Twelve Classic Tales from the World of Wall Street
About John Brooks
John Brooks was a writer and longtime contributor to The New Yorker magazine. His articles and books covered the shenanigans of the 1960s Wall Street bull market. His books Once inGolconda, The Go-Go Years, and Business Adventures have endured as classics. Although he is remembered primarily for his writings on financial topics, Brooks published three novels and wrote book reviews for Harper’s Magazine and the New York Times Book Review.
Business Adventures is a collection of Brooks’ New Yorker essays about why various companies succeeded or failed. Although written decades ago, the lessons learned are as applicable today as they were in 1969. Business Adventures is Bill Gates’ favorite business book of all time.
The Fluctuation: The Little Crash in ’62
“We may see another speculative buildup followed by another crash, and so on until God makes people less greedy.”– John Brooks
The Flash Crash of 1962 is an example of how the behavior of investors is heavily influenced by their mood. The three days of this crash sent stock market investors into chaos. But, those who had simply held their investments for those three days would likely have had a portfolio with similar worth. Brooks describes the events that unraveled during the flash crash of 1962 to highlight that fluctuations are often due to arbitrary factors.
On May 28, 1962, the stock market had been declining for six months. This market panic was then exaggerated by the central office running late in updating stock prices. So, investors had to predict the price of a stock 45 minutes in advance. Due to their current mood, they assumed the price had fallen further. This led to a panic sell-off of shares, creating a downward spiral that cut stock values by 20 billion dollars. Another market panic is what led to the market swiftly moving back to its original value. It is common knowledge that the Dow Jones Index could not go below 500 points. So, when the value got close to that level, investors started panic buying. Within just three days, the market had fully recovered.
After this event, people were searching for rational explanations for this brief crash. The reality is the crash was caused by irrationality and market unpredictability. So, Brooks points out that the only certainty in the market is that it will fluctuate.
The Fate of the Edsel: A Cautionary Tale
Brooks explains that blame is rarely attributed to executives when they make a mistake. Leaders are often eager to deny blame and this has a negative impact on their company. Brooks provided the example of Ford in the 1950s when they were struggling due to questionable decisions by leaders. Instead of accepting any blame, they tried to shift it. The company was struggling due to the company’s unpopular Edsel model, failing due to bad marketing and research. The car is now considered one of the biggest product failures of all time. The project cost them 250 million dollars, the most spent on one project but offered nothing revolutionary. The car also had several technical faults, including unreliable brakes and a jumpy acceleration.
Instead of accepting these failures as the main reason for the car’s failure, the executives blamed a man called Roy Brown. He was the man who designed the Edsel. The design was not to blame, but Brown was demoted as punishment. The result was a depressed Roy Brown and a leadership team that still made the same mistakes.
The Federal Income Tax: Its History and Peculiarities
“The income-tax law in toto has virtually no defenders, even though most fair-minded students of the subject agree that its effect over the half century that it has been in force has been to bring about a huge and healthy redistribution of wealth.”– John Brooks
Brooks describes how federal income tax has changed since 1913, leading to a tax system that allows the wealthy to pay less tax than the middle class. 1913 was the year that the US introduced federal income tax because the government’s income stream was running low and their expenses were increasing. At the start, this system worked, with the richest citizens being the main contributors. This tax has since been expanded to include most of the population, which inadvertently led to several loopholes for the rich to exploit.
The way the tax is structured today encourages inefficiency. For example, freelancers will often stop taking on new contracts mid-way through the year. This is because they are actually better off earning less at this point because of federal income tax. Increasing complexity and the strong political influence of the rich has made tax reform impossible. So, Brooks recommends we instead revert back to the tax system of 1913.
A Reasonable Amount of Time: Insiders at Texas Gulf Sulphur
Brooks then covers the way insider trading has changed over time. Insider trading is when an individual makes a market trade based on inside information that is not widely available. This crime was initially very rarely enforced by the Securities and Exchange Commission. That said, this all changed with insider trading in the Texas Gulf Sulphur case of 1959. In 1959, several people working at or associated with Texas Gulf Sulphur decided to heavily invest in the company as they had recently found millions of dollars worth of copper and silver. Crucially, the company did not announce this find, so they could keep buying stocks before they went up in price. Rumors then spread the company had found something. Still, executives held press conferences to convince the public that nothing had been found. All the while, they continued to buy more and more stock. Finally, after they had bought as much stock as they could afford, they announced their find. The price of the stocks suddenly skyrocketed and the insiders made millions of dollars.
Previously, people would have got away with this illegal behavior. But, the Securities and Exchange Commission felt this had gone too far. So, they charged the company with deception and insider trading. All insider traders were found guilty and this changed the way Wall Street was regulated. Today, people involved in insider trading are far more likely to be charged.
Xerox Xerox Xerox Xerox
Brooks outlines the influence that Xerox had on the business world. In a way, Xerox was the Google of the 1960s. To “Google something” is now recognized as performing an internet search. In the 1960s, to “Xerox something” was used in place of the word “copy.” Xerox was the market leaders in producing the automatic copy machine. Unlike Google, though, Xerox was unable to sustain its society-wide influence.
Xerox’s immediate success was a surprise to everyone, even the founders. Copying was regarded as expensive and plagiarism by many in society. The founders didn’t even believe in their product, discouraging their friends and family from investing in the company. Despite this, the company had revenues of 500 million dollars within just five years. After this success, the owners showed their gratitude by investing heavily in philanthropy. They were the second-largest donor to the University of Rochester, the institution where photocopying technology was invented. They also spent 4 million dollars on a television campaign to protect the UN after right-wing politicians started attacking the organization. This approach prolonged their success.
