Jack Welch used to tell everyone to buy General Electric stock during his tenure as GE CEO, and many employees in Schenectady, New York were wise enough to follow the chief’s counsel when it came to loading up on the stock. A New York advisor once remarked being shocked at all the blue-collar and secretarial clients who would show up on the eve of retirement with $10,000-$25,000 in generic mutual funds and over 10,000 shares of General Electric.
This phenomenon is well explored in the book “At Any Cost: Jack Welch, General Electric, and the Pursuit of Profit” which details the wild universe of parallel outcomes for GE employees in the 1980s and 1990s: some were laid off and had their lives destroyed as GE grew obssesive about automation and efficiency, and simultaneously, remaining employees that loaded up on the stock through the company’s 401(k) made a lot of money by owning the stock and collecting tax-deferred dividend payments.
If you were making $50,000 and raising a family while working in a GE factory putting light bulbs in the cardboard encasements, you found your world turned upside down when the factory got reduced to a dozen tech employees because robot technology could package the light bulbs. It can be difficult to move on from a job involving highly specific manual labor because there are a limited amount of employment opportunities when your resume states that you screwed in light bulbs from 1975 through 1995.
Meanwhile, a GE secretary that was making $50,000 and was able to save a high percentage of her salary during the 1980s and 1990s would have received a wildly different outcome from the GE experience. If she saved $9,500 in a typical year, she also would have picked up $3,500 from the existing company match at the time. Furthermore, the purchase of GE stock merited a 15% discount during a few of those years, which I lack the specific information to perform a calculation on it. But even without the stock discounts, the wealth created by GE during this extended period was nothing short of magnificent (there is a reason why the stock had found itself in the accounts of almost every blue-chip investor in the United States.)
If you saw how efficient GE was becoming during this period, and chose to act on it, your life could have been changed if you had your eyes open and maintained a high enough savings rate to take advantage of the circumstances. GE returned almost 17% annually between 1975 and 1995. An employee picking up $13,000 of stock per year during this period would have ended up with $358,000 in twenty years. It would have been difficult to save that during the 1970s, but I am also ignoring the effects of GE’s discount on its own stock that existed during some parts of this time period.
And no, holding the stock throughout the financial crisis collapse and the dotcom bubble did not impede the wealth creation process–that same stock investment would have grown to $1,560,000 on July 1, 2015. It only required $190,000 in savings to generate that outsized benefit, and when you factor in the tax advantages of reducing this income by putting money into the retirement account, the true cost of this savings plan becomes even more impressive. For being entirely passive, this investor got to create one of those Peter Lynch ten-baggers.
And the dividend income, even with all the cuts, would currently be enormous: You’d have around 67,000 shares paying you $15,000 in quarterly income today. You created your own $164 per day pension plan from your experience at GE, except you receive the additional benefit that the dividend will likely be moderately higher a few years from now once the upfront costs associated with selling off the financial division leave the books.
It amazes me how a strong asset that throws off torrents of cast can prevail through so many storms, some caused by management and others caused by investors. People bid this stock up to 50x earnings in 1999. The financial arm brought the firm to its knees in 2008, causing the first dividend cut in 73 years. It invested heavily in the gas sector right before the fall in commodities prices. This is supposed to be a formula for disaster. Yet, you have this core industrial engine growing profits by 8% per share each year when you adjust for stock buybacks, and you also collect a dividend over 3%. That’s an important countervailing force that wades through the ruckus.
Industrial companies involved in complex machinery tend to do well over the long-term because the profits on manufacturing highly specialized equipment is enormous. Look up the returns of Honeywell. Look up the returns of Emerson Electric. Look up the returns of United Technologies. These are good places to be for the long haul. GE’s story has been clouded by mismanaging a sprawling financial portfolio, and a valuation in the late 1990s and early 2000s that had taken over a decade to return to a homeostasis point where an investor could get a fair shake.
There are clusters of people throughout the country who have done this. You have Coca-Cola millionaires in Atlanta. You have Exxon millionaires throughout New Jersey and Texas. You have St. Louis millionaires that can trace their wealth-building to the success of Anheuser-Busch. In Cincinatti, you have people who have owned Procter & Gamble for generations. Geographical limitations have never existed–if you were a Montana resident in 1960 that recognized the merits of Anheuser-Busch as a long-term investment, you got to collect your dividend checks just the same as the person living next-door to the brewery.
It’s just that people tend to forget that stocks are businesses unless you can see the business up close and personal. That’s why people tend to own stock in their employer–you can see the production, the buildings, the sales. It feels real. It’s not just a ticker blip. The truly successful long-term investor, then, takes this observation and applies it to the universe of publicly traded stocks even if it’s not right there at your fingertips.
There is a book written by Gene Bedell titled “The Millionaire in the Mirror.” The gimmicky title, and the fact that the book cover is translucent so you can parts of yourself, make it easy ignore. But this truly is an example where the adage about not judging a book by its cover does apply. One of Bedell’s unique ideas is that people should aim to turn themselves into what he calls “heat-seeking missiles.” To successfully do this, you must focus on the highest impact activities you can engage in relative to the amount of effort expended. It’s an attitude that can serve you well for life because you’ll start to structure your life so that you get more than just the table scraps. Instead of building an app and selling it for $50,000, you will learn to maintain ownership yourself and collect $30,000 in the first year while still retaining the ownership structure and entitling yourself to the indefinite income stream after that. It’s about turning one-off events into repeatable activities and trying to structure your life so that you receive the absolute best outcome for each unit of time and effort expanded.
This applies to blue-chip investing. There aren’t many other activities where you can achieve such great success with little effort. Even a modest $1,000 invest in Exxon, held throughout your working life, turns into something that will produce thousand-dollar dividend checks every 90 days to nicely augment other things you do in life. The consolidated output of all the small things you get right in life can become something quite formidable in aggregate.
The GE millionaires of Schenectady have generally kept a low profile, and the evidence of their exists lies in the one-off comments of financial advisors that have seen the phenomenon. I don’t blame them. People who earn middle-class salaries are create outsized fortunes don’t want to alienate their communities if they learn of their accumulated fortunes. The truly high-earning GE executives that built these fortunes don’t want to highlight it to society at large because they don’t want to inspire populist sentiment for tax hikes. But yet, their chosen privacy doesn’t mean it isn’t real; owning cash flows for long periods of time leads to disproportionately lucrative outcomes, even if an all-in wager on General Electric itself wouldn’t be the best risk-adjusted way to get there.
Originally posted 2015-07-12 19:00:22.