Walking down Wall Street in 1973

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Walking down Wall Street in 1973

Postby nisiprius » Sat Apr 30, 2011 8:27 am

OK, the library was able to get me a copy of the 1973 edition of A Random Walk Down Wall Street, and it is a trip. I'll probably post more as I dig in, but here are the things I've noticed already.

First of all, the word "index" is not in the index. The book, of course, contains this famous passage on p. 226
What we need is a no-load, minimum management-fee mutual fund that simply buys the hundreds of stocks making up the broad stock-market averages and does no trading from security to security in an attempt to catch the winners. Whenever below-average performance on the part of any mutual fund is noticed, fund spokesmen are quick to point out "You can't buy the averages." It's time the public could.
Interestingly, he goes on to suggest that the New York Stock Exchange ought to "sponsor such a fund and run it on a nonprofit basis" and, this is the part I find interesting, "if the New York Stock Exchange (which, incidentally has considered such a fund) is unwilling to do it..." I'd like to know more about that. (Sort of an anticipation of the first ETF, the original SPDR, which was actually created and operated by the AMEX itself).

It appears as if a large portion of the 1973 text survives with little change into the 2007 edition. The chapter "The Madness of Crowds" seems little changed, for example, although a couple of charts and illustrations have been added. A 1973 chapter called "The Clay Pedestal of SuperAnalyst, or How Good is Fundamental Analysis" is very recognizable in 2007 as "How Good is Fundamental Analysis." Maybe 3/4ths of the current chapter is lightly reworked from 1973, then somewhat expanded. There are many familiar turns of phrase and subheadings; "A Fitness Manual for Random Walkers," for example.

A "Menu of the Major Investment Choices Available" is an early version of what became the "Sleeping Scale of Major Investments." What's significant is that the 1973 menu includes only five choices, which are as follows, with his "Expected Rate of Return (1973)"

* Savings account (5 percent)
* Special Savings Certificate (5-3/4-6%)
* Corporate Bonds (good quality public utilities) (7-1/2%)
* Diversified Portfolio of Blue-Chip Common Stocks (Such as Mutual Funds) (9 percent)
* Diversified Portfolio of Relatively Risky Stocks (Such as Aggressive Growth-Oriented Mutual Funds) (11 percent).

Here are some things that stand out. Money market funds didn't exist. The abbreviation CD was apparently not common, and the quoted rates for "savings account" and "special savings certificates" remind me that the Regulation Q cap was still in effect.

Notice that it is still assumed that the investor will quite likely be investing in individual securities; whether or not they existed, bond funds are not mentioned.

I had completely forgotten that the language of Fama-French factors had not been introduced. Stocks as classified as "Blue-chip" versus "Relatively risky," and I don't know how those categories are defined. I've only skimmed the text, but I think that there is virtually no attention given to small-cap stocks--I think "relatively risky" probably means something like the S&P 425 with the Dow stocks left out.

Yes, the S&P 425. That's news to me. I thought it went straight from 90 to 500 (with perhaps a period of overlap).

I don't think there's any mention at all of international stocks. (The index entries for International are for "International Business Machines," "International Flavors & Fragance," etc.)

There's no lifecycle guide to investing, no stock/bond/cash pie charts, nothing about "asset allocation" in the index or the table of contents. It seems to be assumed that the investor will hold bonds and stocks, and somewhere in the text I'll probably be able to winkle out something suggesting what the balance should be, but "choose your asset allocation" is not a core concept.

The only index entry for "retirement" is "retirement funds," and it does not mean mutual funds. Of course, in 1973, the LifeStrategy and Target Retirement funds were far in the future, and the Wellesley Income Fund was only three years old. By "retirement funds" he means professionally operated "pension and retirement funds."

I think the big thing that strikes me is how the whole investing world changed with the 401(k). The concept of investments as a way for individuals to save for retirement was really just not there.

Before the 401(k) and IRA, I'm actually not sure what the typical goal of investments by individuals would have been!

