It turns out my memory is faulty. The starting point of 1926 is never actually explained.
The paper is candid about saying that "Merrill Lynch, Pierce, Fenner & Smith Inc. provided the funds to establish the Center." It fails to mention that Merrill Lynch's motivation was that Merrill Lynch wanted to run an ad saying that stocks were a prudent investment. At that time Merrill Lynch liked to run full-page fine-print book-chapter-length ads "educating" people on stock investing, and this paper became one of them.
Some interesting features of this pioneering paper include:
- All return calculations included the effect of taxation, and all results were in three columns for investors who were "tax exempt," made "$10,000 in 1960," and made "$50,000 in 1960."
- All calculations included brokerage commissions on round-lot transactions.
- It only included the New York Stock Exchange, although a monumental earlier study by the Cowles commission, "Common-Stock Indexes 1871-1938," had included data from about twelve city exchanges and the Curb Exchange, which by 1964 had matured into the American Stock Exchange.
- Returns are for an equal-weighted portfolio: Table 1 shows the results of investing an equal sum of money in each company having one or more issues of common stock listed on the New York Stock Exchange...The decision to invest equal amounts in each company with common stock listed on the Exchange was based on the desire to calculate rates of return that would on the average be available to the individual investor who selected stocks at random with equal probabilities of selection--that is, exercised no judgment. A policy of allocating funds in proportion to shares outstanding or according to any other criterion implies less neutrality of judgment in making investments.
So it is not clear whether 1926 is really the oldest data they had, or whether they simply chose to begin transcribing there.monthly closing prices of all common stocks on the New York Stock Exchange from January, 1926, through December, 1960, have been placed on tape. Their accuracy has been appraised in several ways, and, after three years of checking and rechecking, it is estimated that the incidence of error is extremely low and that remaining errors do not bias the results.
The authors say "earlier studies have dealt only with one or two brief time periods in contrast to the twenty-two time periods within a thirty-five-year span covered here." This is where things get interesting! Those twenty-two time periods were:
I charted these in graphic form:1/26-12/60
The authors say
Not to me, they weren't! But they go on to say:The periods were chosen for obvious reasons.
What they did was to pick five starting points and nine endpoints and calculate returns over all combinations. I really don't know what to say about this. They give an explicit explanation for the starting points of 9/29 and 6/32, but they don't really give any reason for 1/26, 12/1950, or 12/1955. And the fact that they've picked actual months within the year, rather than the start of the year, heightens my feeling that they really should have.The period from 1926 to 1960 is a long span with booms and epressions--prime examples of each!--and war and peace. The periods beginning in September, 1929, were included to indicate the experience of those who invested at the height of the stock-market boom of the 1920's. The periods beginning in June, 1932, were included to show the results of investing at the nadir of this country's worst depression. The numerous brief, recent periods were included to bring details of postwar experience into sharp focus. Aside from most periods ending in 1932 or 1940, the rates of return are surprisingly high.
Because the endpoints do not coincide with any of the starting points, it is not possible to splice together their numbers to get returns over any period of time other than those twenty-two.
I don't think Fisher and Lorie inserted any bias in support of Merrill Lynch's marketing effort. I'm just saying that they didn't explain their methodology for choosing endpoints anywhere near as well as their methodology for calculating returns, and that they don't explain the "1926" endpoint at all.