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You're a conglomerateur, too
On the investing habits of 40 years ago and their relevance today
Go back in time to the 1970s and early 1980s, and you'll find big, widely-diversified conglomerates all across the American business landscape: Companies like ITT (which owned everything from Sheraton Hotels to insurance and timber companies. At one time, the movie studio Paramount Pictures was owned by Gulf + Western, which also owned Consolidated Cigar and New Jersey Zinc.
■ Though there are still a few deeply-diversified companies still around today, they are a rare breed: Berkshire Hathaway, Loews, and a handful of other companies still operate on the principle that wide diversification benefits the shareholder. On a company level, it's more common to hear praise for spinoffs and "pure plays" than for portfolio broadening.
■ The conglomerates of that period were a result of a number of factors, not least of which included the taxation of both corporate profits and individual dividends, as well as the cost to borrow money. When it's expensive to borrow and taxes on dividends are high, it can serve investors well to have their profits reinvested at the corporate level. Profits under those conditions can be used as a substitute for high-interest borrowing and increase a company's total profits.
■ One of the great missed opportunities of the modern educational era is that we don't really educate our secondary or post-secondary students in the basic history of American business. That history is important not only to telling much of the story about how America has become the country it is today, but also to helping young people learn foundational principles useful for their own investing.
■ It may not have seemed important to understand business valuations back when the promise of a secure, defined-benefit pension was commonplace. It isn't anymore; most people are on the hook for their own retirement investing. And that's not necessarily a bad thing: Many companies made pension promises they couldn't actually fulfill, and the shortfalls have resulted in a lot of pain for retirees who ended up getting less than they had been promised. It's probably better to educate individuals so they can have greater control for themselves.
■ But that means every individual investor needs to acquire at least some of the same skills that once benefited the conglomerateurs. Knowing how much a company is worth is one of those essential skills for individual investors -- unless they intend to hand over the duties to the market overall (via index funds) or by paying someone else to do the work. Everyone in the era of individual investing needs the skills that once made for great stories. Teaching them is a much more important and valuable responsibility than we've given them credit.