The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 21

Takeover Tactics in Relation to Assets

With the Dow Jones Industrials setting record highs and most measures of stock market value at the top of their historic range, you can see that stocks are still cheap by considering their replacement cost, right? Not according to the first chart here. It shows the ratio of total stock market value of all stocks (price times total shares of stock) to the replacement cost for the underlying assets of these industrial companies.

In 1968, with stocks selling at levels averaging 1.5 times the value of the companies' assets, stocks were clearly overpriced by this or any other measure. And, sure enough, they fell for the next 15 years. Along the way, stocks became steadily cheaper in relation to the replacement cost of their assets, both because stock prices fell and because replacement costs rose under inflationary pressures. By 1980, stocks were selling for less than 70 percent of the replacement cost of their underlying assets.

Another way to look at this is through the eyes of takeover artists. The 1960s wheeler-dealer conglomerators bought companies fast and furiously, as shown by the second chart. But these fast-trackers knew that their own stocks were overpriced, so when they made acquisitions, they bought small companies and paid for them with overvalued stock (the wheeler-dealers'). By 1980, with those vastly reduced prices in relation to replacement cost, stocks were cheap, which made them even more buyable. But the 1980s takeover ...