Common Stock Theory of Investment
The research demonstrating the superiority of stocks became known as
the “common stock theory of investment.”^15 Smith himself was careful
to not overstate his findings. He wrote:
Over a period of yearsthe principal value of a well-diversified holdingof com-
mon stocks of representativecorporations in essential industries tends to
increase in accordance with the operation of compound interest.... Such
stock holding may be relied upon over a term of yearsto pay an average in-
come return on such increasing values of something more than the aver-
age current rate on commercial paper.^16
Yet Chelcie C. Bosland, a professor of economics at Brown Univer-
sity in the 1930s, claimed that the common stock theory was often mis-
used to justify any investment in stocks no matter what the price.
Bosland stated:
The purchase of common stocks after 1922 was more likely to result in
profit than in loss. Even though this was largely a cyclical up-swing, many
believed that it was a vindication of the theory that common stocks are
good long-term investments. Participation in this profit-making proce-
dure became widespread. The “boom psychology” was everywhere in ev-
idence. No doubt the “common stock theory” gave even to the downright
speculator the feeling that his actions were based upon the solid rock of
scientific finding.^17A RADICAL SHIFT IN SENTIMENT
But the glorious days for common stocks did not last. The crash pushed
the image of stocks as safe and fundamentally sound investments into
the doghouse and with it Smith’s contention that stocks were the best
long-term investments. Lawrence Chamberlain, an author and well-
known investment banker, stated,“Common stocks, as such, are not supe-
rior to bonds as long-term investments, because primarily they are not
investments at all. They are speculations.”^18
The common stock theory of investment was attacked from all an-
gles. In 1934, Benjamin Graham, an investment fund manager, and
82 PART 1 The Verdict of History
(^15) Chelcie C. Bosland, The Common Stock Theory of Investment, Its Development and Significance, New
York: Ronald Press, 1937.
(^16) Smith,Common Stocks as Long-Term Investments, p. 79, emphasis added.
(^17) Bosland,The Common Stock Theory of Investment, p. 4.
(^18) Lawrence Chamberlain and William W. Hay, Investment and Speculations, New York: Henry Holt &
Co., 1931, p. 55, emphasis his.