Equities In The 80S: A Decade Of Investment Opportunities

The 1980s was a significant decade for the stock market and investing in equities. The decade saw the first major boom and bust cycle in private equity, with a dramatic surge in leveraged buyout (LBO) activity financed by junk bonds. The stock market was also soaring, driving profitable exits for private equity investors. This period saw the emergence of well-known companies such as Apple and Microsoft, and investing $1000 in each of these companies in the 1980s would have made you a millionaire today. The 80s financial markets were not as developed or interconnected as they are today, and investors had to rely primarily on newspapers and company reports for financial information.

The 1980s: the first major boom and bust cycle in private equity

The 1980s saw the first major boom and bust cycle in private equity. This period was characterised by a dramatic surge in leveraged buyout (LBO) activity financed by junk bonds. The cycle is typically marked by the 1982 acquisition of Gibson Greetings and ended just over a decade later with the near collapse of the leveraged buyout industry in the late 1980s and early 1990s.

The beginning of the first boom period in private equity was marked by the success of the Gibson Greetings acquisition in 1982. In January 1982, former US Secretary of the Treasury William E. Simon, Ray Chambers, and a group of investors acquired Gibson Greetings, a producer of greeting cards, for $80 million. By mid-1983, just sixteen months after the original deal, Gibson completed a $290 million IPO, with Simon making approximately $66 million. The success of the Gibson Greetings investment attracted the attention of the wider media to the nascent boom in leveraged buyouts.

The 1980s saw a proliferation of venture capital investment firms, with over 650 firms by the end of the decade, each searching for the next major "home run". While the number of firms multiplied, the capital managed by these firms increased only 11% from $28 billion to $31 billion over the course of the decade. The growth of the industry was hampered by sharply declining returns, and certain venture firms began posting losses for the first time. In addition to increased competition among firms, several other factors impacted returns, including the market for initial public offerings cooling in the mid-1980s before collapsing after the stock market crash in 1987, and foreign corporations, particularly from Japan and Korea, flooding early-stage companies with capital.

The 1980s also saw the emergence of "corporate raiders", a moniker rarely applied to contemporary private equity investors. A corporate raid typically involved a leveraged buyout that would involve a hostile takeover of the company, perceived asset stripping, major layoffs, or other significant corporate restructuring activities. Among the most notable corporate raiders of the 1980s were Carl Icahn, Victor Posner, and Nelson Peltz. Icahn developed a reputation as a ruthless corporate raider after his hostile takeover of TWA in 1985, which resulted in him systematically selling off TWA's assets to repay the debt he used to purchase the company.

One of the final major buyouts of the 1980s proved to be its most ambitious and marked both a high-water mark and a sign of the beginning of the end of the boom. In 1989, KKR closed on a $31.1 billion takeover of RJR Nabisco. At the time, it was the largest leveraged buyout in history. The event was chronicled in the book, "Barbarians at the Gate: The Fall of RJR Nabisco", and later made into a television movie.

The stock market trading process in the 80s

The 1980s saw the first major boom and bust cycle in private equity, with the stock market trading process being very different from today's. Before the internet, all stock market trades were conducted over the phone. An investor wanting to buy shares would call their broker, who would write down the trade on a coloured ticket. The ticket would then be sent to the local trade room, sometimes via a tube system. From there, brokers would call their trade desk at the exchange to place the order.

The 1980s financial markets were not as developed and interconnected as they are today. Investors could buy fewer securities, and financial news was less abundant, with newspapers and company reports being the primary sources of information. There were also significantly fewer books, tutorials, and communities available for training materials.

The New York Stock Exchange (NYSE) in the 1980s involved brokers making trades over the phone, then calling down to the "pit" (where trades took place on the exchange floor) to let the floor man know what trades to make. The floor man would go to the pit and use hand signals to identify themselves as a buyer, looking for accompanying hand signals from sellers. Once eye contact was made and a deal was agreed upon, both the buyer and seller would write down the trade details, return to their phones, and call their bosses to report the trade. At the end of the day, the trades would be reconciled, and if everything matched, they would move on to the next day.

The 1980s saw a dramatic surge in leveraged buyout (LBO) activity financed by junk bonds. This period culminated in the massive buyout of RJR Nabisco before the near collapse of the leveraged buyout industry in the late 1980s and early 1990s, marked by the collapse of Drexel Burnham Lambert and the high-yield debt market.

Despite strong share performance in the 1980s, investor enthusiasm waned towards the end of the decade. The Dow Jones industrial average of 30 stocks soared by about 25% in 1989, capping off the greatest decade of stock market performance since the 1950s. However, investors and stock market analysts were relatively lukewarm about stocks at this time. The Standard & Poor's stock market average of 500 stocks performed exceptionally well in the 1980s, with 17.4% annual increases compared to the historic 9.7% annual rise. This superior performance led to predictions that the stock market might run out of steam.

