The Dow Gets Modernized

On this day in economic and financial history...

Two American economic bellwethers began their tenure on the Dow Jones Industrial Average (DJINDICES: ^DJI  ) on March 12, 1987. That day, Coca-Cola (NYSE: KO  ) and Boeing both became part of the Dow, replacing glassmaker Owens-Illinois and Inco, a nickel-focused miner. A spokesman for the Dow Jones company noted that Inco's removal was intended to make the index more representative of the market -- the Dow had counted four metals companies (including two steelmakers) on its roster of 30 prior to the change. Owens-Illinois was removed in preparation for a pending leveraged buyout from Kohlberg Kravis Roberts.

It was the second time around on the index for both companies. Coke had been part of the Dow from 1932 to 1935. Boeing had been a member from 1930 to 1932 after founder William Boeing brought his company together with other leading aviation concerns to create the United Aircraft and Transport Company, a de facto American aviation trust. This time, the addition proved more durable -- and plenty valuable, to boot. In the 25 years following Coke and Boeing's addition, the Dow grew 470%, but Boeing put up a total return of 900%, while Coke thrashed the index with a massive 3,000% total gain.

You can't keep these gains bottled up
Coke had another important milestone on March 12, nearly a century before it joined the Dow. The legendary soft drink, in most popular accounts, was first sold in bottles on March 12, 1894, eight years after it was invented by an Atlanta pharmacist. In its earliest years, Coke was sold as a patent medicine (owing to its pharmacy origins), but once the formula passed into the hands of Asa G. Candler, it began to take on the business model of a modern soft drink. There is some debate as to the exact date of the first sale of bottled Coke, but the use of bottles helped Coke expand nationally before refrigeration entered widespread use. The contour bottle, which is still used today with some modern variation, was introduced in 1916, shortly before Candler sold the business.

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Dow on the rise
The Dow also saw another milestone on March 12. The index first broke through the 500-point barrier on March 12, 1956 to close at 500.24 near the end of one of the longest and strongest bull markets in its history. President Dwight Eisenhower's re-election seemed relatively assured, and a streak of strong earnings reports and high dividend payouts also contributed to investor enthusiasm, although The Washington Post reported that "the many losers scattered throughout the list, and the moderateness of the advance as a whole, indicated to brokers that profit-taking was beginning to brake the rise."

The Dow had then been in existence for 60 years, and its annual gain during that time was a rather mediocre 4.3%. However, the 500-point barrier marked a period of greater upward momentum for the index, which went on to gain 6.4% per year for the following five decades.

The problem of trust-busting
United States v. Alcoa (NYSE: AA  ) , a landmark antitrust case first filed by the administration of President Franklin D. Roosevelt, was decided in the U.S. Court of Appeals for the Second Circuit on March 12, 1945. The decision brought to a close one of the more convoluted antitrust suits filed under provisions of the Sherman Antitrust Act, and yet it left many questions unanswered. Alcoa, while found to be a monopoly, continues to exist today in much the same shape that it held in 1945. What happened in this case, and what precedents did it set?

The government's argument was that Alcoa had created and protected an aluminum monopoly through the holding of overseas plants, cartel agreements with foreign producers, and anticompetitive domestic tactics. Judge Learned Hand (who surely had one of the best names for a justice in the history of the profession) held that Alcoa was indeed a monopoly when considered within the scope of the market for virgin aluminum. Alcoa had argued that it competed against scrap aluminum providers, but this argument was rejected.

The decision reframed the very definition of monopoly, as Hand's decision hinged almost exclusively on size within the market and not on the methods used to attain market share. Earlier decisions -- most notably that of United States v. U.S. Steel -- had ruled against the government's antitrust crusade by finding that methods mattered more than mere size. Without proof of deliberately anticompetitive tactics -- the lynchpin in the government's successful breakup of Standard Oil -- there had been no monopoly. Now, size alone was enough -- and with a 90% share of the American virgin aluminum market, Alcoa clearly ran afoul of this antitrust size restriction.

However, Hand did not order the breakup of the aluminum monopoly. Instead, he remanded the case to trial court to determine what punishment, if any, it might face. Alcoa successfully argued before the trial court that new competitors Reynolds Metals and Kaiser Aluminum had successfully eroded its control of the market and thus made its breakup unnecessary. Alcoa was allowed to continue on intact -- and it even wound up acquiring Reynolds in 2000. Alcoa remains one of the world's leading aluminum-producers, but it was only the third-largest in the world as of 2011, behind Russia's United Company Rusal and England-based Rio Tinto.