Despite these successes, Xerox did quickly crash. Their technological lead over their competitors had diminished, with other companies offering similar machines at lower prices. Xerox threw millions of dollars into research and development but struggled to find another product to pioneer. They lost the vision that fueled the company’s early success. The company does still exist, but it is not the household name it could have been.
The Impacted Philosophers: Non-Communication at GE
In business, communication channels between superiors and their employees can be unclear and problematic. Brooks provides the example of General Electric (GE) to point out the huge impact of poor communication. In the late 1950s, GE became involved in large-scale price-fixing. Several electronics companies worked together to push the prices to 25% above their normal price. GE was found to be the driving force behind this price-fixing and was brought before the court. The remarkable outcome was that although some managers were convicted, no executives were charged. The executives were able to blame everything on communication errors.
At the time, executives provided managers with two types of policy: official and implied. The official policies would be explained with a straight face. The implied policies would be told with a wink. Those implied policies could be genuine or the executives might have been expecting the complete opposite. One of the implied policies was price-fixing. So, even though GE had a policy against discussing prices with competitors, some managers misunderstood. This is just one example of how executives often use communication problems as an excuse to free themselves of legal responsibility.
The Last Great Corner: A Company Called Piggly Wiggly
“He who sells what isn’t his’n must buy it back or go to prison.”– John Brooks
In 1917, Piggly Wiggly patented the concept of a self-service supermarket. They were the first supermarket to provide shoppers with carts, put price tags on all items and have check-outs. Despite its huge influence on modern supermarkets, Piggly Wiggly remains a relatively unknown supermarket. Brooks explains that this is due to its owner, Clarence Saunders. Saunders reacted angrily when a failed franchise led to investors shorting his stock and falsely claiming the company was in trouble. To teach these investors a lesson, Saunders tried to buy back most of the shares. He announced publicly that he would buy all existing stock in Piggly Wiggly and, after borrowing heavily, managed to buy back 98 percent of the shares. This drove up the stock price from $39 to $124 per share. The investors attempting to short his stock faced enormous losses as the price of the stock rose.
Saunders ultimately failed after the stock exchange provided the people shorting an extension on paying what they owed. Saunders was unable to hold on for this time and the stock price dropped, leaving Saunders bankrupt after acquiring too much debt.
A Second Sort of Life: David E. Lilienthal, Businessman
David Lilienthal is the example of an individual who was both business savvy and ethically sound. In the 1930s, Lilienthal was a civil servant under President Roosevelt. He continued to work as a civil servant until the 1950s. In 1950, Lilienthal was honest and admitted he needed more money to provide for his family. Lilienthal had developed a considerable amount of respect from those he had worked for. He earned similar respect as a businessman.
Lilienthal had experience in the mineral industry and decided to take over a failing Minerals and Chemical Corporation of America. He managed to make the company a success and he earned a small fortune from this pursuit. On the back of this success, Lilienthal released a book arguing that big business is vital for the US’ economy and security. This was controversial and many of his former colleagues called him a sellout. Lilienthal disagreed and claimed he was committed to both the public and private domains. To prove this, he founded the Development and Resources Corporation in 1955. This corporation helped developing countries conduct major public works programs. This merely showed that you could be both a successful businessman and care for humanity at the same time.
Stockholder Season: Annual Meetings and Corporate Power
Brooks explains that although the board of directors makes decisions for major corporations, these directors are voted in by shareholders. So, shareholders are the people who hold true power in America. Once a year, shareholders have an annual meeting to elect the board and vote on policies. Although the shareholders should be the ones calling the shots in these meetings, the directors think otherwise. They do not appreciate the shareholders as their bosses and try everything possible to keep the shareholders at arm’s length.
Brooks argues that shareholders do not use their potential. There are some examples of investors who are constantly testing the board of directors, like Wilma Soss, suggesting AT&T needed more women on the board of directors in the 1965 shareholders’ meeting. But, there is nothing more passive and compliant than a small investor who is fed dividends regularly. This means that passionate individuals are unable to hold the board of directors to account. If shareholders only wielded their power more often, company management could not simply do as they please.
One Free Bite: A Man, His Knowledge, and His Job
Brooks explains that your freedom to take a better job has not always existed. Donal Wohlgemuth is the man to thank for setting this precedent. In 1962, he was managing the spacesuit engineering department of the aerospace company, B.F. Goodrich Company. At this time, Goodrich was a market leader and the market was buzzing during the race to land on the moon.
Despite being a market leader, they were pipped to a contract on the Apollo project by its main competitor, International Latex. Soon after, Wohlgemuth was offered the opportunity to join International Latex and work on the Apollo project. As well as this fantastic opportunity, he would also be given more responsibility and a larger salary. He accepted this unique opportunity. When he told his superiors at Goodrich about this, they argued he would divulge their secrets. If he did divulge information about Goodrich’s space suit production, he would be breaking a confidentiality agreement he had previously signed. So, Goodrich decided to sue Wohlgemuth.
In court, a groundbreaking decision was made. The judge accepted that Wohlgemuth could damage Goodrich by sharing their knowledge. He could not be found guilty of this preemptively. So, it was ruled that Wohlgemuth could enter employment with International Latex. This case set a precedent that has improved employee rights.
Final Summary and Review of Business Adventures
Business Adventures offers insight into the world of business. Brooks describes several short anecdotes to offer guidance on the state of the market and common mistakes made within companies. The lesson appears that the market, investor’s moods and the legitimacy of people at the top can be unreliable. But, knowing that this is the case allows you to make more informed decisions.
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