The 1980s also saw the emergence of new private equity firms, such as Bain Capital, Blackstone Group, and Carlyle Group, which would become major investors in the years to come.

The pros and cons of a 100% equity investment strategy

The 1980s was a major period in the history of private equity and venture capital. The decade saw the first major boom and bust cycle in private equity, with a dramatic surge in leveraged buyout (LBO) activity financed by junk bonds.

A 100% equity investment strategy is a strategy commonly adopted by pooled funds, such as a mutual fund, that allocates all investable cash solely to stocks. This strategy is common among mutual funds that allocate all investable cash to stocks, avoiding higher-risk instruments such as derivatives or strategies like short selling.

Pros

• Total control over business decisions: Retaining 100% business ownership gives you complete autonomy to steer the company in the direction you want without needing approval from shareholders or partners.
• Keeping all profits: With full ownership, all profits remain with you, and there is no need to share financial gains with shareholders.
• Simplified business operations: Operating as the sole owner simplifies decision-making, as you can avoid the complexities of multiple stakeholders and streamline operations.

Cons

• Restricted access to capital and slower business growth: Sole ownership can limit your access to significant capital investments, making it challenging to scale your business, invest in new opportunities, hire additional staff, or expand operations.
• Bearing all financial and operational risks: As the sole owner, you are responsible for all financial and operational risks, which can be burdensome during economic downturns or business instability.
• Little protection against inflation and deflation: Equities generally perform poorly when the economy is affected by inflation or deflation.
• Increased vulnerability to market risks: While a well-diversified portfolio of stocks can protect against individual company or sector risks, market risks can still significantly impact the equities asset class.
• Human psychology: The 100% equity strategy ignores human psychology, which often leads people to sell stocks at the worst time, i.e., when they are down sharply.

In conclusion, while a 100% equity investment strategy offers the benefits of total control and higher profits, it also carries significant risks and vulnerabilities that investors should carefully consider.

The rise of corporate raiders, hostile takeovers and greenmail

The 1980s saw a surge in corporate raiding, hostile takeovers, and greenmail practices, which were often facilitated by investment banking firm Drexel Burnham Lambert, led by Michael Milken. This era witnessed a shift towards shareholder capitalism, with investors prioritising short-term profits and shareholder value. This mindset, along with the emergence of conglomerates, created an environment conducive to hostile takeovers.

Corporate raiders employed various tactics, including leveraged buyouts (LBOs), where they acquired companies using significant debt, often secured by the target company's assets. This allowed raiders to gain control of undervalued companies with attractive underlying assets. Notable corporate raiders of this era included Carl Icahn, Nelson Peltz, and Ronald Perelman. Icahn gained a reputation as a ruthless corporate raider after his hostile takeover of TWA in 1985, which resulted in asset stripping to repay the debt incurred during the acquisition.

The threat of corporate raids led to the emergence of "greenmail," where raiders or other parties would acquire a large stake in a company and receive an incentive payment from the company to avoid pursuing a hostile takeover. This practice benefited existing managers but provided no value to shareholders.

In response to the threat of hostile takeovers and corporate raids, management teams of large publicly traded corporations adopted defensive measures such as poison pills, golden parachutes, and increasing debt levels. These measures were designed to deter potential raiders and protect the interests of the company and its shareholders.

The rise of corporate raiders and hostile takeovers in the 1980s had a significant impact on the business landscape, leading to changes in corporate governance and a focus on shareholder value. The practices and tactics employed during this era continue to shape the world of corporate finance, influencing both regulatory frameworks and ethical considerations in the years that followed.

The 80s: a good time to invest in tech stocks

The 1980s were a turbulent time for financial markets, with two recessions, high inflation and unemployment, and Black Monday, one of history's worst stock market crashes, in October 1987. Many investors lost everything in the '80s, but those who held on through the crash could have made a fortune.

The 80s were a time of transition for the tech sector, with the switch from mainframes to PCs. This transition saw big tech names like Honeywell and Control Data give way to Intel and Microsoft.

Tech stocks foundered for around five years from 1984 to 1989, with an IPO boom turning to bust, venture capital drying up, and former leaders becoming laggards. However, this was also a time when many of today's most successful companies had stock prices of just a few dollars or less.

For example, Badger Meter (BMI) had the highest return in the 1980s by a US stock in the Information Technology Sector, returning 4,027.5%. Other top-performing tech stocks of the 1980s included Amtech Systems (ASYS), Adobe Systems (ADBE), Automatic Data Processing (ADP), and Motorola Solutions (MSI).

The 80s financial markets were not as developed or interconnected as they are today. Investors could buy fewer securities, and financial news was less abundant, with newspapers and company reports being the primary sources of information. The limitations of the time created real barriers to entry and required significant resources.

Despite the challenges of the 1980s, investors who were able to hold on through the decline could have reaped significant rewards.

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