John Sherman was a prominent 19th-century American statesman whose name is forever linked with the foundational piece of U.S. antitrust law: the Sherman Antitrust Act of 1890. While not an investor himself, Sherman's work profoundly shaped the landscape of modern capitalism and competition, creating the rules of the game that every value investor must understand. He recognized the danger that unchecked corporate power posed to a free market, where a few massive industrial combinations, known as 'trusts', could dominate entire industries, stifle innovation, and exploit consumers. The legislation bearing his name was a radical attempt to preserve competition as the engine of the economy. For investors, Sherman's legacy is a double-edged sword: it prevents the formation of all-powerful monopolies that could deliver seemingly endless profits, but it also ensures a healthier, more dynamic marketplace where well-run businesses can thrive on a level playing field. Understanding his principles is key to analyzing industry structures and identifying regulatory risk in today's corporate giants.
Long before he became a business buzzword, John Sherman (1823-1900) was a powerhouse of American politics. Serving as a U.S. Representative, a Senator from Ohio, Secretary of the Treasury, and Secretary of State, he had a front-row seat to the explosive industrial growth of the Gilded Age. He watched with growing concern as a new type of corporate entity, the trust, began to consolidate immense power. Companies like John D. Rockefeller's Standard Oil effectively became giant monopolies, controlling everything from production to pricing. Sherman wasn't anti-business; he was pro-competition. He argued that these trusts destroyed the very essence of a free economy. In his own words, they were a “kingly prerogative, inconsistent with our form of government.” He believed that without fair competition, both individual liberty and economic prosperity were at risk. This conviction drove him to champion the Sherman Antitrust Act, using his political influence to forge the first and most important law to challenge the concentration of corporate power in America.
The Sherman Act is deceptively simple but incredibly powerful. It laid the groundwork for over a century of U.S. competition law and has been the model for similar laws worldwide. Its goal was to dismantle and prevent arrangements that restrained trade or created illegal monopolies.
In the late 1800s, a 'trust' wasn't about inheritance; it was a colossal business combination. Shareholders of many different companies in a single industry would transfer their shares to a board of trustees. In return, they got a certificate entitling them to a share of the combined entity's profits. This structure allowed a small group of trustees to control an entire industry, leading to:
The Sherman Act outlawed these practices through two key provisions:
This legislation gave the U.S. government the authority to sue trusts and break them up into smaller, competing companies. The most famous early cases resulted in the dissolution of Standard Oil and the American Tobacco Company.
While the Gilded Age seems distant, the principles John Sherman championed are more relevant than ever for today's value investor. His work directly influences how we analyze a company's competitive standing and its long-term viability.
Value investors, following the wisdom of Warren Buffett, seek companies with a wide and durable economic moat—a sustainable competitive advantage that protects profits from competitors. This could be a powerful brand, low-cost production, or network effects. However, the legacy of the Sherman Act creates a critical boundary. There is a fine line between a legal, dominant market position (a wide moat) and an illegal, predatory monopoly. A company like Coca-Cola has a fantastic moat due to its brand, but it cannot legally conspire with Pepsi to set soda prices. Microsoft has a powerful moat in operating systems, but as it learned in the 1990s, it cannot use that power to illegally crush web browser competition. Sherman's law ensures that even a company with a great moat must still compete fairly. For an investor, this means you must analyze not just the strength of a moat, but also its legality.
Sherman's ghost haunts the boardrooms of today's largest corporations, especially in the tech and pharmaceutical sectors. When a company becomes exceedingly dominant, it invariably attracts the attention of regulators armed with the very principles Sherman established. As an investor, you must constantly assess a company's regulatory risk:
Answering these questions is vital. A sudden antitrust lawsuit can lead to massive fines, forced changes to business models, or even a breakup of the company—all of which can be catastrophic for an investment. By understanding John Sherman's contribution, you are better equipped to look beyond the balance sheet and see the powerful, invisible forces that shape the market and determine the long-term fate of your investments.