From the Bimbo cartoon “The Bum Bandit” (1931), Fleischer studio- not mickey mouse!

Jack Welch, Fabulous? Dow outperforms GE from his start

Forrest ChristianGovernance Leave a Comment

Has anyone else noticed that Jack Welch’s impeccably run company has stock worth less than it was 16 years ago? If you had bought stock on May 7, 2000 — one day before the split 3 for 1 — and kept it all, you would now be worth less half of what you paid. (Right now GE is at 7 and change, and was at 52 right before the split.

I’ve been wondering whether or not GE’s spectacular rise didn’t have more to do with GE Capital. (Disclosure: I once worked as a consultant to an IT contractor working at a company that was later merged into GE Capital.) They certainly made a lot of money in the Internet bubble and then in housing.

Take a look at this chart from Yahoo! Finance showing GE from 1981 (Jack’s CEO begins) to today, with annotations of what the increases were. The stock price multiples do not take into account stock splits, and probably should. So it goes.

Let’s then compare that to the Dow Jones Industrial Average (DJI):

Notice the tail on the right? Hard to see but right now the DJI is worth 680% of what is was when Jack started. GE is worth ~600% of its 1981 value.

The Dow has outperformed GE over the start of Jack Welch’s tenure to today.

Sure those numbers could change but let’s face it, meeting DJI isn’t Greatest Manager of the 20th Century.

If Elliott Jaques is correct, then Jack Welch isn’t really responsible for policies changing GE until the early 1990s. Certainly Welch is responsible for the runup of GE in the late 1990s just as he is responsible for not understanding risk and the tanking of the GE price in this decade.

Wikipedia notes criticisms and, importantly, that 40% of GE’s profits were coming from GE Capital:

Some industry analysts claim that Welch is given too much credit for GE’s success. They contend that individual managers are largely responsible for the company’s success.[4] For example GE Capital, under Gary C. Wendt, contributed nearly 40% of the company’s total earnings while NBC and Robert C. Wright worked to turn the network around, leading to five years of double-digit earnings growth. It is also held that Welch did not rescue GE from great losses as the company had 16% annual earnings growth during the tenure of his predecessor, Reginald H. Jones. Critics also say that “the pressure Welch imposes leads some employees to cut corners, possibly contributing to some of the defense-contracting scandals that have plagued GE, or to the humiliating Kidder, Peabody & Co. bond-trading scheme of the early 1990s that generated bogus profits”.[2]

Of course, some could also say that when he left, there was no one who could fill his shoes because he was so brilliant. Which would illustrate that he was not a good leader of a company because he did not create succession and management plans that worked well enough if he died. (Very, very important: if I die, the company should still continue.)

I’m making the call that according to these numbers, Jack Welch wasn’t that great. Lucky, yes. Great, no. Right now, Warren Buffet’s company that finances extremely low-income buyers of manufactured housing has a default rate of 3.5% or so, up from 2.8 before the mortgage “crisis”. Buffet may also be “not that great” but he does have a better understanding of risk.

Both of them seem to have missed the Black Swan book. (More on that later.)

From the Bimbo cartoon “The Bum Bandit” (1931), Fleischer studio- not the famous mouse!

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