Now this is all the vaguest memory on my part and has more to do with stereotyping than anything else, but my notion circa 1973 might have been that "investments" were ways for people who had extra, unneeded money to grow that wealth. If you were an ordinary worker, the assumption I guess was that when you got too old to work you'd have a pension and/or social security and/or go on working anyway and/or be supported by relatives and/or be poor. The wealthy were, in a sense, saving for their own retirement, but not in any closely-calculated way--no 4% rules--because it was sort of assumed they had plenty to start with, and they'd end up by leaving a substantial legacy. (The plutocrats of the Gilded Age strove to live, not on the interest, but on "the interest on the interest." but I'm sure that was just an ideal, rarely achieved in reality. But it would certainly be a "safe withdrawal rate!").
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Postby livesoft » Sat Apr 30, 2011 9:26 am

I have the 1990 paperback edition on my bookshelf. I must've read it at about that time.

Some context:

In 1973, I think Louis Rukeyser's Wall Street Week was on the air, so that's what folks were paying attention to. I remember ads for high yield savings accounts in the Washington Post, so I mailed my signed paychecks away to my savings account back then. I recall the interest rate was about 7%.

I wasn't invested in stocks in the early 70's (I was in high school), so I don't remember the bear market. But I do remember the oil crisis since someone I knew owned a gas station.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Postby ResNullius » Sat Apr 30, 2011 10:19 am

I walked down Wall Street in 1972, the year I graduated from undergrad. I can say without hesitation that my greatest worry at the time was getting drafted and sent to Vietnam. My lotto number was 36, which was not good, but I was classified 4F after going for my physical exam after getting my 1A classification...bad eyes. I had been cross-eyed as a kid, but got fixed, but it still made me a 4F. Go figure.
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Postby nisiprius » Sat Apr 30, 2011 10:25 am

More observations.

* The 1973 book is clearly mostly about investing in individual stocks.

* There isn't very much about the general behavior of total markets or total market indices, likely because there weren't any index funds, and probably not many indexes. I think the only index mentioned at all is the S&P 425. It is mentioned mostly as a benchmark for mutual funds. The index itself, with or without dividends, corrected or not corrected for inflation, is not charted or discussed. There are no "mountain charts" comparing long-term returns of stocks/bonds/cash; percentages in tables are assumed to speak for themselves.

* He consistently uses the phrase "common stocks," apparently because there was enough activity and interest in preferred stocks to make the distinction important. This brought back memories because in the 1960s and 70s, even in school, any elementary discussion was sure to include an explanation of the difference.

* Mutual funds are mentioned more than in passing. A chapter is devoted to them, significantly entitled "A Step through the Mutual Fund Mire." Malkiel reluctantly concedes that "mutual funds represent the only practical alternative for small investors" but that "for large investors able to obtain adequate diversification on their own, mutual funds may not be the answer except at times like the present when closed-end funds are selling at unprecedented discount."

* "I have not stressed the often cited advantage that small investors can buy professional investment management with the purchase of fund shares. Random walkers have produced convincing evidence that by an large mutual funds do no better than randomly selected funds with the same risk characteristics."

* His discussion of mutual funds stresses the wisdom of buying no-load funds if you can find them, hard to do because of weak publicizing and marketing of the latter.

* He suggests knowing the "volatility measure (beta)" of mutual funds and matching them to your risk tolerance.
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Postby nisiprius » Sat Apr 30, 2011 10:39 am

Correction: The material below that so surprised by in the 1973 edition was not dropped at all. It is in the 2007 edition on pp 369-373, under the heading, "The Do-It-Yourself Step: Four Potentially Useful Stock-Picking Rules." Amazon Look Inside the Book seems to find the same material on p. 402 of the 2011 edition. It includes his characterization of himself as "one who has been smitten with the gambling urge since birth," and the section describing his four rules. It is softened by an admonition to make index funds the "core of every investment portfolio" and omits his personal stories of his successes and one failure picking specific, named individual stocks.

