Stock Index

Stock indexes set objective benchmarks for how a stock should perform against peers. Reduces the risk of stock investing.

Farmer turned reporter turned media mogul Charles Dow, with reporter Edward Jones, launched a stock newsletter in 1883. Titled the Customers’ Afternoon Letter, they tracked issues affecting the stock market. Dow’s letter gained a reputation for honesty, integrity, and a lack of bias; they unwilling to pump a stock.

Dow would write short stories about baskets of stock to illustrate general trends. In 1896, Dow chose 12 stocks to create a permanent index that would reflect the overall health of the market, the Dow Jones Industrial Average.

In 1889, the Customers Afternoon Letter was renamed The Wall Street Journal.

GE was the only original component of the Dow Jones index to remain to the modern day. Dow Jones removed it on June 26, 2018, after 122 years. Twice before GE lost its position, briefly, but has been in the index continuously since 1907. After wading aggressively into finance, GE allegedly required a bailout in the 2008 financial crisis to make payroll.

Management Consulting

In 1886, Arthur D. Little, of MIT, founded the first management consulting company. Despite a 2002 bankruptcy, it still exists today. Little consulting tended to focus more on technology than management or strategy. Booz started his firm in 1914, focused on management.

In 1933, Bower, a Harvard lawyer and MBA, went to work for McKinsey’s Chicago office, founded by University of Chicago Prof. James McKinsey.

Bower clashed with senior McKinsey partner A.T. Kearney about the direction of the firm. After a short time, McKinsey died in 1937, at 48 years old, and Bower and Kearney split. Kearney kept the Chicago office, renaming it after himself. Bower moved to New York to create a new branch, effectively a new firm, naming it after his deceased mentor McKinsey. Clarifying, Bower effectively founded what today is known as McKinsey. The original McKinsey firm morphed into A.T. Kearney.

Bower transformed management consulting from a field that hired older, oftentimes retired businesspeople to younger people, often just out of school. His belief was consulting firms should look and function like law offices rather than traditional businesses.

Bruce Henderson was a Westinghouse VP for 18 years then joined Arthur D. Little as VP for management services. He left after four years, in 1963, to become CEO of “The Boston Company,” a consulting division of a Boston bank. Searching for a competitive edge Henderson settled on “strategy” because the meaning was vague, so definable as an area of expertise. The firm was eventually renamed the Boston Consulting Group. Eventually, Henderson created an Employee Stock Ownership Plan that allowed him and others to buy BCG from The Boston Company.

In 1973, Bill Bain left BCG to form Bain & Company.

Stock Ticker / Ticker Tape

Both the ticker and ticker tape lowered the cost of transmitting stock prices by eliminating the need for a person to translate them to and from Morse Code.

Subsequently, this innovation served as a bridge from specialists required to send and receive telegraph messages to plain-text transmissions.

Edward Calahan saw people rushing from the floor of a stock exchange to teletypes. He realized a machine could automate the task.

Stock tickers – essentially printing telegraphs – enabled more widespread and faster investing, fueling Wall Street and financing countless innovations.

Edison subsequently created a better ticker. Heis often wrongly credited as the original innovator.

Mechanical stock tickers were manufactured until 1960 when they were overtaken by electronic versions.

Grocery Store Chain / Mass Retailer

The Great Atlantic & Pacific Tea Company (A&P) showed that relying on massive scale could push down prices while running a company profitably.

Relying on low prices A&P expanded rapidly. Early A&P stores were full-service. Shoppers, who typically arrived on foot to the neighborhood stores, would tell grocers what they wanted, and the grocers would remove it from shelves or a limited cold storage area. A&P pioneered the use of private label goods, purchasing entire shiploads of tea or trainloads of fruit, packaging the goods into their own containers, and selling it at their stores.

During WWI A&P sputtered as the US government commandeered food and transport dealing a setback but, after the war, A&P continued to expand. By 1930 A&P was the world’s largest retailer. At one point there were just under 16,000 stores.

In 1946, the US Dept. of Justice used anti-collusion and market protection rules to convict the company of selling food too cheaply. By the 1950’s others started to open more modern and larger stores (A&P evolved into what today we call grocery stores later in its lifecycle).

Over time, A&P failed to keep pace. Their “professional” grocers did not like the self-serve enormous supermarkets. They had a large number of small stores but, over time, lower volume than the larger retailers.

After a long decline and two bankruptcies all stores were shuttered Dec. 1, 2015. By 2018 even the old A&P website is defunct.

