This was the case with American Express in 1963. The company had revolutionized travel with the introduction of traveler's checks, and had tremendous success with the introduction of the American Express card. The business ran into trouble when one of its subsidiaries, a warehouse in Bayonne, New Jersey, was the subject of massive fraud. A company known as Allied Crude Vegetable Oil Refining parked tanks of vegetable oil in the warehouse in exchange for receipts which guaranteed the tanks existed and contained what they were said to. Allied used these receipts as collateral on loans. The problem began when Allied defaulted on its debt. Creditors moved in to take possession of the vegetable oil stored in the American Express warehouse. When they went to open the tanks, they found that they contained not vegetable oil, as American Express had guaranteed and issued receipts for, but sea water, which is worth far less. The creditor's collateral was worth $150 million less than thought, and American's subsidiary was partially to blame for issuing the guaranteeing receipts. Although the company may not have been forced to pay anything [since the mistake was made by a subsidiary and not the parent company itself], the then-CEO Howard Clark felt the business was "morally bound" to try to make up the different. He offered $60 million to Allied's creditors. The stock was driven from $60 per share to $49 1/2.
Although the loss of sixty million dollars was nothing to be scoffed at, it certainly was not going to ruin the company. Wall Street had overreacted and punished the stock more than was called for. The stock would eventually return to its previous levels, and in ensuing years, climb much higher, making a substantial profit for the investor who was wise enough to recognize that 1.) the company was not in serious danger, and 2.) he or she could take advantage of the temporary situation and Wall Street's folly in over-punishing the business, and pick up the stock for a cheap price.
This leads us to to the final point of this lesson: Mr. Market. We have now established why stock prices are sometimes driven to highs and lows. Now we are going to go one step further and explain how the investor should think about the price swings of the market.
Next page > Mr. Market - An Metaphor by Benjamin Graham > << 1, 2, 3, 4, 5, 6, 7, 8 >>
This page is part of Investing Lesson 2 - What Makes Stocks Become Over or Under Valued. If you have already read this lesson, you can skip directly to the Investing Lesson 2 Quiz.