It just isn't as visible when it's buried within a longer chapter, rather than being presented as a whole chapter entitled "The Malkiel Method for Selecting Individual Common Stocks."



----

And now for a jaw-dropper. I wonder when this chapter was removed (I've returned the 1990 edition to the library, alas).

Remember, this is in a book whose cover shows a dart hitting a newspaper stock listings page (on "Texaco").

Incidentally, I didn't pick this up before, but he quotes a literary reference which is the source of his frequent talk of "firm foundations" and "castles in the air." It's from Ibsen, The Master Bulder, in which one character talks of "our castle in the air" and the other replies "Built on a firm foundation."

Chapter ten: The Malkiel Method for Selecting Individual Common Stocks

For starters, this is how Burton Malkiel describes himself. I don't think this has made it into the later editions, either. The boldface is mine.
Taking a random walk is really a very dull way to explore Wall Street and its excitements, and the game of speculating and trying to beat the crowd is too too much fun for many of us to give it up. Being one who has been smitten with the gambling urge since birth, I can well understand the compulsion many investors have to continue to try to pick real winners and their total lack of interest in a system that can produce only so-so investment results. For such investors, this last chapter demonstrates how a sensible and relatively low-risk strategy may produce substantial rewards. This method has worked splendidly for me. I hope it can work for you, too.
I obviously can't do justice to the "method," and am of course personally hostile to the whole idea, but here are the four basic rules and my snarky comments.

Rule 1: Confine stock purchases to companies that appear able to sustain above-average earnings growth for at least five years. No surprise here, although I read "appear able" to mean prediction, not past performance.

Rule 2: Never pay more for a stock than can reasonably be justified by a firm foundation of value.OK.

Rule 3: It helps to buy stocks whose stories of anticipated growth are ones on which investors can build castles in the air. OK, I guess, given rule #3.

And now... (drum roll)

Rule 4: Trade as little as possible. In general, hold on to the winners and sell the ones that don't work out. He does, however, make a point of saying that this rule is not based on technical analysis, but in fact is based mostly on what we now call tax loss harvesting.

His specific picks, or at least his specific stories, involve:

--Tampax, introduced with a mildly sexist appreciation of the "bevy of young women" strolling on Wall Street in 1959 and the sudden flash of insight as to the growing market they represented. He confesses that he "sold it at a big gain" but missed out on a huge further run-up due to his failure to observe Rule 4.

--A. C. Nielsen (the ratings company)

--Pinkerton's, bought as a "new issue"

--Masco, a faucet manufacturer which sold mostly to apartment builders.

--Giddings & Lewis, which "turned sour" and illustrates the importance of following Rule 4. He says he "sold out at a small loss."

I have no idea whether or not these choices represent real acumen at the time, but it does also drive home the fact that even in 1973, so many stocks represented businesses with an identifiable single focus--they did one rather narrow one thing.

He clearly regards these companies as things in themselves, not a component of the retail consumer sanitary paper products sector or anything like that.
Last edited by nisiprius on Sat Apr 30, 2011 2:43 pm, edited 2 times in total.
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Postby nisiprius » Sat Apr 30, 2011 10:52 am

ResNullius wrote:I walked down Wall Street in 1972, the year I graduated from undergrad. I can say without hesitation that my greatest worry at the time was getting drafted and sent to Vietnam. My lotto number was 36, which was not good, but I was classified 4F after going for my physical exam after getting my 1A classification...bad eyes. I had been cross-eyed as a kid, but got fixed, but it still made me a 4F. Go figure.
Actually Whitehall street, wasn't it? Dignity was respected, mostly, but you did have to carry your bottle of urine openly from point A to point B. Naturally everyone was eyeing everyone else's. Whoever knew there was so much variation in color?
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Postby grayfox » Sat Apr 30, 2011 11:13 am

That is probably about the edition of Random Walk Down Wall Street that I read, although 1974 edition sticks in my mind. I bought the book around 1981 and read it thoroughly. I have not read any of the updates. At that time, I was working and started thinking about investing. I also read books about options and commodities.

