We are going to hop on the anecdote train and take a spin back to 1917 during the, yep, you guessed, Spanish Flu. I don’t know if many of you are familiar with the career of Phil Carret, but he was a somewhat famous and very successful investor who ran the Pioneer Fund. He lived to over the age of 100, and reportedly experienced over 30 boom markets and corrections during his lifetime. He was well-known to Berkshire Hathaway shareholders, as he purchased Blue-Chip Stamps stock in the 1960s at the same time as Warren Buffett and Charlie Munger.
In a 1995 interview, he mentioned that he only encountered two great investors in his lifetime—Warren Buffett and…his college friend at Harvard, Fred Abbe (Class of 1914). Abbe was known for rarely making an investment, and when did, he would purchase a dominant blue-chip stock at a beaten down price and then hold the stock for the rest of his life—much to the ribbing of his friends who were investment professionals.
In one of his stories about Abbe, Phil Carret indicated that Abbe purchased $1,500 of the Washburn-Crosby Company, the cereal maker that is now General Mills, during 1917. At the time, the world was being ransacked by not only World War I but also the Spanish Flu. The price of Washburn-Crosby’s stock had fallen from $118 per share to under $30 per share. Abbe figured that people would always need to eat cereal, and that Washburn-Crosby was trying to build premium brands for itself by advertising heavily in the newspapers. During this time, Washburn-Crosby was generating wheat profits and using the surplus to launch the Betty Crocker brand in the Saturday Evening Post and form its first national advertising campaign.
And then, Abbe did nothing with his stock—he sat back and let it compound even though it wildly fluctuated in price. Carret would ask Abbe if he minded all the jokes about being an absentee investor who never pruned any of his investments, and Abbe responded, “If you buy a great company at a low enough price, it’ll watch itself for the rest of your life.”
Carret told a Wall Street Journal reporter in 1955 that he checked in with Abbe again about his General Mills investment and at that time it was worth $2,000,000. That amounted to 20.58% annual compounding over a thirty-eight year period. I checked in with General Mills’ Investor Relations, and the company grew its profits by 16.7% annualized during the 1917-1955 time frame. So Abbe was able to add almost four percentage points to his compounding by purchasing the stock during a world war and national pandemic.
You know what I find crazy? If Abbe had “only” achieved 16.7% compounding over that time frame, his $1,500 would have grown to $600,000. The ability to purchase the stock at the price of $30 rather than $105 meant that he ended up with $2,000,000 rather than $600,000. He was compensated very well for having the funds and acting intelligently during moments of crisis.
This is a pattern that plays out over and over again. When you look at the investors who “super-compound”, or achieve 12% or greater annual returns over a multi-decade period while owning the most obvious of blue-chip stocks, it is a common refrain over and over again that the stocks were purchased during a period of distress.
I have no doubt that investors who purchased at the March lows, or any future lows still to come, and hold onto their investments for the long haul, will report similar types of compounding stories. I don’t like the phrase “buy when there’s blood on the streets” because of the impression that you are more worried about investing than helping out your fellow man during times of crises, but it is certainly true that the great fortunes are born by purchasing ownership in great firms at low prices, which are usually only available during periods of distress.