I came across this video that I’ve never seen before. It’s a video of a young 31-year old Warren Buffett giving an interview to a journalist about the stock market decline that occurred in the first half of 1962:
Buffett’s comment at the very beginning of the video regarding President Kennedy’s “actions on steel” referred to this press conference on April 16, 1962.
Basically, JFK announced that the Department of Justice was opening an investigation into the pricing strategies of the major steel companies. Steel prices and steel company profit margins had been rising despite excess capacity, lower input prices (steel scrap and coal), stable labor costs (according to the BLS). Steel company dividends exceeded $600 million in each year between 1957 and 1961. These facts, along with the 100,000 steel workers that lost their jobs in the three years leading up to 1962 was too much for the populist president to take.
I haven’t investigated this, but I wouldn’t be surprised if the steel industry made more money in 1961 than it did in most years of the recent decade or two.
The Difficulties of Investing in Highly Regulated Businesses
Buffett just referenced the steel industry, and although he has made investments in cyclical businesses at times, he has often talked about the headwinds an investor faces when doing so. JFK’s 1962 press conference is an example of one such headwind that recurs over and over again in highly regulated industries.
I heard someone talking about the cyclicality of the airline business and how regulators and lawmakers are constantly trying to balance the opposing desires of customers (who desire low prices) and airline companies (who desire high profitability). Throw in a third party with a third desire (labor unions who desire higher wages) and you have a never ending tug-of-war.
Regulators and lawmakers generally desire to pass legislation designed to keep prices low for consumers, which has the side affect of curbing airline revenue–often to the point at which airlines collectively lose money. Inevitably, it dawns on the bureaucrats that it’s good to have airlines around, and so mergers are allowed and airlines are once again allowed to make profits. For a time the airlines are allowed to make money, but inevitably the profits once again attract the attention of the lawmakers and regulators (not to mention labor unions), who begin looking for ways to tilt the scales back in favor of customers, and the cycle repeats.
The same cyclical battle between lawmakers (who supposedly have a proxy for consumers) and corporations (who supposedly want to make money for their owners) have existed since the days of John Sherman and more specifically, since 1909 when the Justice Department sued John D. Rockefeller’s Standard Oil Company for running an illegal monopoly.
Halfway in between that time and now, JFK was griping about the excess profits and dividends that the US steel industry was making, and he vowed that the Justice Department and Congress would do something about that.
1962 Stock Market Decline
According to Buffett, the JFK press conference precipated the stock market decline (which was presumably top-heavy with steel companies at the time).
However, Buffett seemed a) like he couldn’t care less, and b) like he had no idea where the market would go next.
His apathetic attitude toward general stock market prices should be put into context. Interestingly, in 1962 the Dow dropped from a high of 731 to a yearly low of 535 (a decline of 27% in the span of a few months)! And everyone was panicky over the 12% decline we just had over the summer…
I went back and looked at the history books, and it appears that the Dow had dropped 15% or so when Buffett gave this interview and then went on to drop another 10% for a total top to bottom drawdown of more than 25%. The 1962 Dow rallied strong to close the year down 7.6%. Buffett meanwhile finished the year up 13.9% after being down 7% at the halfway point, a result he was quite pleased with given the sizable margin he achieved over the market.
Although the interview is very brief, it provides a glimpse into how Buffett thought about stock price movements even in his early days. I don’t think much has changed for him, as 53 years later he again is talking about how macroeconomic and geopolitical events (like the horrific terrorist attack this weekend in Paris) do not influence his investment decisions.
But, I started the post with a point about the difficulties of investing in highly regulated businesses. I would say that it helps to think independently, and I would never say never (after all, one could argue that airlines have provided some of the greatest returns over the past four years), but I think as a rule of thumb, it’s helpful to consider why Buffett has often guided investors away from investing in these cyclical businesses.
There are probably easier places to make money.