be delegated to individuals or corporations. –Andrew Jackson

The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity. –Abraham Lincoln

 Issue of currency should be lodged with the government and be protected from domination by Wall Street. We are opposed to…provisions [which] would place our currency and credit system in private hands. – Theodore Roosevelt

 Despite these warnings, Woodrow Wilson signed the 1913 Federal Reserve Act. A few years later he wrote: I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most  completely controlled and dominated Governments in the civilized world no longer a  Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men. -Woodrow Wilson

Years later, reflecting on the major banks’ control in Washington, President Franklin Roosevelt paid this indirect praise to his distant predecessor President Andrew Jackson, who had “killed” the 2nd Bank of the US (an earlier type of the Federal Reserve System). After Jackson’s administration the bankers’ influence was gradually restored and increased, culminating in the passage of the Federal Reserve Act of 1913. Roosevelt knew this history.

(Source: Unknown)

John Davidson Rockefeller: The Richest Man in America

John D. was the second child born to William Avery “Bill” Rockefeller and Eliza Davison on July 8, 1839, in Richford, New York. Eventually, the family would have six children: Lucy, William Jr., Mary and twins Franklin and Frances.

Bill was first a lumberman who later listed his occupation as a traveling salesman – a “botanic physician” who sold elixirs. Bill was known for his shady schemes and his philandering. In 1838 and 1840, Bill and his mistress (housekeeper) had two daughters. Bill once bragged, “I cheat my boys every chance I get. I want to make ‘em sharp.”  John’s mother, Eliza suffered through his double life, which included bigamy. She was thrifty and told her son, “willful waste makes woeful want.”

Rockefeller at 18

Rockefeller at 18

John was an industrious boy who earned money raising turkeys, selling candy and doing jobs for neighbors.  In 1853, when John was 14, the family moved to Strongsville, a suburb of Cleveland, Ohio where he attended Cleveland’s Central High School. He then took a 10-week business course at Folsom’s Commercial College, where he studied bookkeeping.

Every year, throughout his life, John celebrated September 26, the date he entered the business world. He called it “job day.”

In 1859, Rockefeller and a partner raised $4,000 ($100,000 in 2015) and established their own produce commission firm.

In 2863, the partners built an oil refinery in “the Flats,” Cleveland’s industrial area. The refinery was owned by Andrews, Clark & Company, which included Clark, Rockefeller and Samuel Andrews (a chemist) and M.B. Clark’s two brothers. America’s first commercial oil well was drilled in Titusville, Pennsylvania in 1859.

In 1864, Rockefeller married Laura Celestia “Cettie” Spelman (1839-1915), an Ohio native whose father was a prosperous merchant, politician and abolitionist, active in the Underground Railroad. The Rockefellers had four daughters (three of whom survived to adulthood) and one son.

While John’s brother, Frank fought in the Civil War, Rockefeller hired substitute soldiers and gave money to the Union cause – a practice many wealthy Northerners used to avoid combat.

After two years in business with the Clark brothers, John bought them out at auction for $72,000 ($1M in 2015) and renamed the company Rockefeller & Andrews. In retrospect, John said, “It was the day that determined my career.”

In 1866, John’s brother, William built another refinery in Cleveland and brought John into the partnership. In 1867, Henry Flagler became a partner and the firm became Rockefeller, Andrews & Flagler. This company was the predecessor to Standard Oil Company.

Although he was vilified in the press, Rockefeller was kept moving forward. He bought competing refiners, made his operations more efficient and pressed for oil shipping discounts. He undercut his competition, made secret deals, raised investment pools and bought out rivals. In less than four months in 1872, Standard Oil took on 22 of its 26 Cleveland competitors. This was later known as “The Cleveland Conquest” and “The Cleveland Massacre.”

Even Pratt & Rogers caved to the competition and in 1874, they made a secret deal to be acquired. Charles Pratt and Henry H. Rogers became Rockefeller’s partners and Charles Millard Pratt (Charles’ son) became Secretary of Standard Oil.

