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Quote of the Day
The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage.— Charlie Munger
One of the classic books covering how exactly to judge a company’s competitive advantage is Michael Porter’s ‘Competitive Strategy’, we help guide you through the first few chapters of the book starting with our post on Chapter 1 here.
August 27th – This Day in Stock Market History
August 27th, 1957 – Ford Motor Company unveils the Edsel, in what would become the biggest automotive bust in history.
Although just an estimate, it is thought the Edsel caused about $350 million in losses for Ford, or about $3,200 for each sold (which ironically, is about how much they cost). As John Brooks says in his book, Business Adventures:
“In other, harsher words, the company would have saved itself money if, back in 1955, it had decided not to produce the Edsel at all but simply to give away 110,810 specimens of its comparably priced car, the Mercury.”
The monumental failure of the Edsel resulted in a short term panic in Ford shares. Net income per share for Ford fell from $5.40 in 1957 to $2.12 per share in 1958. Ford had to reduce its dividend from $2.40 per share to to $2.00, and Ford’s stock price would fall from $60 to under $40. Earnings quickly recovered and thanks to Ford’s other models, the company survived gloriously.
Additional Source: It Was A Very Good Year: Extraordinary Moments in Stock Market History
August 27th, 1998 – As the Russian debt crisis escalates, stock markets worldwide crumble.
On this day, Russia’s stock market would fall 17%, for a total collapse of 84% year to date.
The Dow Jones Industrial Average falls 357 points, or 4% on the day, Spain falls 6%, Brazil falls 10% and commodities hit a 21 year low.
The losses hit one hedge fund in particular, Long Term Capital Management – who loses $277 million on this day alone. The fund is down nearly 50% from its highs in April. The turmoil causes Larry Hilibrand, a partner of the fund, to fly out and meet with Warren Buffett about a potential “investment” (I believe the correct term is rescue though!).
Buffett declines to invest in the fund, and so did many others. The fund would be bankrupt in under a month.
Source: When Genius Failed
Best August 27th in Dow Jones Industrial Average History
1990 – Up 3.11%, 78.71 points.
Worst August 27th in Dow Jones Industrial Average History
1998 – Down 4.19%, 357.36 points.
Read of the Day
The classic book: Business Adventures by John Brooks devotes one chapter to Ford’s development, marketing and release of the Edsel.
Before its recent new edition, this book had been out of print for decades, and used copies were going for well over $1,000 a piece. Now thankfully, you can read it for a fraction less. Business Adventures also made Bill Gates’ reading list a few years back, and Buffett has called it his favorite book on business.
“Business Adventures is as much about the strengths and weaknesses of leaders in challenging circumstances as it is about the particulars of one business or another. In that sense, it is still relevant not despite its age but because of it. John Brooks’s work is really about human nature, which is why it has stood the test of time.”
<– Go To Previous Day: August 26th, 1983: Berkshire Hathaway shares reach $1,000 for the first time.
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