The big thing I remember from Random Walk was that academics at universities looked at the stock market and came up with the efficient markets hypothesis (EMH). The research showed that both technical analysis and fundamental analysis could not beat a monkey throwing darts. So the best thing was index fund of the whole market.

The other book I read was THE ONLY INVESTMENT GUIDE YOU'LL EVER NEED by Andrew Tobias. Both Tobias book and Random walk convinced me that everything like commodities, options, charting were pretty much a waste of time and the S&P 500 was the way to go. So I took their advice and was pretty much 100% in S&P500 (or equivalent) from 1982 on. I don't have to tell you that that paid off. Thanks Burton and Andrew! :beer :moneybag

What I recall about the 1970s, is that people either had savings accounts and CDs or they were investors with brokerage accounts. Most average people, like my parents were in the bank account group. I do recall my friend's mother owned some preferred stocks because they paid a handsome dividend.

Back in 1973, investing essentially meant buying individual stocks, and for the most part, only stocks. The idea with stocks was buy-low sell high. The idea was you bought it, when it went up, you sold it. Then find another stock that's going to go up.

I never heard of anyone investing in bonds. Rich people that had such a large amount of money, so that they could live off the interest, may have held bonds. But bonds didn't fit into the buy-goes up-sell model that would multiply your fortunes several fold that investors were looking for. Bonds only paid 7% (only!), and stocks investors were looking for the next IBM that would double in a short time.
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Postby stlutz » Sat Apr 30, 2011 11:15 am

As a side note, the "S&P 500" as such was created in 1957. The "S&P 425" was the industrials section of the index, excluding rails, utilities, and banks.
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Postby nisiprius » Sat Apr 30, 2011 11:26 am

stlutz wrote:As a side note, the "S&P 500" as such was created in 1957. The "S&P 425" was the industrials section of the index, excluding rails, utilities, and banks.
Thanks! Interesting that Malkiel used that as his benchmark, without explanation. Next question, does the S&P 425 still exist? Google didn't find it instantly...)

It appears that small-cap was "discovered" in 1981 by one Rolf W. Banz. The Ibbotson Associates SBBI 2005 Yearbook credits their source for "smaller companies from 1926 to 1980" to "the historical series developed by Professor Rolf W. Banz," and later says, p. 127
One of the most remarkable discoveries of modern finance is the finding of a relationship between firm size and return. Rolf W. Banz was the first to document this phenomenon. See Banz, Rolf W., "The Relationship Between Returns and Market Value of Common Stocks," Journal of Financial Economics, Volume 9 (1981), pp. 3-18.


The first edition of Stocks, Bonds, Bills, and Inflation: The Past (1926-1976) and the Future (1977-2000) by Roger G. Ibbotson and Rex A. Sinquefield, was first published in 1976. I ought to dig that up. I wonder if the first edition had those 1926-present charts for "stocks," etc. and at what point they added "small-company stocks?"
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Postby yobria » Sat Apr 30, 2011 11:36 am

In the version of the book I read, published during the dot.com era, Malkiel contrasted "safe" and "risky" stocks. His "safe" stock was AT&T, which he called a "good stock for windows and orphans". Shortly after the book came out, AT&T's stock price dropped by 95% or so.

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Postby grayfox » Sat Apr 30, 2011 11:50 am

I was curious about interest rates, earnings and dividends, and Maximum Withdrawal Rate (MWR) in 1973.

Dec-1973 Rates & Yields
In Dec-1973, CPI was 46.20.
Ten years earlier in Dec-1963 it had been 30.90. Prices increased about 1.5x in ten years.
By Dec-1983, CPI was 101.3. Prices increased about 2.2x in ten years.