Standard continued to grow. It added its own pipelines, tank cars and home delivery network. The company kept prices low to stifle competition, made its products affordable to the average household and in some cases, sold below cost. The company developed more than 300 oil-based products from tar to paint to Vaseline petroleum jelly to chewing gum. By the end of the 1870s, Standard was refining more than 90% of the oil in the US. Rockefeller was already a millionaire ($25M in 2015).

Railroad vs. Pipeline

In 1877, Standard Oil clashed with Thomas A. Scott, President of the Pennsylvania Railroad — Standard Oil’s primary transporter. Rockefeller saw pipelines as the alternative transport system for oil and launched a campaign to build and/or acquire them. Scott saw this as infringement and decided to form a subsidiary to buy and build oil refineries and pipelines.

Standard retaliated by holding back shipments and with help from other railroads, launched a price war that substantially lowered freight payments and led to labor unrest. Rockefeller prevailed and the railroad sold its oil interests to Standard. Following that battle, however, the Commonwealth of Pennsylvania, in 1879, indicted Rockefeller on charges of monopolizing the oil trade.

By the end of the Civil War, Cleveland was one of the five main refining centers in the US. Others were Pittsburgh, PA, New York and northwestern Pennsylvania, where most of the oil originated. By 1869, there were 3 times more kerosene refining capacity that was needed to supply the market; excess capacity lasted several years.

Rockefeller decided to abolish the partnership on January 10, 1870 and formed Standard Oil of Ohio, which became one of the largest shippers of oil and kerosene in the country. Railroads competed for traffic and attempted to create a cartel to control freight rates by forming the Southern Improvement Company. This company was in collusion several oil companies (including Standard Oil) outside the main oil centers. The cartel received preferential rates as a high-volume shipper, which included steep rebates of 50% for their product and the same rebate for competitors’ shipments.

https://upload.wikimedia.org/wikipedia/commons/7/73/John-D-Rockefeller-sen.jpg

Rockefeller at 36 in 1875

The announcement of increased freight charges led Independent well owners to go bonkers. They protested, boycotted, vandalized and soon found out that Standard Oil was part of the scheme. Charles Pratt & Company (a major NY refinery) led the opposition of the plan and before long, the railroads backed down. Pennsylvania revoked the cartel’s charter and non-preferential rates were restored…for the moment.

That action led to a host of new court proceedings in other states, making a national issue of Standard Oil’s business practices.

Standard Oil gradually gained almost complete control of oil refining and marketing in the US, via horizontal integration in the kerosene industry. It supplied kerosene by tank cars to local markets and tank wagons that delivered kerosene to retail customers. That way, they cut out the existing network of wholesale jobbers.

The company’s business practices were controversial. They included underselling, differential pricing and secret transportation rebates. Politicians and journalists attacked the company for its monopolistic methods and led to the antitrust movement.

According to the New York World, Standard Oil was “the most cruel, impudent, pitiless and grasping monopoly that ever fastened upon a country.” Rockefeller’s response to critics, was “In a business as large as ours…some things are likely to be done which we cannot approve. We correct them as soon as they come to our knowledge.”

It was difficult to incorporate in one state and operate in another, so Rockefeller and his associates owned dozens of separate corporations that operated in just one state. In 1882, his lawyers created the Standard Oil Trust, a corporation of corporations. Nine trustees, including Rockefeller, ran the 41 companies in the trust. The concept came under suspicion but other companies began mimicking it. Standard Oil became the richest, biggest, most feared business in the world. It was seemingly immune to the boom and bust of the business cycle and consistently made profits year after year.

The American empire included 20,000 domestic wells, 4,000 miles of pipeline, 5,000 tank cars and over 100,000 employees. At its zenith, it had 90% of the world’s refining but dropped to about 80% for the rest of the century.

Standard Oil moved its headquarters to 26 Broadway, New York City and Rockefeller became a large figure in the business community. In 1884, he purchased a residence on 54th Street at Fifth Avenue, near the mansions of other wealthy businessmen such as William Henry Vanderbilt. Despite ongoing personal threats and pleas for charity, Rockefeller took the new elevated train to his downtown office each day.

