But one should hesitate to render too harsh a judgment on Fisher’s
analysis. By the end of 1929, stock prices had recovered nearly 50 percent
of their losses, and they would have likely continued upward had it not
been for the disastrous performance of the Federal Reserve, an institu-
tion into which Fisher and many investors put their faith.
As the central bank stood by when the financial system collapsed
around it, the most vicious bear market in history took hold. The 1930s
would leave an indelible mark on the psyches of all investors. As hap-
pened so often throughout history, the data that confirmed the long-
term superiority of stocks and served as the rationale for the market
advance were dismissed as investors dumped stocks regardless of their
intrinsic value. Public and professional opinions about stocks are as
volatile as the markets themselves.EARLY VIEWS OF STOCK INVESTING
Throughout the nineteenth century, stocks were deemed the province of
speculators and insiders but certainly not conservative investors. It was
not until the early twentieth century that researchers came to realize that
stocks, as a class, might be suitable investments under certain economic
conditions for investors outside those traditional channels. In the early
1920s, Irving Fisher maintained that stocks would indeed be superior to
bonds during inflationary times although common shares would likely
underperform bonds during periods of declining prices.^6 This view be-
came the conventional wisdom of the early twentieth century.
Edgar Lawrence Smith, a financial analyst and investment manager
of the 1920s, exploded this popular conception. Smith was the first to
demonstrate that accumulations in a diversified portfolio of common
stocks outperformed bonds not only when commodity prices were ris-
ing but also when prices were falling. Smith published his studies in
1925 in a book entitled Common Stocks as Long-Term Investments. In the in-
troduction he stated:
These studies are a record of a failure—the failure of facts to sustain a pre-
conceived theory,... [the theory being] that high-grade bonds had proved
to be better investments during periods of [falling commodity prices].^7
By examining stock returns back to the Civil War, Smith found that
not only did stocks beat bonds whether prices were rising or falling but
there was also a very small chance that you would have to wait a longCHAPTER 6 The Investment View of Stocks 79
(^6) Irving Fisher, How to Invest When Prices Are Rising, Scranton, Pa.: G. Lynn Sumner & Co., 1912.
(^7) Edgar L. Smith, Common Stocks as Long-Term Investments, New York: Macmillan, 1925, p. v.