A day without trading
The New York Stock Exchange has not often closed down for weather-related reasons, and there have been only two instances when the exchange closed for more than one day because the weather outside was simply too frightful to brave. Before Hurricane Sandy, the last such multiday closure occurred during the Great Blizzard of March 12 and 13, 1888 -- but not for lack of effort by some extremely determined stockbrokers. On the first day of the shutdown, The New York Times -- which miraculously managed to keep printing -- wrote:

There was something almost startling in the sudden paralysis of business downtown. The effect of the storm on the big Exchanges, the Government offices, the banks, and the transportation companies was unique and unprecedented. ...

Lines of communication were almost wholly blocked long before the commercial world is usually astir, and it was extremely difficult for anybody to reach the lower end of the island unless he came by way of the ferryboats or had extraordinary transportation abilities. ... Prices ranged from $5 to $40 [equivalent to between $125 and $1,000 today] for anything on runners or wheels that could be propelled against the storm. It was hard on the drivers, but harder on the horses compelled to make the exhaustive trip. ...

Telegraph wires were down, signs were broken, torn awnings flapped in the wind, and abandoned vehicles, half buried in snowdrifts, were conspicuous objects on the main thoroughfares. ... There were only 30 of the 1,100 members of the Stock Exchange on the floor when the gong sounded at 10 o'clock. ... Only a nominal business was done. The trades were in five stocks and represented about 15,000 shares. ... As the stocks sold on Fridays are delivered on Mondays, it was manifestly useless to attempt to continue business, as checks could not be certified, and no deliveries can be made without certified checks; accordingly at noon the board adopted a resolution that no deliveries should be made during the day and further business should be suspended.

The fall of the house of Madoff
Bernard "Bernie" Madoff pled guilty to 11 counts of fraud, money laundering, perjury, and theft on March 12, 2009. This brought a swift and decisive end to the career of one of Wall Street's most successful investors, who had turned out to be nothing more than the mastermind of the largest Ponzi scheme in history. During his sentencing, Madoff attempted to strike a note of contrition by saying:

I knew what I was doing was wrong, indeed criminal. ... As the years went by I realized this day, and my arrest, would inevitably come. ... I cannot adequately express how sorry I am for what I have done.

The $65 billion fraud carried a maximum 150-year sentence, and when sentencing was carried out that June, it was determined that Madoff should serve the maximum possible term. The septuagenarian former investor will remain in prison until his death.

The original printing revolution
Hewlett-Packard (NYSE: HPQ  ) unveiled the ThinkJet, the world's first mass-market inkjet printer, on March 12, 1984. What began as a project to develop a portable printer to pair with HP's popular scientific calculators grew into a technology that would eventually become nearly as ubiquitous as the keyboard or the mouse. The original ThinkJet, priced at $495, was very affordable for a time when top-quality laser printers might retail for more than $100,000. However, its 96 dot-per-square-inch print resolution was still a bit too pixelated for commercial use. It was only when HP built on the technology developed for the ThinkJet to create the Deskjet -- which offered superior resolution and the ability to use ordinary sheets of paper -- that the home printing movement began to take off. Today, HP remains the global leader in home printer sales, with more than 240 million units shipped since the first ThinkJets in 1984.

The birth of Berkshire Hathaway
Many investors know that Warren Buffett's rise to greatness began with his acquisition of Berkshire Hathaway (NYSE: BRK-B  ) . Fewer know the origins of that former textile manufacturer, which was in fact two separate textile manufacturers named "Berkshire Fine Spinning Associates" and "Hathaway Manufacturing Company" until their merger on March 12, 1955. Berkshire, "a leading manufacturer of combed cotton goods" according to a New York Times brief on the merger, produced 235 million yards of the stuff in 1954. Hathaway, which made rayon twill linings and curtain materials, produced 79 million yards of material.

Buffett began buying shares of the company in 1962, but by then weakness was already apparent in its core textile busines. He assumed control in 1964, and by 1967 Berkshire began its transition into an uber-holding company by expanding into insurance and other businesses. Berkshire Hathaway retained some textile operations until 1985, when Buffett shut down the last links to his company's past. Much later, Buffett claimed that buying Berkshire was the biggest mistake he ever made; without that emotion-driven acquisition weighing him down, Buffett claims he might have generated an additional $200 billion in investment returns in the years that followed.

Thanks to the savvy of investing legend Buffett, Berkshire Hathaway's book value per share has grown a mind-blowing 586,817% over the past 48 years. But with Buffett aging and Berkshire rapidly evolving, is this insurance conglomerate still a buy today? In The Motley Fool's premium report on the company, Berkshire expert Joe Magyer provides investors with key reasons to buy as well as important risks to watch out for. Click here now for instant access to Joe's take on Berkshire!


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