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    Common Stocks As Long Term Investments
    Common Stocks As Long Term Investments
    Common Stocks As Long Term Investments
    Ebook171 pages1 hour

    Common Stocks As Long Term Investments

    By Edgar Lawrence Smith

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    Edgar Lawrence Smith, (1882-1971) was an economist, investment manager and author of the influential book “Common Stocks as Long Term Investments”, which promoted the then-surprising idea that stocks excel bonds in long-term yield. . He worked in banking and other financial endeavors in the years after college, then signed on in 1922 as an adviser to the brokerage firm Low, Dixon & Company. While there, he later recounted in his Harvard class’s 50th reunion yearbook, “I tried to write a pamphlet on why bonds were the best form of long term investment. But supporting evidence for this thesis could not be found.” This discovery led to the 1924 publication of “Common Stocks as Long Term Investments.” The book was widely reviewed and praised, and became a key intellectual support for the 1920s stock market boom. Its success enabled Smith to launch a mutual fund firm, “Investment Managers Company.” It also garnered him an invitation from the economist John Maynard Keynes, who had favorably reviewed the book in “The Nation”, to join the Royal Economic Society. The Wall Street Crash of 1929 brought a turn in Smith’s fortunes.—Print Ed.
    LanguageEnglish
    PublisherGolden Springs Publishing
    Release dateNov 6, 2015
    ISBN9781786256294
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      Book preview

      Common Stocks As Long Term Investments - Edgar Lawrence Smith

      This edition is published by PICKLE PARTNERS PUBLISHING—www.picklepartnerspublishing.com

      To join our mailing list for new titles or for issues with our books – picklepublishing@gmail.com

      Or on Facebook

      Text originally published in 1924 under the same title.

      © Pickle Partners Publishing 2015, all rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted by any means, electrical, mechanical or otherwise without the written permission of the copyright holder.

      Publisher’s Note

      Although in most cases we have retained the Author’s original spelling and grammar to authentically reproduce the work of the Author and the original intent of such material, some additional notes and clarifications have been added for the modern reader’s benefit.

      We have also made every effort to include all maps and illustrations of the original edition the limitations of formatting do not allow of including larger maps, we will upload as many of these maps as possible.

