REFILE-COLUMN-Unsinkable ways to avoid a Titanic portfolio
By John Wasik
CHICAGO, April 20 (Reuters) - By now you're probably seasick of hearing about the 100th anniversary of the Titanic tragedy and the myriad analyses of why it sunk and what it means. Yet for some of us who felt compelled to see the James Cameron movie again - and got suckered into paying for a disappointing 3D - we're still looking for metaphors and analogies.
Few Titanic buffs look at how J.P. Morgan, the principal investor in the Titanic, fared after the disaster in 1912. Morgan was a financial emperor at the time, controlling the Titanic's parent company, White Star Line, as part of an attempt to monopolize North Atlantic shipping through a trust of other shippers he owned.
Morgan set up the White Star Line as a British-crewed company to side-step U.S. antitrust laws. The banker, who had canceled his trip aboard the Titanic, died in 1913. (It was said that the ship was doomed by the ghosts of the eight Irish men who died building it, according to my wife, who grew up a few blocks away from where the ship was built in Belfast).
What later submerged Morgan's shipping trust was that it was over leveraged as it tried to control an already volatile business that took a huge hit when World War One started in 1914. Ultimately, Morgan's monopoly attempt failed, and his International Mercantile Marine Co went into receivership a few years after the Titanic sank. Like most other attempts to corner a commodity or industry, it was an "all in" bet that over-concentrated risk. It was the equivalent of borrowing money to invest your entire portfolio in dot-com stocks in 1999.
Managers of the reorganized International Mercantile, which became United States Lines during World War Two, though, apparently hadn't learned the lesson of spending big on mammoth ships or outdated technologies. The company built and launched the SS United States in 1952, the largest passenger ship built in the United States at the time, just before the airline industry was starting its long run to dominate long-distance travel.
It's more instructive to look at two of the survivors of Morgan's legacy, namely General Electric Co and U.S. Steel Corp. Both companies were consolidations of smaller companies, employed huge economies of scale and are still very much in business after more than a century. What kept these goliaths in business over the years? Adapting to changing markets, technologies and diversifying their sources of income.
U.S. Steel began its life in 1901 as the largest business enterprise ever created. General Electric was a merger of Thomas Edison's holdings and another company. Neither corporation made sexy products like tablet computers or smartphones. What makes them survivors is that they produce things that are indispensable in modern life. Steel is a global commodity in ever-greater demand. Electrical equipment such as transformers and generators are still needed to make power, which is needed in every mature and developing country.
Even though these companies have weathered intense storms over the years, a basic rule of corporate survivorship is to make something or provide a service that's a virtual staple, improve your process over time, generate cash and hold onto dearly to market share.
Some of the least-glamorous companies, surprisingly, have also been around for a century or more: Colgate-Palmolive, Procter & Gamble and Church & Dwight. Who would have ever thought that you could consistently make money initially only producing toothpaste, consumer staples and baking soda?
What also binds these old-timers together is the fact they've been paying dividends for more than a century. They've enriched shareholders and grown dividend payments over the years. Want to find more boring companies like this? Consider the Vanguard Dividend Appreciation ETF or the PowerShares Dividend Achievers Portfolio.
Often the best way to avoid financial icebergs is to hedge disasters, don't increase your vulnerability to them. Be aware that markets will forever be volatile. Don't over-invest in one stock, industry or country. If you have most of your wealth in your employer's stock, that's one huge iceberg. The worst events are those you can't see coming, although you can always prepare for them.