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Quote of the Day

Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.

–Warren Buffett

Buffett’s famous quote seems fitting on a day that would usher in one of the worst economic declines in American History – The Panic of 1893. The panic would result in 14,000 business failing (4,000 of those banks) and an unemployment rate of 20%. It would take the country more than 4 years to dig itself out of the depression.

May 5th – This Day in Stock Market History

May 5th, 1893 – The Panic of 1893 is underway as stocks suffer their worst intra-day decline in history, a record that would stand until 1929.

1 day after Nation Cordage declares bankruptcy, stocks start the day in what can only be described as a panic. General Electric shares fell from 80 to a low of 58 (nearly 28% on this day alone, and down nearly 35% from its high just 2 days prior).

But bargain hunters, bankers and possibly even foreign investors come to the rescue and the market recovers nearly as fast as it fell earlier. General Electric, and the market as a whole, would almost completely recover by the market’s close, (GE would close the day at 78 1/2) in one of the market’s most volatile days in history.

Sources: New York Tribune May 6, 1893 page 1, and Panic Prosperity and Progress

The Panic of 1893 would turn into one of the worst economic depressions in the nation’s history. 14,000 business would close, and unemployment would rise to 20%. The depression would last 4 years before the country began to recover. The panic of 1893 would lead to massive strikes, marches on the capital, mass unemployment and stock market declines. The panic would produce what would become the worst economic depression in history, and remain so until 1929.

Best May 5th in Dow Jones Industrial Average History

1905 – Up 2.87% or 1.57 points

Worst May 5th in Dow Jones Industrial Average History

1915 – Down 2.95% or 2.05 points

Reads of the Day

• “The Hottest Metric in Finance: ROIC” – Interesting article in the Wall Street Journal talking about ROIC (Return on Invested Capital). Ultimately it attempts to measure a CEO’s success by measuring the return a company gets on its reinvested capital. A company with much higher ROIC would be able to compound value much quicker, an obvious quality long term shareholders would benefit from. Like any other metric, it is hardly a “one-size-fits-all” solution to finding your next investment, but it is a great one to understand and evaluate.

Buffett also discusses this concept in his 2007 letter to shareholders, where he talks about See’s Candy:

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)

<– Go To Previous Day: May 4th: 1893: National Cordage fails, igniting panic.

Go To Next Day: May 6th: 1964, Chairman of Berkshire Hathaway erks the wrong person, forever changing the course of financial history –>