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Common Stocks as Long Term Investments
This scarce antiquarian book is a facsimile reprint of the original. Due to its age, it may contain imperfections such as marks, notations, marginalia and flawed pages. Because we believe this work is culturally important, we have made it available as part of our commitment for protecting, preserving, and promoting the world's literature in affordable, high quality, modern editions that are true to the original work.
136 pages, Paperback
First published June 5, 2003
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Displaying 1 - 12 of 12 reviews
June 20, 2017
Toward the end of Chapter 27 of their 1940 edition of "Security Analysis", Benjamin Graham and David Dodd discuss Edgar Lawrence Smith's 1924 book "Common Stocks as Long Term Investments", which they deem a "small and rather sketchy volume." Writing after the Great Depression, you can't blame them. With hindsight, we know that Smith's book was used by many at the time of its publication to justify what became the Coolidge-era stock market bubble of the late 1920s. From one man's sound premise came a nonsense conclusion on a massive scale: While it is true that stocks are advantaged over bonds in the long-run because of a) the positive effects of retained earnings on the growth of businesses and b) the negative effect of inflation on debt holdings, these two ideas unfortunately were used to justify paying any price at all for a stock if it had an attractive trend in earnings. As Graham and Dodd note: "This example illustrates one of the paradoxes of financial history, viz., that at the very period when the increasing instability of individual companies had made the purchase of common stocks far more precarious than before, the gospel of common stocks as safe and satisfactory investments was preached to and avidly accepted by the American public." That all aside, this small book is still worth reading, especially as a historical document on evolving theories related to portfolio construction and investment management, but only if, as soon as you finish this book, you remember that reality is more complex than theory and price still matters.
Some good quotes:
“The best that can be said is that some measures of value are more stable than others.” - p. 10
“To an individual a temporary decline in the market quotations of his security holdings is not of such serious import, provided he knows that his assets are sound and of real value.” p.12-13
“Therefore, it is of the greatest importance in the selection of bonds for long-term investment, to get all the assurance possible that the revenues, after operating expenses of the debtor company, are and will continue to be, during the whole period that the bonds are to be held, well in excess of all fixed charges, and will provide ample funds for depreciation and possible obsolescence; that the margin over all fixed charges will be ample to afford the company the best of credit so that changes in plant or extensions may be financed in part at least through the sale of stock on favorable terms.” - p. 15
“The importance of these tests lies in their cumulative force. No single test would have more than passing significance. But all of them together are strongly indicated of underlying factors which have been overlooked by too large a portion of individual investors.” - p. 19
“[This serves] to emphasize the power of diversification to offset unsound judgment in the selection of individual stocks or industries.” - p.58
“[We must] explain the false picture that is presented by charts which give no consideration to stock dividends.” - p. 69
“Over a period of years these directors will never aim to declare all the company’s net earnings in dividends. They will turn back a part of such earnings to surplus account, and invest this increasing surplus in productive operation. Such a policy successfully carried out is in fact a practical demonstration of the principle of compound interest.” - p. 77
“[We should accept this] law, not as proved, for that is impossible, but as sufficiently indicated[.]” - p. 79
“A well diversified investment in common stocks, held over a long period, may be counted on not only for a somewhat more than normal income return (compared with current interest rates), but also for a definite increase in principal value, and that this increase in principal value is not based upon speculative factors but upon factors inherent in the nature of the security[.]” - p. 80
“We have found that there is a force at work in our common stock holdings which tends ever toward increasing their principal value in terms of dollars, a force resulting from the profitable reinvestment, by the companies involved, of their undistributed earnings. We have found that unless we have had the extreme misfortune to invest at the very peak of a noteworthy rise, those periods in which the average market value of our holdings remains less than the amount we paid for them are of comparatively short duration, and that even if we have bought at the very peak, there is definitely to be expected a period in which we may recover as many dollars as we have invested. Our hazard even in such extreme cases appears to be that of time alone.” - p. 81
“These figures, which imply the total absence of any judgement in the selection of the time when purchases are hard, suggest that in buying a well diversified group of representative common stocks in essential industries, our chances of coming out even, or of making a profit in principal value, are: Within 1 year, 78 in 100; 2 years, 87 in 100; 4 years, 94 in 100. There remain about six chances in one hundred that we should have to wait from six to fifteen years before having an opportunity to liquidate upon even terms.” - p. 82
“That our corporations have so consistently been able to reinvest profitably a pat of their surplus earnings may be attributed to the constant growth of population—or is it the growing population which makes the excess earnings possible? In either case it is interesting to observe that the rate at which the principal values in our stock holdings rose (Chart No. 6) is measurably close to the rate at which the population of the United States has increased since 1820, which averages 2.43% per annum.” - p. 85
“Fortunately, businessmen are both buyers and sellers.” - p. 88
“There would, therefore, seem to be ample justification for including as a part of the investment of any large private fortune a relatively large proportion of sound, well diversified common stocks, selected not for their immediate market possibilities, but rather with their long term investment prospects in mind.” - p. 89
