volume over 1 million shares in 1936. By regularly purchasing these 92
stocks without any regard to the stock market cycle (a strategy called dol-
lar cost averaging), they found that the returns over the next 14 years, at
12.2 percent per year, far exceeded those in fixed-income investments.
Twelve years later they repeated the study, using the same stocks they
had used in their previous study. This time the returns were even higher
despite the fact that they made no adjustment for any of the new firms
or new industries that had surfaced in the interim. They wrote:
If a portfolio of common stocks selected by such obviously foolish meth-
ods as were employed in this study will show an annual compound rate
of return as high as 14.2 percent, then a small investor with limited knowl-
edge of market conditions can place his savings in a diversified list of
common stocks with some assurance that, given time, his holding will
provide him with safety of principal and an adequate annual yield.^21
Many dismissed the Eiteman and Smith study because it did not in-
clude the Great Crash of 1929 to 1932. But in 1964, two professors from
the University of Chicago, Lawrence Fisher and James H. Lorie, exam-
ined stock returns through the stock crash of 1929, the Great Depression,
and World War II.^22 Fisher and Lorie concluded that stocks offered sig-
nificantly higher returns (which they reported at 9.0 percent per year)
than any other investment media during the entire 35-year period, 1926
through 1960. They even factored taxes and transaction costs into their
return calculations and concluded:
It will perhaps be surprising to many that the returns have consistently been
so high.... The fact that many persons choose investments with a substan-
tially lower average rate of return than that available on common stocks
suggests the essentially conservative nature of those investors and the ex-
tent of their concern about the risk of loss inherent in common stocks.^23
Ten years later, Roger Ibbotson and Rex Sinquefield published an
even more extensive review of returns in an article entitled “Stocks,
Bonds, Bills, and Inflation: Year-by-Year Historical Returns (1926–74).”^24
They acknowledged their indebtedness to the Lorie and Fisher study
and confirmed the superiority of stocks as long-term investments. Their
summary statistics, which are published annually in yearbooks, are fre-
84 PART 1 The Verdict of History
(^21) Wilford J. Eiteman and Frank P. Smith, Common Stock Values and Yields, Ann Arbor: University of
Michigan Press, 1962, p. 40.
(^22) “Rates of Return on Investment in Common Stocks,” Journal of Business, vol. 37 (January 1964), pp.
1–21.
(^23) Ibid., p. 20.
(^24) Journal of Business, vol. 49 (January 1976), pp. 11–43.