New Digs

The Sherman Act of 1890 was originally designed to control unions, but it was later used to break up the Standard Oil trust. Ohio was particularly interested in using the anti-trust laws and eventually forced Standard Oil of Ohio to separate from the rest of the company

Standard Oil moved its headquarters to 26 Broadway, New York City and Rockefeller became a large figure in the business community. In 1884, he purchased a residence on 54th Street at Fifth Avenue, near the mansions of other wealthy businessmen such as William Henry Vanderbilt. Despite ongoing personal threats and pleas for charity, Rockefeller took the new elevated train to his downtown office each day.

The Sherman Act of 1890 was originally designed to control unions, but it was later used to break up the Standard Oil trust. Ohio was particularly interested in using the anti-trust laws and eventually forced Standard Oil of Ohio to separate from the rest of the company.

In 1892, the Ohio Supreme Court dissolved the Standard Oil Trust but the businesses within the trust soon became part of Standard Oil of New Jersey, which functioned as a holding company. In 1911, after years of litigation, the U.S. Supreme Court ruled Standard Oil of New Jersey was in violation of anti-trust laws and forced it to dismantle; it was broken up into more than 30 individual companies.

Rockefeller at 46 in 1885

Rockefeller at 46 in 1885

Rockefeller survived the breakup of Standard Oil and continued to make money in mining. He also survived the 1913-14 Ludlow Massacre which began when the United Mine workers struck against coal mine operators in southern Colorado. Although Rockefeller was in the background, he was involved with the company. Once the dust settled, Rockefeller denied any responsibility and minimized the seriousness of the event. When testifying on the Ludlow Massacre (where a tent town was set on fire and 15 women and children were burned to death) Rockefeller (a director of the company), said “I would have taken no action. I would have deplored the necessity that compelled the officers of the company to resort to such measures to supplement the state forces to maintain law and order.” He later admitted that he made no attempt to bring the militiamen to justice.

When Rockefeller was in his 50s, he suffered from moderate depression and problems with his digestion. During the stressful 1890s, he developed alopecia, a condition that causes the loss of some or all body hair. By 1901 (at 62) he did not have a hair on his body and he began wearing wigs. His hair never grew back but his other health issues subsided as he worked fewer hours.

John D. and Laura

Married 51 years, John and Laura had five children. Of Laura, John said, “Her judgement was always better than mine. Without her keen advice, I would be a poor man.” There children were:

  • Elizabeth “Bessie” (1866-1906)
  • Alice (1869 – 1870)
  • Alta (1871 – 1962)
  • Edith (1872 – 1932)
  • John D. Jr. (1874 – 1960)

Rockefeller wealth has been distributed through foundations and trusts and continues to fund family philanthropic, commercial and political aspirations. Notable grandchildren of include David, a banker who for 20+ years was CEO of Chase Manhattan (now part of JPMorgan Chase); Nelson Aldrich – NY Gov. and the 41st U.S. VP; Winthrop – ARK Gov.

John D. Rockefeller was devoutly religious, a temperance advocate and an avid golfer. His goal was to reach the age of 100; however, he died at 97 on May 23, 1937, at The Casements, his winter home in Ormond Beach, Florida.

The Richest Man in History

One of Rockefeller’s great talents was to “see” where his company and the industry were headed and hire the right people to help build it.  Still, he was hands on and said his bookkeeping background trained him to keep track of even trivial details on a daily basis.

The Midstream Advantage

The economies of scale of Rockefeller’s business positioned him to earn discounts on railway freight rates, lowering Standard Oil’s transportation costs below what their competitors bid. This led to better pricing and profits for Rockefeller. (Later, these tactics came under serious scrutiny).

However, competition was fierce for shipping by rail and rebates and discounts became common practice for anyone, especially a business that could guarantee regular shipments.

Railway rebates were just the start. Standard Oil also won “drawbacks.”  Let’s say one of his competitors paid $1 per barrel to send his product from Ohio to New York. The railroad would in turn pay $.25 of that dollar to Rockefeller – not to the shipper. This was a huge financial benefit for Rockefeller. Not only were their rates below their competitors, but they made money on their competitors’ rail shipments. In short, competitors were subsidizing Rockefeller’s company.

Overproduction caused prices to plummet and the industry dropped into a depression. From 1865 to 1870, the retail price of kerosene fell more than 50%; refining capacity was 3x market needs. In the oil regions, prices dropped to $.48 per barrel – three cents less than drinking water.