“It is generally recognized that common stocks are subject to changes in market value, which may be at times rapid. But it is not so generally recognized that bonds and mortgages are subject to changes in real value almost as drastic as stocks, rarely as rapid, but perhaps more insidious in that they are not so easily appraised. The words ‘bond’ and ‘mortgage’ have for so long connoted security and safety, while the word ‘stock’ has been so widely accepted as synonymous with risk and hazard, that an investor feels he is necessarily acting with more prudence and conservatism when he buys bonds and mortgage than when he buys stocks. Yet frequently this is not the case.” - p. 92
“Sound investment management, while always subject to error, cannot fail to improve average investment results if the principal of diversification is strictly adhered to. But diversification may be carried to excess. No investor nor group of men responsible for any investment fund can keep constantly informed regarding too long a list of securities representing too wide a variety of industries, locations and managements. There are well recognized limitations to the diversity of items upon which continuous judgement may be exercised. Better results are obtained when these limitations are admitted as facts.” - p. 117
Some good quotes:
“The best that can be said is that some measures of value are more stable than others.” - p. 10
“To an individual a temporary decline in the market quotations of his security holdings is not of such serious import, provided he knows that his assets are sound and of real value.” p.12-13
“Therefore, it is of the greatest importance in the selection of bonds for long-term investment, to get all the assurance possible that the revenues, after operating expenses of the debtor company, are and will continue to be, during the whole period that the bonds are to be held, well in excess of all fixed charges, and will provide ample funds for depreciation and possible obsolescence; that the margin over all fixed charges will be ample to afford the company the best of credit so that changes in plant or extensions may be financed in part at least through the sale of stock on favorable terms.” - p. 15
“The importance of these tests lies in their cumulative force. No single test would have more than passing significance. But all of them together are strongly indicated of underlying factors which have been overlooked by too large a portion of individual investors.” - p. 19
“[This serves] to emphasize the power of diversification to offset unsound judgment in the selection of individual stocks or industries.” - p.58
“[We must] explain the false picture that is presented by charts which give no consideration to stock dividends.” - p. 69
“Over a period of years these directors will never aim to declare all the company’s net earnings in dividends. They will turn back a part of such earnings to surplus account, and invest this increasing surplus in productive operation. Such a policy successfully carried out is in fact a practical demonstration of the principle of compound interest.” - p. 77
“[We should accept this] law, not as proved, for that is impossible, but as sufficiently indicated[.]” - p. 79
“A well diversified investment in common stocks, held over a long period, may be counted on not only for a somewhat more than normal income return (compared with current interest rates), but also for a definite increase in principal value, and that this increase in principal value is not based upon speculative factors but upon factors inherent in the nature of the security[.]” - p. 80
“We have found that there is a force at work in our common stock holdings which tends ever toward increasing their principal value in terms of dollars, a force resulting from the profitable reinvestment, by the companies involved, of their undistributed earnings. We have found that unless we have had the extreme misfortune to invest at the very peak of a noteworthy rise, those periods in which the average market value of our holdings remains less than the amount we paid for them are of comparatively short duration, and that even if we have bought at the very peak, there is definitely to be expected a period in which we may recover as many dollars as we have invested. Our hazard even in such extreme cases appears to be that of time alone.” - p. 81
“These figures, which imply the total absence of any judgement in the selection of the time when purchases are hard, suggest that in buying a well diversified group of representative common stocks in essential industries, our chances of coming out even, or of making a profit in principal value, are: Within 1 year, 78 in 100; 2 years, 87 in 100; 4 years, 94 in 100. There remain about six chances in one hundred that we should have to wait from six to fifteen years before having an opportunity to liquidate upon even terms.” - p. 82
“That our corporations have so consistently been able to reinvest profitably a pat of their surplus earnings may be attributed to the constant growth of population—or is it the growing population which makes the excess earnings possible? In either case it is interesting to observe that the rate at which the principal values in our stock holdings rose (Chart No. 6) is measurably close to the rate at which the population of the United States has increased since 1820, which averages 2.43% per annum.” - p. 85
“Fortunately, businessmen are both buyers and sellers.” - p. 88
“There would, therefore, seem to be ample justification for including as a part of the investment of any large private fortune a relatively large proportion of sound, well diversified common stocks, selected not for their immediate market possibilities, but rather with their long term investment prospects in mind.” - p. 89
“It is generally recognized that common stocks are subject to changes in market value, which may be at times rapid. But it is not so generally recognized that bonds and mortgages are subject to changes in real value almost as drastic as stocks, rarely as rapid, but perhaps more insidious in that they are not so easily appraised. The words ‘bond’ and ‘mortgage’ have for so long connoted security and safety, while the word ‘stock’ has been so widely accepted as synonymous with risk and hazard, that an investor feels he is necessarily acting with more prudence and conservatism when he buys bonds and mortgage than when he buys stocks. Yet frequently this is not the case.” - p. 92
“Sound investment management, while always subject to error, cannot fail to improve average investment results if the principal of diversification is strictly adhered to. But diversification may be carried to excess. No investor nor group of men responsible for any investment fund can keep constantly informed regarding too long a list of securities representing too wide a variety of industries, locations and managements. There are well recognized limitations to the diversity of items upon which continuous judgement may be exercised. Better results are obtained when these limitations are admitted as facts.” - p. 117
April 14, 2020
A bit out of date now but has very good principles to follow in investment management.
