Back in the late 1960s, my father thought it would be a good idea to purchase a stock in my name. There was a tool called the Uniform Gift to Minors Act (UGMA) that allowed him to open an investment account in my name and fund it with some money. As the trustee of this account, he could add money to it, but it became mine when I became 18 years old. I believe he opened it with perhaps $10 (worth just under $80 in today’s dollars). Over the years, he added a total of $300 into the account. But more about how the investment did later.
At the time, he picked (or someone gave him the advise to pick) a transportation company called Seaboard Coast Line Railroad (SCL was it’s ticker back then). He purchased the initial stock in what is called a DRP (pronounced “drip”) which stands for Dividend Reinvestment Program. One of the benefits of a DRP was that he could purchase a certain dollar amount as opposed to having to purchase a round lot (100) shares at a time. As a transportation (utilities sector) company, it paid a quarterly dividend and when the account got a dividend, it used that money to purchase additional shares of the company. As a DRP account, it could purchase fractional shares, since the dividend wasn’t enough to purchase an entire share of the stock. So here are ten lessons he taught me through this investment.
Lesson One: Owning a Stock is Owning a Company
The first lesson taught by owning this stock is that when you own stock in a company, you own a small piece of this company. A young boy could understand the concept of owning a company that had trains! At the time, it had both freight and passenger trains (in 1971 the new government Amtrac took over the passenger trains). Where I grew up we had coal tipples that would load coal into rail cars, so trains were a concept I understood. And at the time, its tracks went from Florida up to Virginia, so on trips there was a good possibility we might even see one of their trains.
Lesson Two: You Get to Participate When the Company Makes Money
Since this was a stock that paid a quarterly dividend, I learned that every three months the company would pay me some money for every share of stock. Later on I realized that that money came from the operating profits of the company. The lesson there was that the more profits the company makes, the higher the dividend paid out.
Lesson Three: Reinvesting Dividends Helps Your Holdings Grow
In this account, the dividends were reinvested in more shares of stock. So every quarter when I got a dividend, I could see how much of a share of stock my dividend would buy. Over time I could see these statements each quarter showing me my total holdings. Since each share purchased with the dividend then earned its own dividend, I learned the lesson of compounding. That was the “a-ha” moment that showed that dividend stocks could make you rich over a long period of time. At first my dividend would only purchase a fraction of one share. However, by the time I was watching this as a pre-teen or teenager, the dividends were purchasing multiple shares each time.
Lesson Four: Stock Splits Increase Your Shares Quickly
As a transportation company in the 1970s, it was doing pretty well during this inflationary period where the market in general was fairly flat. So, like most companies at the time, once the stock price grew to a certain level the company would announce a 2-for-1 or 3-for-2 stock split. Suddenly I would see the addition of a bunch of shares to my holdings. I don’t think I completely grasped the fact that the shares would increase but the price per share would decrease. To me it just meant that when the dividend came, it would buy even more shares of stock.
By 1980, I was old enough to understand the company and I would read their annual reports each year (and look at the cool pictures of trains!) and although I wasn’t interested in the numbers section, I could see what the company was doing in the glossy section. That year I learned another lesson.
Lesson Five: Mergers and Acquisitions
Seaboard Coast Line acquired the Chessie System (which itself was a combination of merged lines) and became CSX Transportation (with new ticker CSX). I could see how a company could acquire a company and become a larger entity. Later on, CSX and Norfolk Southern Railway took over a government-created company called Conrail (which was made up of several bankrupt railroads) and split it between the two companies. So I was able to experience the concept of this three-way deal. One of the aspects of the Chessie system acquisition made for the foundation of the next lesson.
Lesson Six: Conglomerates
One of the holdings of the former Chessie System was the Greenbrier Hotel, a five-star hotel located in White Sulfur Springs, West Virginia. Now CSX Transportation was in the hotel business as well as the railroad business. The company was no longer just a railroad, but was involved in other businesses as well. Soon after this period, the company also purchased another one or two hotels, and also decided to get into the shipping business. These were supposed to be “synergistic” to their core business. After all, if you can run one hotel, why not more top-tier hotels? Since many of the trains carried shipping containers from ports to locations inland, why not get a piece of the shipping action as well? SeaLand was the name of that business. How well did that work out? That’s the next lesson.
Lesson Seven: Stick to Core Competencies
The hotels did not do well. It turned out that CSX really didn’t know how to run a hotel other than the flagship Greenbrier. Likewise, trying to run a shipping business (when other companies like Mersk had this as its core business). Within a couple of years of getting into the business they were selling off those divisions and focusing more on the core transportation business. The one area that did work pretty well for them was their intermodel unit where they would get a tractor-trailer trailer from point A to point B by using a truck to haul from the origin to the nearest CSX terminal. Then the trailer went on a train car and hauled by train to the destination area. Then a truck would haul the trailer that last part of the journey to the destination.
Lesson Eight: Watch the Top Management
I must say that I do not recall who was president of the company when I first became a stockholder. However, after the acquisition of the Chessie System, I recall that Hayes T. Watkins Jr. was put in charge of the combined company. After he retired, a new fellow by the name of John Snow became head. Later on, when George W Bush named a new Secretary of the Treasury I heard the name John Snow again and wondered if it was the same person. It was. My lesson was that top management move around and sometimes into political positions.
My final lessons from the company were not at any particular point in time, but came from the time I held the stock.
Lesson Nine: Both the Economy and Business Affect Companies
During the 1970s, inflation became almost out of control and the stock market was pretty flat. Likewise, my holdings didn’t increase in price a lot during that time. In fact, there were times during downturns in the economy where the stock price would go down and my holdings went down in value. After the merger into CSX, the company press was very positive on how this was good for the shareholders and how this would be beneficial. However, the market wasn’t as impressed (particularly when their financials didn’t grow quickly after the merger) and so for a year or three the stock price stayed pretty flat and the only increase in value was from that dividend reinvestment into more stock. (On the plus side, when the price was down, that dividend would purchase more stock!) That led to my final lesson.
Lesson Ten: Long-Term Holding is Beneficial
Long before I had heard of Warren Buffet, I had learned about long-term holdings of quality companies. I had held onto this stock for upwards of 30 years and over that time had seen the value go up and down, but over the long-term it continued to increase in value. Without trying to dig up the numbers, I think that when I eventually sold my shares in CSX Transportation, that $300 in investment in the 1960s and 1970s had grown to over $10,000!
In looking back, I am amazed that my father was able to pick a single company stock that would teach me so many things about investing. I’m looking forward to the day soon when I can start a UGMA account (they still exist!) for my niece and nephew and use the accounts and their holdings to help them learn about investing.
Update 9/27/20: Clarified to indicate that Conrail was a government created railroad made up of several bankrupt railroads.