To consolidate the industry and bring in more capital without diluting control, on Jan. 10, 1870, Flagler, Rockefeller and three others established the Standard Oil Company; Rockefeller held 25% of the stock. The name was selected to reflect a “standard quality” of the product.

During the refinery depression of 1872, Rockefeller was busy controlling most of Cleveland’s refineries and some in New York City. At that time, he headed the largest refinery group in the world.

The 1870s were marked by industry disputes and questionable tactics, with Standard Oil coming out on top. By 1879, Standard Oil controlled 90% of America’s refining capacity. It also controlled pipelines and dominated transportation.

Rockefeller Philanthropy

Rockefeller’s fortune peaked in 1913 at $900 million. Today that amount translates into nearly $665 billion. He was the richest man in the world.

In his lifetime, Rockefeller helped launch the field of biomedical research by funding scientific investigations that resulted in vaccines for things like meningitis and yellow fever. He revolutionized medical training in the United States and built China’s first proper medical school. He promoted the cause of public sanitation, created schools of public health at Johns Hopkins and Harvard, and helped lead major international public health efforts against hookworm, malaria, yellow fever, and other maladies.

Higher education was the first major beneficiary of Rockefeller’s more focused philanthropic efforts. A project of lifelong interest to him was the creation of a distinguished Baptist university. Rockefeller considered several options before pairing with William Rainey Harper to establish the University of Chicago. In 1890, he made his first donation of $600,000 to the school. Over the rest of his life, he donated a total of $35 million, to the University of Chicago, making it possible for the school to instantly rank among the world’s leading institutions of higher learning.

In 1901, John D.  funded the Rockefeller Medical Research Institute in New York City.  It was modeled on the Institut Pasteur in France and the Robert Koch Institute in Germany, and was this country’s first biomedical institute, on a par with its European models. The results were dramatic. Within a decade, it created a vaccine for cerebrospinal meningitis and supported the work of America’s first winner of a Nobel Prize in medicine. Today, known as Rockefeller University, it is one of the leading biomedical research centers in the world. Twenty-four Nobel Prize winners have served on its faculty.

In 1902, Rockefeller created the General Education Board, to improve rural education for both whites and blacks in the South. He wanted to modernize agricultural practices and improve public health, primarily through efforts to eradicate hookworm, which debilitated many Southerners and dragged down productivity.

The 1913 the campaign against hookworm was exported globally and led to similar efforts against malaria, scarlet fever, tuberculosis, and typhus. Rockefeller funded the International Health Commission.

In 1918, Rockefeller created the first school of public health and hygiene at Johns Hopkins University, which he then duplicated at Harvard in 1921. In all, he spent $25 million introducing public health programs at scores of universities across the globe.

By 1909, he had given away $158 million in his personal funds to various causes. In 1913, he donated 73,000 shares of Standard Oil, worth $50 million to establish the Rockefeller Foundation with a mission “to promote the well-being of mankind throughout the world.”

It has been said that John D. Rockefeller is one of the greatest philanthropists in American history; he gave away approximately $540 million before his death in 1937 at the age of 97.

Today, the Rockefeller Foundation continues to support causes around the world.


The Break-up

On May 15, 1911, The U.S. Supreme Court upheld the lower court judgment and declared Standard Oil an “unreasonable” monopoly under the Sherman Antitrust Act of 1890. The Court ruled that Standard Oil must be dissolved and broken into 33 companies.

While the description of Standard Oil as an unreasonable monopoly may have been accurate in 1880 (when it controlled 90% of the American refining capacity) by 1911, the economic and political world had changed.

Industry Domination

For decades, Standard Oil dominated the industry. It was vertically integrated and began with well drilling (upstream), transporting oil through pipelines, on railroads and in barges (midstream) to refineries where it was transformed into various products (downstream). Some critics said the company created a “monopoly” through interlocking trusts to control regions.

Demand for oil products was greater than Standard Oil could deliver. The 1901 discovery of the Spindletop oil field led to new huge oil supply that launched the oil boom in the west and south, where Standard Oil had much less control.