The 10-YR Treasury in Dec-1973 was yielding 6.74% per year. Based on the previous 10 year CPI, I estimate that the real rate on the 10-YR Treasury was 2.53% per year The actual real return on the 10-Year Treasury was -1.32% per year. Inflation over the next ten years was brutal. There were no TIPS.

The S&P Composite was trading at 94.78, had $8.16 of earnings, and paid out $3.38 in dividends. Dividend Yield was 3.57%. The stock market earnings yield, E10/P, in Dec-1973 was 7.41% per year.

The 30-year Maximum Withdrawal Rate (MWR) for the period 1973-2002 from 50/50 was 4.45%
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Postby nisiprius » Sat Apr 30, 2011 11:51 am

yobria wrote:In the version of the book I read, published during the dot.com era, Malkiel contrasted "safe" and "risky" stocks. His "safe" stock was AT&T, which he called a "good stock for windows and orphans". Shortly after the book came out, AT&T's stock price dropped by 95% or so.

Nick
The concept of "blue chip" stocks is interesting. I wonder if it has ever had a formal, precise definition.

It is interesting in and of itself that a gambling metaphor is used.

Literally, it seems as if it ought to mean stocks that merely have a high price per share.

The notion that blue chip stocks are somehow "safe" persists. People seem to have just discovered that stocks pay dividends and an increasing number of idiots are suggesting that you can prudently put your emergency cash reserves into "blue chip" stocks.

Investopedia--no idea where it gets it stuff or how reliable it is--gives two definitions, "A nationally recognized, well-established and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth." and "Blue chip stocks are seen as a less volatile investment than owning shares in companies without blue chip status because blue chips have an institutional status in the economy. Investors may buy blue chip companies to provide steady growth in their portfolios. The stock price of a blue chip usually closely follows the S&P 500." What can I say except that both of these definitions reference wishes for future behavior you'd like to see, not objectively identifiable characteristics of a company itself.
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Postby stlutz » Sat Apr 30, 2011 11:54 am

Next question, does the S&P 425 still exist?


In the late 80s they dropped the requirement of having exactly x number of banks, y number of utilities etc. in the 500. So, the number of companies in the industrials index began to float.

As an aside "industrial" in that case didn't really refer to the type of industry, but the reporting format that was used in their financial statements. So, McDonalds was an "industrial" company. Plus, back in the early 70s banks and utilities were much more highly regulated than now, making them much different beasts (i.e. they couldn't try to maximize profit).

In the early 2000s, S&P adopted (in partnership with MSCI) a new structure of sectors. In that case, "industrials" was actually one of 10 sectors. I'm sure the old "S&P Industrials" index still exists, but they don't seem to publicize it much anymore. The concept doesn't really reflect current reality anymore.
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Postby simplesimon » Sat Apr 30, 2011 12:27 pm

I find this thread extremely fascinating. Thanks for sharing!
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Postby nvboglehead » Sat Apr 30, 2011 12:48 pm

It is amazing the changes we have seen in the financial services industry! I have a copy of the August 15, 1969 issue of Forbes magazine, with annual mutual funds performance ratings. It is amazing to know how far we have come since then.

There were 136 load funds rated that year by Forbes, 132 of them had loads between 7.50% to 8.75%. Only four funds had loads below that range.

There was a much smaller universe of no-load funds in 1969 - only 33 no-load funds rated. The names are mostly for investment companies I don't know. Some of the mutual fund companies that I do recognize are: T. Rowe Price (2 funds), Scudder (4 funds), Loomis Sayles (2 funds), Templeton (1 fund).

Thank you again, Jack Bogle, for what you have created for us!

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Postby Fallible » Sat Apr 30, 2011 1:39 pm

Looking back on those years when the need for indexing was at last being recognized, it's disheartening that some 40 years later, indexing is still being resisted and maligned by some in active management - at the considerable expense of their clients.
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Postby wintermute » Sat Apr 30, 2011 2:41 pm

This thread is a good reminder of how much lower the barriers of entry to investment are now and why backtesting w/o compensating for that is highly dubious.

