History of Investing in Stocks
In the early 20th century, John Pierpont Morgan wanted to do for steel what he had done for railroads. The only problem was that Andrew Carnegie controlled the largest and most efficiently productive steel company, Carnegie Steel. Morgan worked with Charles Schwab to convince Carnegie to sell his business to the new entity Morgan envisioned, U.S. Steel. Carnegie, who was already contemplating retirement, agreed to sell his business to the trust that Morgan chaired for a total of about $492 million in stock and bonds of the new company. Carnegie went on to focus on philanthropy while Schwab became president of U.S. Steel.
First Company to Achieve a Market Value of $1 Billion
Unfortunately for Schwab, U.S. Steel was a patchwork of modest businesses stitched together on the slim frame of Carnegie Steel. To improve the rest of the company, U.S. Steel needed to raise vast amounts of capital. In 1901, Morgan issued $303 million in mortgage bonds, $510 million in common stock, and $508 million in preferred stock – resulting in a total market value of about $1.4 billion – for a company that had real assets worth $682 million. Thus, half of its value was brand value, but the public bought the overvalued securities.
Impact of the First Company to Achieve a Market Value of $1 Billion
U.S. Steel would never realize its potential, and although Schwab’s management deferred accounting, its market share was eroded by hungrier companies, including Schwab’s Bethlehem Steel, which was formed when he left U.S. Steel out of frustration. In fact, one of the disappointing shareholders in U.S. Steel was the widow of Benjamin Graham’s mother. Watching the family fortune shrink with the stock may have prompted the smart investor to focus on tangible assets and intrinsic value, ignoring large amounts of brand value.
Sources for the Article
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Article Sources
Encyclopedia Britannica. “United States Steel Corporation.”
John Hinshaw. “Steel and Steelworkers: Race and Class Struggle in Twentieth-Century Pittsburgh,” Page 31. State University of New York Press, 2002.
Louis M. Hacker. “The Course of American Economic Growth and Development,” Page 248. John Wiley & Sons, Inc., 1970.
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