By 1911, Standard Oil’s 60% – 65% market share was declining while demand for oil was growing. Standard Oil dominated older oil regions but only controlled 44% of the total mid-continent production. (California produced 29% and the Gulf Coast produced 10%).

Regional players included Pure Oil in the east, Texaco and Gulf Oil on the gulf coast, Cities Service and Sun were in the midcontinent and Union Oil was in California.

 

Overseas Opportunities

Standard Oil’s efficiencies enabled it to take advantage of overseas opportunities. In the 1890s it began marketing kerosene and shipping bulk oil in tankers to China, where it was re-packaged into five gallon tins.

Standard Oil also supplied fuel, lubricating oil and paraffin to countries in Europe. The company’s European competitors included Branobel, owned by Ludvig and Alfred Nobel. In 1901, Branobel, Royal Dutch Shell and the Rothchilds were major players in Russia’s Baku oil field, which was producing more than 50% of the world’s oil.

Rockefeller built Standard Oil during the recession following the Civil War (the 1870s and 1880s). By 1900, electricity and the combustion engine created a new industrial revolution, while deflation, corruption and uneven economic growth launched the Populist Party and the Progressive movement.

Rockefeller’s motto of turning disasters into opportunities led his company to perform well in poor economic times. Following the company’s break-up, the successor companies also performed well.*

 

Upstream and Downstream Companies

Below are most of Standard Oil’s upstream and downstream companies.

      Exxon-Mobil

  • Standard of NJ (Esso)
  • Mobil (Vacuum)
  • Imperial Oil (Canada)
  • Standard of NY (Socony)
  • Standard of LA
  • Standard of Brazil
  • Anglo-American Oil
  • Humble Oil & Refining

     BP

  • Standard of OH (SOHIO)
  • Standard of IN
  • Standard of MN
  • Standard of IL
  • Standard of KS
  • Fleet-Wing

     Chevron

  • Standard of CA
  • Standard of KY
  • Standard of IA

     Others

  • Marathon (formerly Ohio Oil)
  • Atlantic
  • Conoco (Continental Oil)
  • Standard of NE
  • Prairie Oil & Gas
  • Solar Refining

Mid-stream companies include:

Transportation – Buckeye Pipe Line, Crescent Pipe Line, Cumberland Pipe Line, IN Pipe Line, Eureka Pipe, National Transit, NY Transit and Northern Pipe.

Lubricants – Galena-Signal, Swan & Finch Co.

Others – Union Tank Lines – manufacturers of rail tanker cars (Standard Oil owned 10,000 tankers in 1911), Cheesebrough Manufacturing Co. (petroleum jelly-Vaseline) and Atlas Tires (replacement parts/tires sold by service stations).

* Sources: Wikipedia, The Prize by Daniel Yergin and Oil 101 by Morgan Downey.

Ida Tarbell – Muckraker: How She Took Down Standard Oil

Born in 1857, in a log home in Hatch Hollow, Pennsylvania, Ida Minerva Tarbell grew up among the derricks of the Oil Region. Ida’s father, Frank Tarbell, manufactured wooden storage tanks for the oil industry in Pithole, PA. He later became a refiner and producer. In 1872 Frank sympathized with independent oil producers in the Oil War against the Southern Improvement Company. The 1872 Southern Improvement scheme was a hidden agreement between the railroads and refiners led by John D. Rockefeller. The scheme killed the prosperous Pennsylvania oil region and destroyed families and their livelihoods. Ida later wrote, “Out of the alarm, bitterness and confusion, I gathered from my father’s talk, a conviction to which I still hold – is that what had been undertaken was wrong.”

 

Ida Tarbell, 1857 – 1944

Ida Tarbell, 1857 – 1944

She was the only woman to graduate in 1880 from Allegheny College. Her dogged pursuit for facts and fairness was the hallmark of her writing career. Frank Tarbell’s struggles against the advancements of Standard Oil influenced Ms. Tarbell’s interest in the Standard Oil trust. Between 1902 and 1904, Tarbell wrote a 19-part series for McClure magazine about the monopolizing powers of Standard Oil. Her series drew public attention and earned her the moniker of “muckraker.”

