Unrelated Diversification as Cycle Insurance

“non-textile acquisition. Our basic concept of unrelated diversifica- tion at that time was to accomplish these objectives: 1. Eliminate the effect of business cycles on the parent company by having many divisions in unrelated fields. 2. Eliminate any Justice Department monopoly problems by avoiding acquisitions in related businesses. 3. Eliminate single industry's temptation to overexpand at the wrong time. Finance the growth of only those divisions which show the greatest return on capital at risk. Rather than overex- pand any division, use surplus funds to buy another business. 4. Confine acquisitions to leading companies in relatively small in- dustries. Never buy a small company in a $5 to $10 billion indus- try. One of my particular "No-No's"—never buy a company that manufactures a product with an electric wire attached—no radios, televisions, washing machines, driers, electric stoves, or refrigerators. 5. Having made a complete analysis of all major manufacturing companies' return on net worth and found that only about twenty-five in 1952 earned over 20 percent on common stock”

“There is one serious defect in our free enterprise system and we must correct it. We must find a way to eliminate the disastrous cycles that occur in business, which create our recessions and throw millions of productive workers out of jobs. Since World War I, we have had recessions in 1920, 1932, 1938, 1946, 1949, 1954, 1958, 1 96 1, 1970, and one of the worst in 1975; and will probably have one in 1979 or 1980. We can no longer justify losing forever the output of services and products that 8 million unemployed could have contributed to the GNP during the last recession. In the future, the private sector must not overexpand its pro- ductive facilities or overcommit for raw materials during every up- swing in business the way they have in the past, for to do so will only accentuate our business cycles and create recessions and unemployment. The free enterprise system will not survive if 8”

“”