Publications

Common Stocks as Long Term Investments

Type
Link
Cost
Paid
Published
1924
Updated
2012

With a great influence on the 1920’s stock market boom, he discovered that stocks had a hidden advantage over bonds in the long run. Its success enabled Smith to launch a mutual fund firm, "Investment Managers Company." Common Stocks as Long-term Investments is a collection of failed studies to prove the theory that to protect purchasing power, bonds were better investments than stocks during deflation, while stocks were better than bonds during inflation. It states that the value of bonds may change due to changes in the credit quality of the company or changes in demand in relation to the maturity/yield of the bond.

Some of the key notes discussed include:

  • Stocks represent ownership in a business, with the value and income fluctuating with the earning power of the business,

  • Bonds represent a promise to pay an amount of money in the future and an annual set rate of interest on the amount for the life of the bond.

  • The value of bonds may change due to changes in the credit quality of the company or changes in demand in relation to the maturity/yield of the bond.

  • The selection of stocks for each test was based on 1) constancy of income and 2) safety of principal.

  • The conclusion from the tests is that stocks benefit from an underlying factor that offers an advantage over bonds in the long run.

  • The risks of bonds: depreciation of the dollar, increase in interest rates, and worsening credit position of the company.


The Principal Functions of Investment Management:

  1. Establish a sound investment plan specific to the investor.

  2. Determine what proportion of funds belong in stocks and bonds based on current conditions.

  3.  Watch for changing conditions and adjust the stock/bond proportions as needed.

  4. Study various industries and select the most promising industries.

  5. Study the management and fundamentals of leading companies in the chosen industries.

  6. Watch for changing conditions in leading companies/industries and make changes as needed based on sound analysis.

  7. Diversification is fundamental, but within limits to not dilute the quality of management.