      COMMON STOCKS AS LONG TERM INVESTMENTS

      BY

      EDGAR LAWRENCE SMITH

      TABLE OF CONTENTS

      Contents

      TABLE OF CONTENTS 4

      INTRODUCTION 5

      ACKNOWLEDGEMENTS 6

      CHAPTER I—BONDS AND THE DOLLAR 8

      THE DOLLAR 11

      OTHER MEASURES ARE FIXED 11

      IMPORTANT TO INVESTORS 11

      BANKS AND INSURANCE COMPANIES 12

      CHAPTER II—BONDS AND COMMON STOCKS 14

      NATURE OF SECURITY 14

      SAFE BONDS IMPLY SAFE STOCKS 15

      WHERE DOES THIS REASONING LEAD US? 15

      CHAPTER III—COMPARISON BETWEEN COMMON STOCKS AND BONDS, 1901-1922 17

      METHOD OF SELECTION 17

      RESEARCH 17

      IMPORTANCE OF TESTS 17

      TEST NO. 1―1901-1922 18

      TEST NO. 2―1901-1922 22

      TEST NO. 3―1901-1922 24

      THE FLUCTUATING DOLLAR APPLIED TO TEST NO. 3―1901-1922 26

      CHAPTER IV—COMPARISON BETWEEN COMMON STOCKS AND BONDS, 1866-1899 29

      APPRECIATING DOLLARS 29

      TEST No. 4―1880-1899 30

      THE FLUCTUATING DOLLAR APPLIED TO TEST NO. 4―1880-1899 33

      TEST No. 5―1866-1885 33

      1866 SIMILAR TO 1923 33

      CHAPTER V—FINANCIAL CONDITIONS, 1866-1885 38

      STOCK PRICES 38

      THE DOLLAR 38

      COMMERCIAL PAPER 39

      PANIC OF 1873 39

      NEAR PANIC OF 1884 40

      CHAPTER VI—ADDITIONAL COMPARISONS BETWEEN COMMON STOCKS AND BONDS 41

      TEST NO. 6, BOSTON―1866-1885 41

      TEST NO. 7—1892-1911 43

      TEST NO. 8―1906-1922 44

      THE LARGEST COMPANIES 45

      CHAPTER VII—RAILROAD STOCKS, 1901-1922 49

      TEST NO. 9―1901-1922 49

      TEST NO. 10―1901-1922 51

      TEST NO. 11―1901-1922 52

      CHAPTER VIII—A NEW STOCK MARKET CHART, 1837-1923 55

      MANY CHARTS ARE MISLEADING 55

      COMMON STOCKS, 1837-1923 58

      CONSTRUCTION OF CHART No. 6 60

      CHAPTER IX—LAW OF INCREASING COMMON STOCK VALUES AND INCOME RETURN 62

      THE FACTOR FAVORING COMMON STOCKS 62

      LAW OF INCREASING STOCK VALUES AND INCOME RETURN 63

      CHAPTER X—TIME HAZARD IN THE PURCHASE OF COMMON STOCKS 65

      CHAPTER XI—A FEW GENERALITIES 67

      THE HUMAN FACTOR 67

      DIFFICULT TO HOLD HIGH YIELD BONDS 68

      GERMANY 68

      STRONG FORCES AGAINST DEFLATION 69

      COMMON STOCKS TO-DAY 69

      INCREASE IN NUMBER OF STOCKHOLDERS 70

      INCREASING RESPONSIBILITY 70

      ECONOMICS, A GUIDE TO INVESTMENT 70

      CHAPTER XII—FLUCTUATIONS IN BOND VALUES 71

      BONDS 1902 TO 1920 71

      BONDS 1902-1913 75

      PROFITS IN BONDS 1866-1885 76

      CHAPTER XIII—SUPPLEMENTARY TESTS OF COMMON STOCKS 78

      REINVESTMENT OF SURPLUS INCOME 78

      REINVESTMENT OF SURPLUS INCOME FROM STOCKS 78

      SUPPLEMENTARY TEST No. 3—1091-1922 79

      SUPPLEMENTARY TEST No. 4—1880-1899 82

      SUPPLEMENTARY TEST No. 5—1866-1885 84

      CHAPTER XIV—INVESTMENT MANAGEMENT 87

      APPENDIX I—RETURN FROM BONDS, 1866-1885 90

      INCOME FROM BONDS 91

      APPENDIX II—RETURN FROM BONDS, 1866-1885 (SECOND GROUP) 92

      APPENDIX III—RETURN FROM BONDS, 1880-1899 95

      REQUEST FROM THE PUBLISHER 98

      INTRODUCTION

      These studies are the record of a failure—the failure of facts to sustain a preconceived theory. This preconceived theory might be stated as follows:

      While a diversity of common stocks has, without doubt, proved a more profitable investment than high-grade bonds in the period from 1897 to 1923, during which dollars were depreciating, yet with the upturn in the dollar, bonds may be relied upon to show better results than common stocks, as they did in the period from the close of the Civil War to 1896, during which the dollar was constantly increasing in purchasing power.

      Based upon a general understanding of the results which logically follow changes in the purchasing power of the dollar, such a theory should have been demonstrable, and the tests of the comparative investment value of bonds and of common stocks covering the period from 1866 to the end of the century, which are outlined in the following pages, were undertaken in its support. But they failed, because, quite unexpectedly, they demonstrated that the premise upon which the preconceived theory rested, namely, that high-grade bonds had proved to be better investments during the period of appreciating dollars, could not be clearly sustained by any evidence available.

      The preconceived theory was, therefore, abandoned.

      The facts assembled, however, seemed worthy of further investigation. If they would not prove what we had hoped to have them prove, it seemed desirable to turn them loose and to follow them to whatever end they might lead.

      Fortunately they seem to have led to the isolation of certain characteristics inherent in a diversification of representative common stocks which may be of value to those investors who have given small heed to the long-term investment attributes of this class of security, and to others, who, while drawn to common stocks, have felt that their leaning in that direction should be repressed as lacking in conservatism.

      Bonds, as a class, have certain recognized attributes. A diversification of common stocks has its own attributes, which differ from those of bonds. Each class of investment has its useful purpose and its proper place in any investment plan. A clearer understanding of their differing attributes may help to determine the relative proportion of each of these two classes of securities which will best serve the investment requirements and purposes of each investor.

      ACKNOWLEDGEMENTS

      While the account of these studies is brief, their pursuit has been long, and the author wishes to acknowledge the sympathetic co-operation through discussion which he has received from many sources, notably from members of the firm of Wood, Low & Company in whose offices they were carried out, and from Theodore T. Scudder and F. Haven Clark, of the firm of Scudder, Stevens & Clark, of Boston.

      Their co-operation has not stopped with the completion of this volume, but has continued in the formulation of a practical plan under which certain fundamental principles of investment management disclosed by these studies may be brought, under responsible auspices, to the service of investors.

      The tables were compiled largely by Mr. W. C. Beecken.

      THE FLUCTUATING DOLLAR

      CHART No. 1.—This chart is derived from U. S. Department of Labor index numbers of Wholesale Commodity Prices, using their old series, corrected, from 1860 to 1900 and the new series from 1900 on. The transfer from old to new series was made in 1900 because the transition in that year showed the smallest variation. See U. S. Dept. of Labor Bulletin No. 149, and Monthly Labor Review, Vol. XV, No. 1, July, 1922.

      Variations in the dollar, as a measure of real value, have an important bearing upon the advantageous investment of individual resources. A series of studies is here presented, based on a comparison of high grade bonds and of common stocks over different periods extending from the close of the Civil War up to 1922. The cumulative evidence of these studies favors diversified common stocks, even in periods of appreciating currency, such as from 1866 to 1897. Since 1897, with currency depreciating, the diversified common stocks selected are shown to have been by far the superior form of long term investment.

      CHAPTER I—BONDS AND THE DOLLAR

      WHEN the topic of conservative investment is under discussion, high grade bonds hold an

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