I wish I had the time to mod that Simba spreadsheet or write from scratch something to hold random "blue chips", loaded funds (would require some research), then a tax-conscious transition to no-load funds. Contribution modeling, also (with periodic raises). ie, a real-world portfolio simulation. I'm not aware of any software that can do that. Maybe there's a study on real-world returns already.

I think the future will be custom pensions, with a commitment, that include an insurance aspect. You input all your personal data, goals, and then trades are optimized with others' goals to everyone's mutual benefit (similar to in/out cash management in mutual funds). There's a company trying to do something similar now. I believe Malkiel or some other author is involved, but I can't find the link now.
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Postby lazyday » Sat Apr 30, 2011 7:00 pm

nisiprius wrote:Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth." and "Blue chip stocks are seen as a less volatile investment than owning shares in companies without blue chip status because blue chips have an institutional status in the economy. Investors may buy blue chip companies to provide steady growth in their portfolios. The stock price of a blue chip usually closely follows the S&P 500." What can I say except that both of these definitions reference wishes for future behavior you'd like to see, not objectively identifiable characteristics of a company itself.

You could make an objective measure of Bluechipness if you wanted to. A score for size, a score for profitability, and importantly, a score for consistency of profits even in recessions. To qualify, a high total score is needed, with none of the three being too low. Your scoring period should include at least a couple recessions. 2000-2010 is good, for dotcom and financial crisis. Two or three decades would be even better.

GE would have made the score in 2007, but probably not today.
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Postby norookie » Sat Apr 30, 2011 7:42 pm

:D Thank you for your "cliff notes" Nisi :wink: We all recall how that "blue chip" GE weathered the last crash. :evil: Now its CEO is best friends w/ the president. To go on would violate board policy. :wink:
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Postby tadamsmar » Sun May 01, 2011 6:42 am

Way back when, I thumbed through an early edition in a book store.

I remember how he said he created random walk charts and gave them to chartist (technical analysts). Sometimes the chartist would get all excited and want to know what the stock was so they could trade it.

The Life-Cycle Investing Plan was added in the late '90s I think.
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Postby Bylo Selhi » Sun May 01, 2011 9:00 am

nisiprius wrote:Interestingly, he goes on to suggest that the New York Stock Exchange ought to "sponsor such a fund and run it on a nonprofit basis" and, this is the part I find interesting, "if the New York Stock Exchange (which, incidentally has considered such a fund) is unwilling to do it..." I'd like to know more about that. (Sort of an anticipation of the first ETF, the original SPDR, which was actually created and operated by the AMEX itself).
Historical note: The world's first ETF (then called Index Participation Unit) was launched by the Toronto Stock Exchange (TSX) three years before even SPY. Toronto 35 Index Participation Units (“TIPS 35”), symbol TIP, came out in March 1990 and owned the top 35 stocks. I was followed by an IPU that tracked the top 100 stocks, symbol HIP, but also known as TIPS 100. In those days the TSX subsidized the ER in order to encourage people to buy it. IIRC the effective ER then was 2bp. Later the TSX sold the ETFs to BGI/iShares who merged them into a single ETF, XIU that owns the top 60 stocks, and raised the ER to 17bp.

Regardless, what's striking is that it took Wall Street 20 years from the publication of Random Walk to implement such an ETF. It only took Jack Bogle 3 years to "get it." ;)

I had completely forgotten that the language of Fama-French factors had not been introduced.
Speaking of Fama, look for a copy of The Money Game by 'Adam Smith' published in 1968. (You can find downloadable copies via Google.)

The book is an exposé of Wall Street. In particular read Chapter 11, "What the Hell is a Random Walk?" deals with a new-fangled concept of market efficiency and the random nature of stock price movements. Even Fama is tentative in saying, "If the random walk model is a valid description of reality, the work of the chartist, like that of the astrologer, is of no real." That must have been a very big IF in those days.

