I was at an estate sale not that long ago, and I came across a cancelled-stock certificate issued from the Brunswick Company. Back then, it was called the Brunswick-Balke-Collender Company, and derived much of its revenue from developing and selling equipment related to bowling allies. It has actually been a decent investment through the modern area, as it has mitigated against the bowling industry’s collapse by expanding into boating and marine technology services over the years (think of Warren Buffett using the last profit puffs at the Berkshire mills to buy up banks and insurance companies.)
Although the Brunswick Company managed to survive, I was thinking about one of the least-known stock market bubbles in American history—the Great Bowling Alley Bubble of the late 1950s and early 1960s. Between 1956 and 1962, the United States witnessed 125 new bowling alleys enter the market each month. The total bowling alley count increased from 4,500 to almost 13,000 at that time. Contrast that to the 3,500 bowling alleys in existence today, roughly on par with WWII era levels.
It is something that I occasionally think about because it would have been perfectly logical for an enterprising investor to make a large investment in a bowling alley company in 1959. Bowling had a distinguished history, with a record of serving as a recreational outlet dating back to Dutch immigrants in the United States during colonial times.
You think people get excited about the stability of baseball, basketball, hockey, and football as lucrative investments with pro franchises fetching over a billion dollars? Well, bowling is older than all four of those sports—combined. If you wanted stability, bowling seemed like a lucrative investment because “people would always need something to do on a Saturday night.”
Furthermore, bowling appeared to experience some of the characteristics that a business look attractive.
It benefitted from technological advancement. It is not an understatement to say that the post-war development of the automatic pin-setter revolutionized the industry, as bowling could be entirely leisure—you throw the ball, and get it back, without having to stop and reset the pins yourself or go to an alley where you had to wait for the guy in back to reset them.
Also, there were add-on sources of revenue for the bowling alley. You’d have to rent bowling shoes. You might buy pizza, beer, and other concessions, or the alley could rent out part of its real estate to businesses that wanted to do the same. Also, mean bowling alleys added arcades and even pool tables.
A 400+ year history, benefits from technology, and multiple revenue streams made bowling stocks look like lucrative investments.
And the investor class largely agreed. If you purchased Brunswick-Balke-Collender stock in 1951, you would have earned 2,345% cumulative returns by 1961. People got excited about Amazon and Apple during the first decade of the 21st century, but iPhones and fast book shipments created similar “Best 10 Year Returns” to bowling in its heyday. If you bought Brunswick stock in 1960, you didn’t break even until 1993, and that is one of the best-case outcomes for investors that bought stocks or invested their money in bowling alleys in the 1956-1960 stretch.
Of course, the trend changed. Bowling leagues faltered, and the average working class American went from bowling 8 times per year on average in 1959 to officially bowling less than once per year by 1974. There was also a supply glut from the doubling of bowling alleys, and to make matters worse, bowling alleys were financed by large chunks of debt that went unpaid when these large swaths of real estate became vacant.
You know how Delaware is the leading Court in the country for determining corporate-type case law because so many companies incorporate in Delaware and Delaware judges are known for setting extremely persuasive precedent in other states because of their sophistication in corporate transactions?
Well, if you follow a lot of Delaware case cites, you’ll see that they are applying a lot of law that got decided in the early 1960s when the bowling bubble collapsed. The rules governing what a creditor can do regarding delinquent property, how to wind down partnership and corporations after the venture goes bust, and other leading questions originally got decided in the aftermath of the bowling crisis when the banks, investors, and operators squabbled with each other to reclaim any leftover capital that could be extracted after bowling spazz-balled as a recreational activity.
I think the collapse of an industry with an almost half-a-millennium track record, shortly after the time in which it looked like the industry was set to improve, is one of the most instructive case studies on the value of diversification.
If you had less than 20% of your net worth in the bowling sector in the 1960s, you could survive to fight another day. Once you start getting over a third or so of your wealth invested in a venture that fails, you are talking undoing decades of hard work that may be accompanied by a psychological tendency to respond by swinging for the fences to recoup your losses.
You may have seen that Warren Buffett speech at Florida in the early 1990s in which he defined diversification as the ownership in a minimum of six stocks. I don’t think that number is a coincidence. If you have six profit streams, the failure of any one will only amount to a 17% or so reduction in income.
That can be made up. In fact, that’s what happened to bank stock investors when the industry collapsed during the 2009 financial crisis and most banks cut their dividends and some went bankrupt or heavily diluted their shareholders. If you lost 17% of your portfolio income due to bank failure in 2009, and the rest of your portfolio mimicked the S&P 500 and you reinvested your dividends, you were back to even from an income basis in 2012. Three years is a tolerable rebuilding duration after you experience near total failure with a significant minority portion of your wealth.
People have different definitions of what financial success looks like. My view is that industrious wealth-builders should aim to create six sources that create at least $1,000 per month in income. If you ever reached that point, the only risk remaining in your life would be the excess of leverage, fraud, or any folly that results from your own aggrandizement after accomplishing such a feat. When you study the wealthy families that remain so, it seems that a wide collection of cash-generating assets plays an important explanatory role in explaining why they survive and prosper generation after generation. At a minimum, the starting point should be avoidance of sharing anything in common with the “bowling investor families” of the 1960s that got wiped out by the Great Bowling Alley Collapse.
Originally posted 2018-06-25 01:20:40.
