American Stock Market Investing During The Civil War

In the 1790s, the Bank of New York and the Bank of the United States issued the first ever stock certificate creations of publicly traded stocks for American banks, water utilities, and railroads. Over 400 businesses were created in America’s first two decades of existence, and eighteen of them had their shares traded on a weekly basis (for the rest, you would have to physically contact the owners and get them to sign over their stock certificates to your own in exchange for cash. This was a massive inconvenience, although it came with the side effect of making people actually understood that buying stock meant ownership, and the inconvenience hopefully led to extra contemplation before buying just any old stock willy nilly).

In the lead up to the American Civil War, you had two tracks of stocks that dominated the marketplace—the insurance/bank stocks and the transportation/manufacturing companies. In a sign that some things never change, conservative investors eschewed bank stocks because they experienced significant volatility in stock price and were often prone to bankruptcy (back then, banks would only lend to a few manufacturing companies that didn’t have the credit worthiness to issue their own stock, often at 11-15% annual interest rates. If the company remained solvent, the banks prospered as significant wealth came pouring into the hands of the banks to make them balance sheet rich. For the ones that lent to industrial companies that couldn’t pay back, well, you understand why there was so much volatility).

What I find so interesting is this: if you bought the two dozen companies trading on the industrial and manufacturing side on the eve of Abraham Lincoln’s election to the presidency, you would have been planting the seeds for enormous wealth that continued to this day. Bought some American Cotton Oil in the 19th century? That $100 investment would now be 6,270,233 shares of Unilever paying out over $10,000,000 in dividends per year—you’d be collecting 274x your initial investment amount in daily dividends. You would have over 1.5 million shares of General Electric if you got in during the GE IPO with a share and reinvested it. Even putting $500 into IPO of Laclede Gas would give ownership of 5% of the $2 billion company today if you had held on and reinvested. And if you bought $5 worth of North American Energy, you’d be sitting on over 680,000 shares of Wisconsin Energy. Of course, my favorite of them all is York Water, which began paying out dividends in 1812 and hasn’t missed a dividend payment since then.

Obviously, none of us are working with two hundred year compounding periods. That’s not the point. Instead, the point is that outside of financial institutions that are risky because of debt, and outside of companies subject to rapid changes in technology, investing in large companies is a remarkably enduring enterprise. If you bought ten manufacturing/industrial companies that were publicly tradable on the eve of the Civil War, and gave the instruction to keep passing it down the family tree without selling, the few survivors would have created very significant streams of dividend income and very large fortunes just by sitting on your keister and watching the business grow.

Part of the problem is that some investors today are remarkably spoiled—selling gems like Procter & Gamble or Coca-Cola merely because they deliver disappointing revenue figures for a few years—when the hardships of today are nothing compared to what investors faced during the Civil War or WWI/WWII years. It also provides some historical perspective that makes me very unlikely to overpay for anything—you don’t want to pay 30x earnings for a stock that should trade for 20x earnings because something terrible in the global economy will happen to bring that stock down to 14x earnings at some point in your life. Dealing with stock market declines is much more manageable when you insist on a fair price at the time you start your ownership position. Once you realize people are going to use water, drink beer, buy shavers, buy lotion, use electricity, and buy soap and toothpaste for the rest of your life, and once you see that the companies selling those products have timeless records, holding through the rough periods of business performance or stock price becomes that much easier.