The book offers many other insights about Wall Street, many of which are valid to this day or which presage more current events.

nisiprius wrote:Remember, this is in a book whose cover shows a dart hitting a newspaper stock listings page (on "Texaco").
Yabbut those monkeys were exceptionally skilled. My 1985 4th edition has a dart in the bullseye on the listing for "Exxon." ;)
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Postby Valuethinker » Sun May 01, 2011 11:09 am

Bylo Selhi wrote:
nisiprius wrote:Interestingly, he goes on to suggest that the New York Stock Exchange ought to "sponsor such a fund and run it on a nonprofit basis" and, this is the part I find interesting, "if the New York Stock Exchange (which, incidentally has considered such a fund) is unwilling to do it..." I'd like to know more about that. (Sort of an anticipation of the first ETF, the original SPDR, which was actually created and operated by the AMEX itself).
Historical note: The world's first ETF (then called Index Participation Unit) was launched by the Toronto Stock Exchange (TSX) three years before even SPY. Toronto 35 Index Participation Units (“TIPS 35”), symbol TIP, came out in March 1990 and owned the top 35 stocks. I was followed by an IPU that tracked the top 100 stocks, symbol HIP, but also known as TIPS 100. In those days the TSX subsidized the ER in order to encourage people to buy it. IIRC the effective ER then was 2bp. Later the TSX sold the ETFs to BGI/iShares who merged them into a single ETF, XIU that owns the top 60 stocks, and raised the ER to 17bp.

Regardless, what's striking is that it took Wall Street 20 years from the publication of Random Walk to implement such an ETF. It only took Jack Bogle 3 years to "get it." ;)

I had completely forgotten that the language of Fama-French factors had not been introduced.
Speaking of Fama, look for a copy of The Money Game by 'Adam Smith' published in 1968. (You can find downloadable copies via Google.)


I think 'Adam Smith' wrote another couple of books? (Supermoney and one other). Neither were as good, but both sounded prescient warnings about the US living beyond its means.

Did 'Adam Smith' then not become a stock market commentator on PBS? Not Lewis Rukeyser but someone else? Adam Goodman?


The book is an exposé of Wall Street. In particular read Chapter 11, "What the Hell is a Random Walk?" deals with a new-fangled concept of market efficiency and the random nature of stock price movements. Even Fama is tentative in saying, "If the random walk model is a valid description of reality, the work of the chartist, like that of the astrologer, is of no real." That must have been a very big IF in those days.

The book offers many other insights about Wall Street, many of which are valid to this day or which presage more current events.

nisiprius wrote:Remember, this is in a book whose cover shows a dart hitting a newspaper stock listings page (on "Texaco").
Yabbut those monkeys were exceptionally skilled. My 1985 4th edition has a dart in the bullseye on the listing for "Exxon." ;)


This all brings me back-- we used this as a university textbook in the early 1980s.

And I remember his chapters about fundamental analysis.
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Postby LikeYouImagine » Sun May 01, 2011 2:01 pm

nisiprius wrote: "for large investors able to obtain adequate diversification on their own, mutual funds may not be the answer except at times like the present when closed-end funds are selling at unprecedented discount."


nisiprius wrote: The material below that so surprised by in the 1973 edition was not dropped at all. It is in the 2007 edition on pp 369-373, under the heading, "The Do-It-Yourself Step: Four Potentially Useful Stock-Picking Rules."


I read the 2007 Edition (I'm too young to have read any other). Somewhere else near the stock picking rules are his method of beating the market. One of those methods is buying closed ended funds at a major discount to their NAV. He says he has done this and outpaced the market as a whole. He truly is a bit of a gambler.

I thought for a time, I might pick up a few CEFs and do the same. I couldn't bring myself to do it (apparently I'm not enough of a gambler).
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Postby Scott S » Sun May 01, 2011 5:39 pm

I love early editions of books. Anyone who is/was into VWs remembers John Muir's "idiot book". I have a 1971 printing, and it's quite the contrast to newer printings -- it's spiral-bound, much thinner, and with very few pictures. Plus, there's the neatness of owning a classic book that was printed while the author was alive! (John Muir died in 1977, I believe, 3 years before I was born.)

