Big Money Thinks Small by Joel Tillinghast

Author:Joel Tillinghast
Language: eng
Format: epub
Tags: BUS050020, Business & Economics/Personal Finance/Investing, BUS036000, Business & Economics/Investments & Securities/General
Publisher: Columbia University Press
Published: 2017-08-15T04:00:00+00:00

Life Span and Industry Structure: Are Railroads Obsolete?

Elroy Dimson, Paul Marsh, and Mike Staunton (all of the London Business School) have produced panoramic statistical histories of the American and British stock markets, surveying the stock performance of fifteen industry groups from 1900 to 2016. Over that time, the economy has changed dramatically. Something like four-fifths of stock market value in 1900 was in industries that are no longer prominent today. Matches and candles were key industries in 1900; to provide continuity over 116 years, the Dimson studies lumped them into miscellaneous manufacturing.

In the Dimson studies, the best-performing industries in the U.S. market (in order) were tobacco, electrical equipment, chemicals, food, and railroads. The worst (from the bottom up) were shipping, textiles, steel, paper, utilities, and coal. In the UK, the best-performing industry was alcohol. This might have been the case in the United States as well had it not been for Prohibition (1920–1933).

In 1900, railroads were the stock market. They accounted for 63 percent of the market value of listed American stocks, and nearly half of the UK market. Today, railroads are a trivial portion of overall market value in both countries at less than 1 percent. Passengers may now fly or drive instead. Freight that once might have moved by ship or rail now travels by truck or air. Despite railroads being displaced by trucks and planes over this period, rail stocks have outperformed truck and airline stocks.

The data series for American trucking and airline shares start in 1926 and 1934, respectively; since then, both have underperformed in the broader market. Despite falling from dominance to insignificance in the stock market, railroads have been the best-performing category of transportation shares. Cumulatively, rails have more or less matched the general market, though not in a straight line. In the early 1970s, there was a flurry of railroad bankruptcies, including the giant Penn Central. Dividends have provided an important part of the total return from railroad stocks.

Intuitively, railroad profits should have been totally knocked out by the new modes of transport. As industries lose customers to substitutes, they generally erode in relative importance, and profit margins shrivel, as happened with shipping, steel, paper, and coal. By the 1970s, passenger trains were such a financial disaster that on May Day 1971, the government nationalized almost all intercity passenger service. Then it seemed that rail freight might crash as well. The most devastating substitutes cost less and have at least one feature that is superior. When two or more people are traveling, it’s cheaper incrementally to pay for gas to drive a car than to buy passenger rail tickets. Plus travelers depart whenever and wherever they want.

Freight moves faster on trucks and airplanes, but rail has the price advantage. Railroads have reinforced that advantage through massive cost cutting and productivity improvement. Employment at class I (major) railroads plummeted from 1.35 million in 1947 to 152,000 in 2016. With diesel locomotives and double-stacked containers, railroads move almost three times the ton-miles of freight at higher speeds by fewer employees on less track.

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