was founded in 1901 and produced roofing materials. In 1980 an owner-
ship stake was bought by Genstar, which was then absorbed by Imasco,
and finally bought by British American Tobacco in 2000. The purchase
was lucky for shareholders because Flintkote went bankrupt in 2004 as a
result of asbestos litigation.
Virginia Carolina Chemicals was bought by Mobil Oil, best per-
former of the largest 20 corporations. Houdaille Industries, founded by
the Frenchman Maurice Houdaille before World War I, was bought by
KKR in 1979; at the time, it was the first leveraged buyout over $100 mil-
lion. Its 17.78 percent average return from 1957 through 1979 was high
enough to give the firm the twentieth position.^7OUTPERFORMANCE OF ORIGINAL S&P 500 FIRMS
One of the most remarkable aspects of these original 500 firms is that the
investor who purchased the original portfolio of 500 stocks and never
bought any of the nearly 1,000 additional firms that have been added by
Standard & Poor’s in the subsequent 50 years would have outperformed
the dynamic updated index. The return of the original 500 firms was
11.72 percent versus 10.83 percent for the updated index. This annual
difference results in a 50 percent higher accumulation in the original
stocks than those updated in the index.
Why did this happen? How could the new companies that fueled
our economic growth and made America the preeminent economy in the
world underperform the older firms? The answer is straightforward. Al-
though the earnings and sales of many of the new firms grew faster than
those of the older firms, the price investors paid for these stocks was
simply too high to generate good returns.
Stocks that qualify for entry into the S&P 500 Index must have suf-
ficient market value to be among the 500 largest firms. But a market
value this high is often reached because of unwarranted optimism on
the part of investors. During the energy crisis of the early 1980s, firms
such as Global Marine and Western Co. were added to the energy sector,
and they subsequently went bankrupt. In fact, 12 of the 13 energy stocks
that were added to the S&P 500 Index during the late 1970s and early
1980s did not subsequently match the performance of either the energy
sector or the S&P 500 Index.CHAPTER 4 The S&P 500 Index 63
(^7) However, one can trace the firm further. In 1987 IDEX was formed to buy back six units of
Houdaille that had been sold to a British firm. IDEX, an acronym for Innovation, Diversification,
and Excellence, has outperformed the S&P 500 Index by 1.5 percent per year, and if that return were
appended to Houdaille, its half-century return would be even higher.