Common Stocks As Long Term Investments

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.

Common Stocks as Long Term Investments (1924) by Edgar Lawrence Smith proved for the first time that stocks outperformed bonds in long-term stock market investments. Before Smith's work, the prevailing wisdom regarding investing stated that bonds were a safer investment. Conservative investors would allocate a large portion of their investments to bonds, relying on the annual rate of interest as a sure bet. Stocks, on the other hand, were viewed as risky speculations, due to the market's volatility. Smith himself held that view, before beginning the research for this book. As he told his Harvard class at their 50th reunion, "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." Edgar Lawrence Smith (b. 1882, d. 1971) was a Harvard-educated economist and investment manager. While working as an advisor to the brokerage firm Low, Dixon & Company, he began to look at the relative performance of bonds versus stocks. Through 11 case studies completed for Common Stocks as Long Term Investments, Smith proved that the prevailing wisdom in favor of bonds over stocks was wrong. In 10 out of the 11 cases, a $10,000 investment in arbitrarily chosen stocks would have outperformed an equal investment in high-grade bonds. And in the 11th case, the lower return was impacted by two market panics and inflation (in the years 1866-1885). How does Smith account for the better performance of stocks over time? To begin, stocks often grow with or even in excess of inflation. Returns on bonds, on the other hand, lose purchasing power over time due to inflation. In addition, the general march of progress through population growth and improved standards of living over time leads to greater demand for products and services. The trajectory of progress often leads to growth that outpaces inflation, making stocks a better long-term investment. Smith's work supports a long-term investment strategy. He shows that over 15 years, the value of stocks sees a loss only 1.1% of the time. While they may be subject to short-term fluctuations, their long-term reliability makes them a smart investment as part of a balanced portfolio. Smith does not advocate against bonds. He merely suggests that investors give heavier weight to stocks than bonds, rather than the other way around. Famous economists Irving Fisher and John Maynard Keynes praised the book. Keynes invited Smith to join the Royal Economic Society, and Fisher directly stated that he had more confidence in common stocks due to Smith's work. Unfortunately, Smith, Irving, Keynes, and the rest of the world were about to discover that while stocks were generally the best long-term investments, there could still be ruinous market fluctuations. The Wall Street Crash of 1929 was the ruin of many individuals and businesses. Keynes' fortune was nearly wiped out. Irving lost over $100M in today's dollars. And Smith himself had to sell his own mutual fund firm, Investment Managers Company. In the subsequent years, Smith focused instead on research and writing, rather than working directly in the financial industry. But the long-term reliability of common stocks still holds. Even accounting for large market downturns, a diversified investment portfolio weighted to common stocks is still the clear financial winner when we look at an investment strategy over decades. While Smith suffered from the Crash of '29 (along with the rest of the country, including great economists), his ideas have been backed up since he first published, by Alfred Cowles in 1939 and again by Rex Sinquefield in 1976.

Common Stocks as Long Term Investments (1924) by Edgar Lawrence Smith proved for the first time that stocks outperformed bonds in long-term stock market investments. Before Smith's work, the prevailing wisdom regarding investing stated that bonds were a safer investment. Conservative investors would allocate a large portion of their investments to bonds, relying on the annual rate of interest as a sure bet. Stocks, on the other hand, were viewed as risky speculations, due to the market's volatility. Smith himself held that view, before beginning the research for this book. As he told his Harvard class at their 50th reunion, "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." Edgar Lawrence Smith (b. 1882, d. 1971) was a Harvard-educated economist and investment manager. While working as an advisor to the brokerage firm Low, Dixon & Company, he began to look at the relative performance of bonds versus stocks. Through 11 case studies completed for Common Stocks as Long Term Investments, Smith proved that the prevailing wisdom in favor of bonds over stocks was wrong. In 10 out of the 11 cases, a $10,000 investment in arbitrarily chosen stocks would have outperformed an equal investment in high-grade bonds. And in the 11th case, the lower return was impacted by two market panics and inflation (in the years 1866-1885). How does Smith account for the better performance of stocks over time? To begin, stocks often grow with or even in excess of inflation. Returns on bonds, on the other hand, lose purchasing power over time due to inflation. In addition, the general march of progress through population growth and improved standards of living over time leads to greater demand for products and services. The trajectory of progress often leads to growth that outpaces inflation, making stocks a better long-term investment. Smith's work supports a long-term investment strategy. He shows that over 15 years, the value of stocks sees a loss only 1.1% of the time. While they may be subject to short-term fluctuations, their long-term reliability makes them a smart investment as part of a balanced portfolio. Smith does not advocate against bonds. He merely suggests that investors give heavier weight to stocks than bonds, rather than the other way around. Famous economists Irving Fisher and John Maynard Keynes praised the book. Keynes invited Smith to join the Royal Economic Society, and Fisher directly stated that he had more confidence in common stocks due to Smith's work. Unfortunately, Smith, Irving, Keynes, and the rest of the world were about to discover that while stocks were generally the best long-term investments, there could still be ruinous market fluctuations. The Wall Street Crash of 1929 was the ruin of many individuals and businesses. Keynes' fortune was nearly wiped out. Irving lost over $100M in today's dollars. And Smith himself had to sell his own mutual fund firm, Investment Managers Company. In the subsequent years, Smith focused instead on research and writing, rather than working directly in the financial industry. But the long-term reliability of common stocks still holds. Even accounting for large market downturns, a diversified investment portfolio weighted to common stocks is still the clear financial winner when we look at an investment strategy over decades. While Smith suffered from the Crash of '29 (along with the rest of the country, including great economists), his ideas have been backed up since he first published, by Alfred Cowles in 1939 and again by Rex Sinquefield in 1976.

Deep insight and candid discussion from one of Wall Street's best investors Common Stocks and Common Sense provides detailed insight into common stock investing, using a case-study approach based on real-world investments. Author Edgar Wachenheim is the 28-year CEO of Greenhaven Associates, boasting an average annual portfolio comparable to Warren Buffet's. In this book, he shares his knowledge and experiences by providing detailed analyses of actual investments made by himself and other investors. The discussion covers the entire investment process, including the softer, human side, with candid insight into the joys and frustrations, intensities and pressures, and risks and uncertainties. The unique emphasis on behavioral economics and real-world cases set this book apart from the herd—but it's Wachenheim himself and his deeply-examined perspective that elevates the book beyond a mere investing guide. Between 1990 and 2014, a typical portfolio managed by Wachenheim enjoyed an average annual return in excess of 18%, achieved using relatively conservative stocks and no financial leverage. As a proponent of evidence and example, his analysis of real cases serve as a valuable education for anyone looking to improve their own investment practices. Understand investment through the lens of a Wall Street leader Dig into the details of real-world common stock investing Learn how to invest creatively and minimize risk Go beyond theory to study strategy on a case-by-case basis Investment principles and strategies are easy to find—entire libraries have been written about theories and methods and what 'should' happen. But this book goes beyond the typical guide to show you how these ideas are applied in the real world—and what actually happened. Investors seeking real insight, real expertise, and a proven track record will find Common Stocks and Common Sense a uniquely useful resource.