Daily Speculations
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Daily Speculations |
01/06/06
Stefan Jovanovich on the Morgan Fortune
The foundation of the Morgan fortune was the hotel business. J.P. Morgan Sr.'s grandfather, Joseph, bought the Exchange Coffee House in Hartford with money gained from selling his share of the family farm. He later traded the Exchange Tavern for the City Hotel. The cash flow from the hotel was invested in common stock in Aetna Insurance and the Hartford & New Haven Railroad. Operating a profitable hotel requires the skills of a crocodile. Most of the profits come from the relatively brief periods when the hotel owner (read: trader) can predict that all the rooms will soon be booked. Relatively steady if smaller profits come from being able to assess what a walk-in customer's price point will be. During the slow periods the ability to live on a near starvation diet is the difference between success and extinction. None of the Morgan biographies pays much attention to the nature of Joseph Morgan's business and its legacies for son Junius and grandson John Pierpont. They tend to look from wide end of the telescope and view the Morgan's success as a matter of "investing" rather than trading. I wish it were so. Those of us who have been successful investors know that the traders are the people who make the money in any business whose profits come from the margins on "turns". The difficulty for investors is in finding a trader whom you can fully trust to simply "buy 'em and sell 'em". The problems come when the traders decide to "invest" -- i.e. make large unhedged bets where the positions cannot be squared. In our radio business that has come several times from having the traders fall in love with a particular type of equipment or be seduced into making a large inventory purchase in advance of any actual orders.
Morgan Senior was a ferocious trader. His father's letters to their partner George Peabody complain about the risks J.P. took. Peabody is more sanguine. He is happy to have the firm's "idle" capital put to use. Most of the time, the "idle" capital is a large sum because the firm's biggest allocation is to "money" itself - i.e. gold. Peabody's only caution for the junior partner is that he not lay on a trade that he cannot as quickly reverse. Since he trusts J.P. Morgan's character, Peabody reassures the elder Morgan that the firm has the right "crocodile" for the trading post. J.P. Morgan never stopped being a crocodile at heart. What his biographers described as investing - the railroad recapitalizations, the formation of U.S. Steel - were, in fact, large trades - using cash to turn bad old paper into good new paper. Sometimes, as with the maritime trust International Mercantile Marine, the trade failed. Only then did the paper become an "investment".
The only investments Morgan actually bought and held were art objects. When he died, he gave those away.