I have a copy of "Profiles in Courage" that makes no mention of JFK's death, so I have to assume it's pretty early, too.

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Postby Noobvestor » Sun May 01, 2011 5:57 pm

nisiprius wrote:
yobria wrote:In the version of the book I read, published during the dot.com era, Malkiel contrasted "safe" and "risky" stocks. His "safe" stock was AT&T, which he called a "good stock for windows and orphans". Shortly after the book came out, AT&T's stock price dropped by 95% or so.

Nick
The concept of "blue chip" stocks is interesting. I wonder if it has ever had a formal, precise definition.

It is interesting in and of itself that a gambling metaphor is used.

Literally, it seems as if it ought to mean stocks that merely have a high price per share.

The notion that blue chip stocks are somehow "safe" persists. People seem to have just discovered that stocks pay dividends and an increasing number of idiots are suggesting that you can prudently put your emergency cash reserves into "blue chip" stocks.

Investopedia--no idea where it gets it stuff or how reliable it is--gives two definitions, "A nationally recognized, well-established and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth." and "Blue chip stocks are seen as a less volatile investment than owning shares in companies without blue chip status because blue chips have an institutional status in the economy. Investors may buy blue chip companies to provide steady growth in their portfolios. The stock price of a blue chip usually closely follows the S&P 500." What can I say except that both of these definitions reference wishes for future behavior you'd like to see, not objectively identifiable characteristics of a company itself.


I would be curious to see how blue chips compare to Morningstar's 'Wide Moat' concept and Grantham's 'High Quality' definitions, too - perhaps even some contract to 'fundamental' weightings, etc...

I have nothing to add per se, save a big 'thanks' to Nis for this really enlightening ongoing set of projects comparing advice both old and new - I am following with enthusiastic attention!
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Postby dumbmoney » Sun May 01, 2011 7:26 pm

Noobvestor wrote:I would be curious to see how blue chips compare to Morningstar's 'Wide Moat' concept and Grantham's 'High Quality' definitions, too - perhaps even some contract to 'fundamental' weightings, etc...


The Dow stocks are often refered to as blue chips. So to me blue chip means a very large, established, widely owned company. Nothing more than that.
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Postby Noobvestor » Sun May 01, 2011 7:48 pm

dumbmoney wrote:
Noobvestor wrote:I would be curious to see how blue chips compare to Morningstar's 'Wide Moat' concept and Grantham's 'High Quality' definitions, too - perhaps even some contract to 'fundamental' weightings, etc...


The Dow stocks are often refered to as blue chips. So to me blue chip means a very large, established, widely owned company. Nothing more than that.


Yeah, that jives with my mental image and the other definitions I've read - I think of it a bit like this: S&P 500 - any company in the index that hasn't been around for at least a decade. Probably not very scientific but *shrug*
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Walking down Wall Street in 1973

Postby petrico » Tue May 03, 2011 10:10 pm

nisiprius wrote:OK, the library was able to get me a copy of the 1973 edition of A Random Walk Down Wall Street, and it is a trip. I'll probably post more as I dig in, but here are the things I've noticed already.

First of all, the word "index" is not in the index.

Thanks for this look back, nisiprius.

Somehow, investing seems more susceptible than most things to an Orwellian mental scrubbing of history. Not so much in a sinister way, but probably due to a random quirk of human nature.

"We have always been at war with Eastasia."

"Mutual funds have always existed."

"No-load mutual funds have always existed."

"Index funds have always existed."

"REIT index funds have always existed."

"Emerging market small cap value ETFs have always existed."

It's good to remember otherwise. Very interesting post.

Will today's investing methods seem as primitive in 2050 as the investing methods of 40 or 50 years ago seem to us today?

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