While A&P thrived, they did so by continually recreating their stores.

Credit Reporting

Accurate credit reporting vastly lowered the risk of lending and, with it, the cost of capital.

Lewis Tappan

Tappan was a strident Christian who did not believe in credit. His brother and he went bankrupt, twice.

Tappan and brothers were busybodies, known to snoop and report on New York City gaming houses, brothels, and other immoral activities. They believed they were doing God’s work by shutting down sin. In their store, they refused to charge interest and disdained credit on religious grounds.

The brothers became outspoken abolitionists resulting in a boycott of their stores by Southerners. To stay afloat, they reluctantly offered to sell on credit rather than cash.

After a recession caused a $1.1 million loss, in 1837, the store recovered but Arthur Tappan was again forced to extend easy credit. Lewis recognized the need to extend credit but decided to keep methodical files on customers and behavior.

In 1841, at age 53, Lewis wrote to a friend he was “worth nothing.” However, he did have one asset, files he collected on the creditworthiness and morality of his customers.

The Origin of Credit Reporting

Due to his files snooping on sin, other merchants would come to him for background information focused on creditworthiness. Eventually, Tappan realized the value of the information itself but he needed to collect more. For this, he relied on a network of abolitionist friends spread across the country who would file reports. In return for reporting, his reporting agents could sell the reports to potential creditors.

Lewis left full-time work at his brother Arthur’s store to set up his own business of agents and credit reports, the Mercantile Exchange.

“In prosperous times they will feel able to pay for the information and in bad times they feel they must have it.”

Lewis Tappan (Evans, They Made America)

Agents were sparse in the south but common in other places; Abraham Lincoln himself was a Tappan agent.

Dun & Bradstreet

Tappan installed his manager, Benjamin Douglas, a pro-slavery Southerner as a part-owner and tasked him with running the business. He bought Tappan out in 1854 and continued to grow the business.

Later, Douglas handed the business to Robert Graham Dun. In 1864, Dun published a book emphasizing the use of financial statistics over character-based reports for credit decisions. The slang verb “to dun” comes from Dun’s last name and the use of his reports to coerce payment lest credit be destroyed.

In 1855, John Bradstreet opened a competing business, putting information into books (something that worried Douglas, who had lost a defamation lawsuit and was jailed for 20 days). Dun followed suit, with a locked book, and renamed the business R.G. Dun & Co.

After his death, Tappan’s company of snoops merged with Bradstreet’s company to become Dun & Bradstreet, which still exists.

Stock Exchange

Like insurance, regulated stock exchanges opened the door to high-quality stock offerings which allowed businesses to procure financing. That both lowered the cost of capital and also spread both the risk and returns of an investment to a wider group of people.

The Antwerp, formed in 1531, traded what today is called of government debt but not stocks.

Over time, investors created limited companies to invest in a voyage, typically to Asia (the East Indies). Multiple investors funded trips to diversify the risk of loss from any single ship. These companies dissolved after the completion of each voyage, either with success or the loss of the ship. Over time, large companies formed that issued stock and paid dividends, rather than creating new small companies every time.

The walls of London coffeehouses contained stock and debt issues that could be bought and sold. Investors typically hired brokers to find counter-parties to buy and sell stock offerings.

Many early stock issues were for sham businesses. Until, in 1773, the London Stock Exchange opened ensuring quality stock issues. Exchanges in the newly formed US formed soon after, first in Philadelphia then, soon after, in New York with the New York Stock Exchange.

Little changed over the next centuries; other countries opened stock exchanges, but most businesses preferred to list on the NYSE or in London. Eventually, in 1971, the National Association of Securities Dealers (then NASD, now the Financial Industry Regulatory Authority, FINRA), created a new computer-only stock exchange, the Nasdaq.

Insurance

Insurance – paying to spread risk – is an ancient practice. Modern insurance, where businesses specifically focus on assuming the risk of loss for a third-party is a more modern practice.

The Hamburger Feuerkasse (Hamburg Fire Office) opened in 1676. Fire insurance spread throughout Europe. Eventually, Lloyd’s of London popularized shipping insurance, where people willing to insure the arrival of ships. Individual insurers, called underwriters, signed their name underneath one another.

Fire insurers ran private fire departments and if a building did not have fire insurance the fire department did not respond.

Life insurance dates to 1706; the first company to offer it was the Amicable Society for a Perpetual Assurance Office of London.