What did you invest in before the war, great grandpa?

by Terry Smith | Mar 07, 2014
  • financial_times_md

Few companies from 1914 are still around today

In this centenary year of what contemporaries called the Great War and we now call the first world war – because it became necessary to number them – what can we learn from the changes in the constituents of the stock market over the intervening century?

The problem in attempting to answer this question is that most of the major stock market indices on which we now rely were devised long after 1914.

Looking at the world’s two most significant equity markets, London and New York, Standard & Poor’s first introduced what is now the S&P 500 index in 1923, and it has only existed in its current form since 1957.

The FTSE 100 is of even more recent vintage having only come into existence in 1984. Even the much less representative FT 30 share index was devised in 1935.

The only index from either side of the Atlantic that existed when Gavrilo Princip’s fateful shot echoed around the world, and which still exists today, is the Dow Jones Industrial Average, established by Charles Dow in 1884. By 1914 the Dow consisted of 10 companies. Today it contains 30.

The constituents in 1914 show that the commanding heights of the US economy were occupied by heavy industrial companies. They were manufacturers, mostly of basic materials consumed by other manufacturers.

Only one company made it into both lists: General Electric.

Even so, its business has changed radically over the century. Nearly half of its revenues now come from aero engines and financial services – two businesses that did not exist in 1914, since Wilbur and Orville Wright had only taken to the skies just over a decade earlier.

Just two of the 1914 companies, Amalgamated Copper and Central Leather, have actually ceased to exist.

The remainder have disappeared from prominence and no longer form part of any index, apart from US Steel, which has not made a profit since 2008.

Today’s index is dominated by companies of a very different ilk.

Five are involved in financial services, if you include Visa, which is a payment processor.

Four are involved in computer hardware, software or services; four are in the drug or healthcare sector; and four are in consumer goods or fast food.

Two are oil companies, two are in retailing and two are telecoms companies. The aerospace industry has Boeing, but is also represented within GE and United Technologies, which makes Sikorsky helicopters and Pratt& Whitney engines. There is one entertainment company (Walt Disney). The only companies which look anything like the 1914 vintage are 3M and chemicals group Du Pont.

What should we conclude from this?

The idea of investing with a century as a time horizon is clearly unrealistic. Not much lasts forever in the world of equity investment. If you had invested a trust in the Dow constituents for the benefit of your descendants before you marched off to the western front in 1914, and locked it away for the next century, your great grandchildren would now be mightily bemused by its contents.

If instead you had invested in the companies which rose to the top of the Dow, in terms of market capitalisation, you would certainly have done better (even though these companies may have become large partly by issuing large amounts of equity on which they have made inadequate returns).

But the position of these companies offers some clue to what is regarded as representative of the dominant sectors of the economy now and then.

In so doing it serves to remind us that the US, somewhat like the UK economy, is increasingly post-industrial with a growing reliance on financial services, consumers and healthcare.

Finally, the evolution of the Dow shows it is better to invest in companies that make aeroplanes (and their engines) than those that fly them – there isn’t a single airline in the Dow.