Something Big Was Born Today
Mar 1st 2013 11:30AM
Updated Mar 1st 2013 1:55PM
On this day in economic and financial history...
The S&P 500 was created on March 1, 1957, when Standard & Poor's expanded the "S&P 90" to its present form. Introduced half a year after the dominant Dow Jones Industrial Average updated its components for the first time in 17 years, the S&P resembled a greatly expanded version of that iconic index. At the time, the Dow was still principally an industrial concern -- 26 of its 30 components could be classified as "industrials," or companies whose primary business was making things, compared to 425 industrials out of 500 components in the S&P 500. Half of the S&P's value was tied to materials and energy stocks within the industrials grouping, and 16 of the Dow's components were of the same business model. However, despite the similarities between these two indexes of wildly different sizes, the S&P's diversity has helped it to superior returns: In the 50 years following the S&P 500's creation, it grew at an annualized rate of 7.2%, compared to 6.7% for the Dow.
Professor Jeremy Siegel and Jeremy Schwartz of WisdomTree Investments dug into the S&P 500's history to celebrate its 50th anniversary, and these are some of their key findings.
1. Only 6% of the index was made up of tech, health care, and finance in 1957. Today, half the stocks in the S&P 500 can be classified in one of these three categories.
2. Of the original S&P 500 companies, 111 survived intact for 50 years. Of these stocks, 20 outperformed the index's annual returns by an average of at least 5% per year. A portfolio of the 20 largest companies on the original S&P beat the index by about 1% each year.
3. The best-performing stock from the original S&P 500 is Altria , which provided a 19.9% annual return for the first 50 years of the index. A $1,000 investment in Altria on March 1, 1957 would have grown to $8.4 million 50 years later, but the same investment in the S&P would have returned $168,000 over the same time frame. The second-best stock on the original S&P was Thatcher Glass, which Altria (then Philip Morris) bought in 1988, and which turned $1,000 into about $5 million over 50 years. The Dow missed out on much of these gains, as it only included Altria as a component from 1985 to 2008.
4. Almost 1,000 companies were added to the index over 50 years, but a portfolio of the original S&P 500 companies would have easily beaten the actual index, with all its modifications. Like the Dow, which would have produced far greater gains by simply holding onto its original 30 components, the S&P would have been better if it had never changed.
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Chartered for success
The Bank of Italy gained federal banking charter No. 13044 on March 1, 1927. Several days later, the bank combined with Liberty Bank of America, creating one of the largest banking institutions in California. However, it was not until 1930 that the Bank of Italy, having merged with another Bank of America headquartered in Los Angeles, unveiled its current name, which is instantly familiar to savers and investors across the country. Bank of America, which in 2012 was the second-largest bank in the United States and the 10th-largest in the world, continues to use charter No. 13044 to this day.
A transformative typewriter
Look down at your keyboard (or cue it up, if you're on a mobile device). If you're using an English-language keyboard, the first six letters on the top row will be "Q," "W," "E," "R," "T," "Y." You can thank Remington Rand for that. On March 1, 1873, the longtime gunmaker diversified into business technology when it produced the world's first QWERTY typewriter, marking the first time people could use such a device to write faster than they could by hand.
This device, based on designs created by Christopher Sholes and Carlos Glidden, was called the Remington No. 1 and was initially a failure in the marketplace due to its high price and low utility in what was still a largely agrarian economy. Remington produced a more advanced model in 1878, and the typewriter industry began to take shape. Stiffening competition prompted Remington to sell its typewriter segment to a competitor, which changed its name to Remington Typewriter at the turn of the century. This company later became Remington Rand following a merger and went on to become an early computing pioneer. Its legacy lives on today in Unisys, which is the end result of Remington Rand's acquisition in 1955, and the merger of that company with another business equipment manufacturer in 1986. QWERTY also lives on as the world's dominant keyboard layout, despite the occasional attempts to create a better system.
The company that could not be broken
U.S. Steel won a historic antitrust case on March 1, 1920. The case, filed by President William Howard Taft's Justice Department in 1911, came during a time when the would-be monopolist controlled half of all American steelmaking. The case drew national attention during the course of its arguments, not only because it was a potentially lethal attack on one of America's largest industrial concerns, but also because the suit violated a gentlemen's agreement between former President Theodore Roosevelt and dominant financier J. P. Morgan, who had assembled U.S. Steel at the turn of the century.
The Steel suit repudiated Roosevelt's approach to the largest corporations, which was less combative than often thought. Roosevelt, despite a reputation for busting several major trusts (including Standard Oil, broken apart several months after Steel case's filing), preferred regulation over legal remedies as a means of controlling big business in the U.S. The suit created a rift between Republicans Roosevelt and Taft, Roosevelt's successor in the White House. Roosevelt said that such an approach would "put the business of the country back into the middle of the 18th century." This led to Roosevelt's entry into the 1912 presidential election as a third-party spoiler, a decision which split the Republican vote and won Woodrow Wilson the White House.
The case should have been fairly straightforward. U.S. Steel then dominated its industry more than Standard Oil dominated the oil industry at the time of its own antitrust suit. It held the vast majority of known American iron-ore reserves and had bought out its largest competitor only four years before the filing. However, the Supreme Court didn't see U.S. Steel as a monopoly, in part because the Sherman Antitrust Act was vague in its prohibitions. What defines an "unreasonable" restriction of trade? Steel had not acted as Standard Oil had, controlling the price of its goods at below market value to drive out competitors. In fact, the company had engaged in brief price-fixing schemes with its fellow steelmakers, which is an entirely different form of corporate malfeasance.
Ultimately, the Court decided in favor of Steel because size alone was not enough to warrant breaking up a company, and Steel's increasing magnitude was not in and of itself an anticompetitive tactic. This set a precedent that led to more pro-business rulings from the Supreme Court -- which, beginning a year later, would be led by newly appointed Chief Justice William Howard Taft.
The beast of the Far East
Samsung was formed on March 1, 1938, when founder Byung-Chull Lee started an export business in Taegu (now Daegu), South Korea to ship dried fish and produce to China. Samsung grew quickly into a major food-processing concern, but it was not until 1969 that the company would first establish itself as an electronics manufacturer. Samsung has since grown to become the largest electronics manufacturer in the world by revenue, a feat it most recently accomplished in the 2012 fiscal year. That year, Samsung also became the world's largest mobile-phone manufacturer, overtaking longtime leader Nokia with a 29% share of the global mobile-phone market compared to 24% for its Finnish competitor.
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The article Something Big Was Born Today originally appeared on Fool.com.Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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