This 1915 photo shows John D. Rockefeller (76) and John D. Jr., (41), still going strong after Tarbell let the public know how powerful Standard Oil was, which led to the breakup of the company.

This 1915 photo shows John D. Rockefeller (76) and John D. Jr., (41), still going strong after Tarbell let the public know how powerful Standard Oil was, which led to the breakup of the company.

In her series, she condemned Standard Oil’s illegal practices. The rapidly changing economy in the late 1880s and the rise of monopolistic trusts was, wrote Ida, “disturbing and confusing people.”   Tarbell was obsessed with Rockefeller and convinced that Standard Oil was a great story. She gained access to Standard Oil executive H.H. Rogers (aka Hell Hound Rogers) who was under the impression that her intention was to present the public with an unbiased narrative of the oil business.  After Rogers read her installment about how Standard’s intelligence network operated (by exerting extreme pressure on small independent retailers), he became irate and refused to see her again. Ida’s first entry was published in November 1902 and month after month, she related Standard Oil’s story of machination and manipulation…of rebates and brutal competition. She portrayed Standard Oil as single-minded and in constant war against “injured independents.”

Tarbell is best known for her two-volume work (originally articles for McClure’s) on John D. Rockefeller and his oil interests: The History of the Standard Oil Company, published 1904. The exposé resulted in federal action and eventually in the breakup of the Standard Oil Company of New Jersey under the 1911 Sherman Anti-Trust Act.

Rockefeller did not publicly respond except to describe her as “that poisonous woman” and “misguided.” Tarbell was a career woman who never married. She died in 1944 at age 86.

Andrew William Mellon: Financier, Industrialist, Servant, Philanthropist

Andrew Mellon is known as a financier, industrialist, art collector and philanthropist. While many of his peers built their careers from the ground up, Andrew was born into a wealthy family. His father, Thomas, who created the first “Mellon” bank, brought Andrew into the banking business and positioned Andrew’ for a successful life and career. Before we learn about Andrew, let us look at Andrew father, who launched the family banking business.

Thomas Mellon
Thomas Mellon wrote in his autobiography that at the age of ten, he had been struck by the “wealth and magnificence I had before no conception of” after he saw the mansion of prominent landowners Jacob Negley and Barbara Ann Negley. (Thomas later married their daughter). At fourteen, Thomas read The Autobiography of Benjamin Franklin and became inspired by Franklin’s rags-to-riches tale. He sidestepped his family’s farming business and in October 1834, he enrolled at the Western University of Pennsylvania (now the University of Pittsburgh), where he studied law and banking.

After his 1837 college graduation, Thomas built a successful legal career in Pittsburgh. In 1859, he was elected assistant judge of the Allegheny County Court of Common Pleas. For the next ten years, he served as a judge. Thomas shrewdly invested income from his legal practice by buying up large portions of downtown Pittsburgh real estate. In late 1869, he retired from the bench and opened a banking house.

T. Mellon & Sons’ Bank
On January 2, 1870, Thomas opened T. Mellon & Sons’ Bank. Above the cast iron door of the original bank, Thomas placed a nearly life-sized statue of Benjamin Franklin, his personal inspiration. The Panic of 1873, led to the failure of half of Pittsburgh’s ninety organized banks and twelve private banks, but Mellon & Sons survived the depression and was well-positioned to prosper when the economy recovered. Mellon’s shrewd investments included real estate holdings in downtown Pittsburgh, coalfields, and a $10,000 ($180k in today’s money) loan in 1871 to Henry Clay Frick (which provided coke for Andrew Carnegie’s steel mills).
On January 5, 1882, Thomas retired from day-to-day management of the bank’s affairs and handed them over to his 26-year old son, Andrew, who emerged as the sole interest in the bank. By the end of the 19th century, Mellon Bank was the largest banking institution in the country outside of New York. Thomas divested himself of most of his remaining property on February 3, 1890, leaving it in the hands of his sons. By 1902, Andrew was president of what had become the Mellon National Bank.
Thomas died on his 95th birthday, February 3, 1908. By that time, the Mellon family ranked among the wealthiest and most prominent industrialists in the United States.

