Marlboro Friday and Zooming Out
One of the best growth investments of the past century has been, counterintuitively, tobacco stocks. In a 2015 article, Morgan Housel pointed out that if you had invested $1 in Philip Morris (now Altria) in 1968, that dollar would have been worth $6,638, of an annual return of 20.6%. The same dollar invested in the S&P 500 index would have been worth $87, or 98% less.
Wrote Housel: “One dollar invested in tobacco stocks in 1900 was worth $6.3 million by 2010. That's 165 times greater than the average industry.”
This is a perfect example of investing in an enduring business versus trying to identify the next big fad. You can chase the next Peloton. I’m looking for the next Philip Morris.
But the ride in stocks is always bumpy, and PM is no exception.
April 2, 1993 has gone down in history with stock investors as “Marlboro Friday.” I was reminded of this while reading Gene Hoots’ excellent book, Going Down Tobacco Road, which I recommend to anyone interested in the history of the tobacco industry in particular, or the bygone era of giant global corporate conglomerates in general. (You can also check out his Substack newsletter here.)
On this fateful day, Philip Morris announced a nearly 20% price cut for its flagship brand, Marlboro. CEO William Campbell said in a statement that he believed this step was necessary due to “prolonged economic softness and depressed consumer confidence.”
Neither of these reasons are good things!
Investors in tobacco stocks were not used to this. It was supposed to be a product with supreme pricing power and inelastic demand. The retail price of a pack of Marlboros had tripled between 1980 and 1992, and customers just kept buying. And now, literally out of nowhere… this?
Investors panicked. Shares of PM dropped 23% in a single day, wiping out $13 billion in market value. The Dow Jones fell 2% that day as fears of price cuts and declining pricing power cut across other companies and sectors. If a brand as entrenched and storied as Marlboro, with some of the most loyal customers of any consumer product, had to resort to price cuts, what did it mean to every other brand?
But while investors panicked and sold, PM management knew they had made a shrewd bet which stood to help them capture market share. Because even though the price cut would temporarily hit their bottom line, it would hurt their debt-burdened competitors more.
So what ended up happening to PM stock? It floundered for the next 6 months, but then started to trend up again. It took until October 1994, about a year and a half, to recover the value lost on Marlboro Friday. And it didn’t convincingly break above that level until March of 1995, almost 2 years later.
In retrospect, all of this investor negativity created the ideal environment to accumulate more shares of PM. It was the wrong time to submit to the fear. It was the wrong time to sell.
This isn’t unique to Philip Morris. The stock market’s initial reaction to news is very often wrong… and it can take years for analysts and portfolio managers to wrap their heads around what new information means to a company. In Low Risk Rules I write to the entrepreneur:
You know more about investing than a portfolio manager who went to an Ivy League school and who never put their own capital at risk to build something. Because, at its core, investing is about understanding businesses.
Don’t assume that the “expert” investment opinion is always right. The investment community too often act like lemmings, piling into the same stocks one day and selling them the next, as simple narratives become the commonly accepted “wisdom.” That’s how you get unprofitable companies selling at crazy valuations, as we saw these past few years. It’s also how bargains appear, as investors look past value stocks hiding in plain sight. How many investors passed on PM in the years following Marlboro Friday under the assumption that it was “dead money,” while they chased the fads of the day?
Zoom out
It’s necessary to zoom out as far as you realistically can.
If you zoomed out a year from Marlboro Friday, it may not have been enough. You might have been focused on their declining gross margins, or the current competitive environment. Also of concern in the early ‘90s were macroeconomic worries like rising interest rates, or geopolitical risks like the first Iraq war. There were many reasons not to buy - or worse, to sell.
How hard would it have been to zoom out for a decade, or longer? If you’re investing (not speculating!) that’s what you need to do.
The people who earned those 20.6% annual returns in PM defeated the myopia that the rest of the investment world suffered from. And in the end, it required no visionary thinking. It was as simple as making a bet that the future would look a lot like the past.
The key to investment success is to buy quality assets and hold on through the ups and downs. It’s owning assets that might be out of favour, or overlooked. That means bucking conventional wisdom, and ignoring the talking heads. It’s about being a maverick, and standing independently from the crowd.
Low Risk Rules makes the case that the same skills that drive business success drive investment success. And the reality is, once you’ve seen the blueprint, it’s actually not complicated at all.