Floyd Odlum was an opportunist. He took advantage of a bad situation to become one of the richest people in America shortly after the crash of 1929.
Odlum saw an opportunity amid the rubble of investment trusts. Investment trusts were like the first iteration of today’s closed-end mutual funds. They were first introduced in the U.S. around 1926, in the form of trading corporations, with the sole purpose of investing pooled capital into stocks.
And like many new investment vehicles, it didn’t take long for investment trusts to become wildly popular with investors. By 1929, roughly 640 trusts existed with about $4 billion in assets. In ’29, trusts accounted for one-third of the $6 billion in new offerings — about $1 billion of that was estimated just in August and September alone.
Yet, those numbers don’t really describe what was going on. One of the worst examples of investment trust excess was highlighted by John Kenneth Galbraith.
Goldman Sachs launched the Goldman Sachs Trading Corporation in 1928, with the funds from the offering going toward speculation in stocks. Goldman Sachs kept controlling interest, selling the rest of the shares to the public. Then the Goldman Sachs Trading Corporation repeated the process with the launch of the Shenandoah Corporation. The Shenandoah Corporation tried it again with the creation of the Blue Ridge Corporation (the scheme gave investors the option to buy Blue Ridge shares via cash or trade blue-chip stocks — at inflated prices — for Blue Ridge shares).
Each new trust helped push stock prices higher. And as the speculation rose, the shares of the child, inflated the shares of the parent…and the bubble ensued.
In the aftermath, trust shares would go from selling at ridiculous premiums to pennies on the dollar. Floyd Odlum was ready with pennies in hand.
Odlum was a lawyer turned industrialist. He started by investing his and his friend’s money. That money multiplied quickly in the bull market of the 1920s and would later become the Atlas Corporation in 1928.
Atlas survived the ’29 crash sitting on a pile of cash:
Then the crash came — investment trust stocks that had mounted market-wise to way above their asset value or capitalized earnings power began falling. They were not in investors’ hands. For the most part they were so-called green goods. They did not stop falling when they reached asset value. They kept on going down until the management which had been at a 100 percent premium was at a discount, sometimes a very heavy one as measured by difference between asset values and market values. This presented an opportunity to those willing or able to see it and take advantage of it to buy securities below their current market values by buying indirectly into the portfolios of investment trusts through purchase of such trusts’ outstanding stocks. By buying control one could take over management and readjust the portfolio to suit one’s ideas or to stop falling values by conversion to cash. This is how Atlas Corporation built a trust up from $15,000,000 to $125,000,000 during the depression, and how we increased the asset value of its common stock approximately 100 percent during a period of falling prices…
Between 1930 and 1933, Atlas bought 22 investment trusts for much less than the market value of their stock holdings, including Blue Ridge, Shenandoah, and Goldman Sachs Trading Corporation. By 1933, Atlas was the largest investment trust in the country.
Atlas would go on to take a controlling interest in a number of “special situations.” These were mostly companies Odlum took an activist role in to replace management and turn around. From 1930 to 1960, Atlas shareholders saw a 25% annual return including dividends (a 15% annual return if you count from the 1929 peak to 1960).
Of course, none of this would have been possible if not for Odlum’s genius and courage to buy a hated asset, at a deeply discounted price, during the depths of the depression.
This post was originally published on February 5, 2020.