Andrew Mellon
Born in Pittsburgh on March 24, 1855, Andrew Mellon was the sixth of eight children of Thomas and Sarah Mellon. The children grew up in a wealthy household but life was not all ribbons and candy. Only five of the eight children lived to become adults. Andrew attended the University of Pennsylvania but left school before he graduated.File:AWMellon.jpg

Thomas encouraged his sons to become entrepreneurs and groomed them to take over his business ventures. At just 21, his sons Tom and Jim had raised $100,000 ($202B in today’s money) operating a nursery, lumberyard and construction supply business.
At 17, Andrew was busy managing a theatre. In 1872, Thomas put Andrew in charge of a struggling lumber and coal business; it soon turned into a profitable enterprise.

Andrew joined his father’s banking firm, T. Mellon & Sons, in 1880 and two years later Thomas transferred ownership of the bank to him. In 1889, Mellon helped organize the Union Trust Company and Union Savings Bank of Pittsburgh. Andrew branched into industrial activities including oil, steel, shipbuilding, and construction.
His financial backing helped create several giant enterprises including aluminum, industrial abrasives (“carborundum”), and coke. Mellon also financed Charles Martin Hall, whose refinery grew into the Aluminum Company of America (Alcoa).
A long line of diversified interests began in 1889 with the founding of the Union Trust Company of Pittsburgh and a later subsidiary, the Union Savings Bank.

Andrew Mellon was one of the wealthiest people in the United States and the third-highest income-tax payer in the mid-1920s – behind John D. Rockefeller and Henry Ford. Andrew’s wealth peaked around 1929 -1930, during his tenure as Secretary of the U.S. Treasury Department. His net worth was estimated to range from $300 to $400 million ($4.1B to $5.5B in today’s dollars).
Marriage, Family and Divorce
In 1900, at the age of 45, Andrew married Nora Mary McMullen (1879–1973), a 20-year-old Englishwoman who was the daughter of Alexander P. McMullen, a major shareholder of the Guinness Brewing Co. They had two children, Ailsa, born in 1901 (d.1969), and Paul, born in 1907 (d. 1999)

Their marriage ended in a bitter divorce in 1912, which was granted on grounds of Nora Mellon’s desertion and her adultery with Capt. George Alfred Curphey, an English soldier, and other men. Mellon did not remarry. In 1923, his former wife married Harvey Arthur Lee, a British-born antiques dealer 14 years her junior. Two years after the Lees’ divorce in 1928, Nora Lee resumed the surname Mellon, at the request of her son, Paul.

Secretary of the U.S. Treasury and Ambassadorship
In 1921, President Warren G Harding appointed Andrew Mellon to the position of Secretary of the U.S. Treasury. Mellon served for nearly 11 years, under Harding, Coolidge and Hoover – the third longest tenure of any Secretary of the treasury.

President Harding and Secretary Mellon were on the same page when it came to taxes. Harding called for a revision of the tax system, readjustment of war taxes and the creation of a federal budget system. Mellon not only supported Harding’s programs, but also had the financial background to implement them. His goal was to reduce government debt that resulted from World War I.

The 1926 Mellon-Berenger Agreement established the amount of France’s debt to the US and a repayment schedule. The agreement reduced the amount of funds owed but it established an amount that the French would be able to pay. Mellon was also a key negotiator for Germany’s war debt. He successfully drew the debt down from $25M to $16M.

During his tenure, Mellon was not happy with the manner in which the government’s budget was maintained, rising expenses and the failure of income or revenues to keep up with increased expenses. The fact that the government was not setting aside any savings also grated on his nerves.

In 1932, Andrew Mellon resigned as Secretary of the Treasury to accept the ambassadorship to the Court of St. James in London.

Philanthropy
Andrew devoted much time and considerable sums of money to philanthropic causes. In 1913, Andrew and Robert honored their father through the creation of the Mellon Institute of Industrial Research, an organization designed to forge a partnership between American scientific research and industry. In 1937, Andrew Mellon left a combined gift of $25 million to the people of the United States, part through the donation of his extensive art collection and the remainder in cash for the construction of what became the National Gallery of Art in Washington, D.C.

In partnership with Andrew Carnegie, Andrew and Richard Mellon founded two schools of higher education that eventually merged to form Carnegie Mellon University.

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