June 4, 2020
Read by reference from Warren Buffet 2018 Berkshire report. Book compares performance of portfolios composed of diversified common stocks versus bonds during 1900 to WWI period.
April 15, 2021
If there was a need to see how a small book can and should punch above its weight range, then this is the book for you.
Edgar Lawrence Smith has written a book that may have been conceived in the fountain of youth, because it does not seem to be showing its age.
I read this because Buffett recommends it as a way of understanding why stocks are better then bonds. I also see a lot of fundamentals within the book that add to the depth and understanding of how, when and why stocks are important to add growth and how that growth can be enhanced and managed.
The first half of the 118 pages would only excite an accountant going through withdrawals, but the second half infatuates someone like myself who wants to understand the relationship between finance, economics and globalized trade.
Most of the examples used are focused on domestic production and logistics, but are still just as relevant as the day this book was written - so long as the reader contextualises the information.
There are very few books that i would read again, and this is one such book. There are kernels of information that someone like myself who has a limited understanding of finance and accounting would have missed, and i know that when i have grown a little more then i will return to have another read of this mighty little book.
Please read this book for its historical interest, and for the wealth of knowledge (quite literally) that it so willingly yields to the reader.
Edgar Lawrence Smith has written a book that may have been conceived in the fountain of youth, because it does not seem to be showing its age.
I read this because Buffett recommends it as a way of understanding why stocks are better then bonds. I also see a lot of fundamentals within the book that add to the depth and understanding of how, when and why stocks are important to add growth and how that growth can be enhanced and managed.
The first half of the 118 pages would only excite an accountant going through withdrawals, but the second half infatuates someone like myself who wants to understand the relationship between finance, economics and globalized trade.
Most of the examples used are focused on domestic production and logistics, but are still just as relevant as the day this book was written - so long as the reader contextualises the information.
There are very few books that i would read again, and this is one such book. There are kernels of information that someone like myself who has a limited understanding of finance and accounting would have missed, and i know that when i have grown a little more then i will return to have another read of this mighty little book.
Please read this book for its historical interest, and for the wealth of knowledge (quite literally) that it so willingly yields to the reader.
September 24, 2025
This book was a big let down after hearing Buffett talk about it at one of the old Berkshire meetings. I was hoping for more theory, whereas the book was almost all statistical tests comparing the return of stocks and bonds over various time periods. Each of which proved that stocks outperform, and is Smiths main question - what is the universal force that allows stocks to outperform? He answers the question as the central thesis of the book as: stocks seemingly compound at some constant rate as a result of reinvestment of earnings that are not distributed. That increases the principal in each year, and correspondingly increases next years’ earnings, hence they outperform bonds.
This entire review has been hidden because of spoilers.
March 22, 2020
With presented 10 tests Edgar Smith makes elegant case in favour of investing in common stocks on a long term basis. Main underlying driver of compound growth of returns from investment in common stocks is shown to be retaining earnings.
November 26, 2020
This is one of the best financial books for the rookie wannabe private investor. It lays basis for sound investment management, which were followed also by no other than Warren Buffett.
August 14, 2022
Some time I'm gonna have a month where instead of writing reviews, I am just going to share a few of my favorite songs. Song September or Music March or something. 15% of the time I just quote songs anyways.
January 29, 2017
Over the long term, stocks outperform bonds. A comprehensive case study on the subject. I really liked the way it's written, similar to the writings of Benjamin Graham the case studies are well researched, well written and above all well reasoned. One caveat, this book has been listed as one of the reasons that lead to the great bubble of the 30s -- the reason is that many people applied the conclusions in it without making sure the pre-requisites which these conclusions are based on, still exists.
July 10, 2016
This is one of the best investing books of all time. Also one of the most overlooked. This book is the cornerstone to Buffets philosophy , along with many other money managers yet this book is severely overlooked by the investing amateur. I cant believe this has only gotten 5 reviews. Some of the best investment literature has come from the 1920's decade.
June 6, 2021
Not too interesting. This book is mainly about proving investing in common stock in the long-term will yield a good result, better than bonds. So stock can be used as a long-term investment, not just short-term speculation.
I didn't gain any special knowledge.
I didn't gain any special knowledge.
Displaying 1 - 12 of 12 reviews