Hostname: page-component-76fb5796d-x4r87 Total loading time: 0 Render date: 2024-04-29T08:49:18.331Z Has data issue: false hasContentIssue false
  • English
  • Français

E. L. SMITH’S ENDURING CONTRIBUTIONS TO FINANCIAL ECONOMICS

Published online by Cambridge University Press:  04 February 2020

J. E. Woods Open the ORCID record for J. E. Woods [Opens in a new window]
Get access Rights & Permissions [Opens in a new window]

Abstract

In 1924, Edgar Lawrence Smith published a monograph presenting evidence aimed at overturning the conventional view that equities were speculative and bonds were the only long-term investments. This was immediately so successful that such eminent commentators as Irving Fisher and Benjamin Graham agreed that the monograph had had a material impact on market psychology, playing an instrumental role in the Great Crash. In this article, we examine Smith’s approach in detail, arguing that he made significant, enduring contributions to finance theory, empirical finance, and portfolio management practice. He was influential in creating the “cult of the equity,” laid the foundations for the equity risk premium, and introduced a probability-based risk metric and equally weighted portfolios. His influence is felt nowadays not only in the methodology employed in empirical work but also in major aspects of the conventional approach to portfolio management.

Type
Articles
Information
Journal of the History of Economic Thought , Volume 42 , Issue 1 , March 2020 , pp. 79 - 104
Copyright
© The History of Economics Society 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

J. E. Woods, john.woods@cantab.net; Surrey, UK. I am very grateful to the referees for their comments on previous versions of this article and especially the co-editor, Professor Pedro Duarte, for his constructive criticism and advice. I am responsible for all remaining errors.

References

REFERENCES

Atwood, Albert W., and Conway, Thomas. 1914. Investment and Speculation: A Description of the Modern Money Market and Analysis of the Factors Determining the Value of Securities. New York: Alexander Hamilton Institute.Google Scholar
Avrahampour, Yally. 2015. “‘Cult of Equity’: Actuaries and the Transformation of Pension Fund Investing, 1948–60.” Business History Review 89 (2): 281–304.CrossRefGoogle Scholar
Bernstein, Peter L. 1996. Against the Odds. New York: John Wiley & Sons.Google Scholar
Brown, Alan. 2014. “Lessons from the Last 40 Years for the Next 20.” Schroders Talking Point, September. https://www.schroders.com/fr/sysglobalassets/digital/insights/pdfs/lessons_from_the_last_40_years_for_the_next_20.pdf. Accessed December 2, 2019.Google Scholar
Cass, David, and Shell, Karl. 1983. “Do Sunspots Matter?” Journal of Political Economy 91 (2): 193–227.CrossRefGoogle Scholar
Chambers, David, Dimson, Elroy, and Foo, Justin. 2015. “Keynes the Stock Market Investor: A Quantitative Analysis.” Journal of Financial and Quantitative Analysis 50 (4): 843–868.CrossRefGoogle Scholar
Cherrier, Beatrice, and Saïdi, Aurélien. 2018. “The Indeterminate Fate of Sunspots in Economics.” History of Political Economy 50 (3): 425–481.CrossRefGoogle Scholar
Cowles, Alfred, et al. 1938. Common-Stock Indices. Bloomington, IN: Principia Press.Google Scholar
Dimson, Elroy, Marsh, Paul, and Staunton, Mike. 2002. Triumph of the Optimists. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Fama, Eugene F. 1965a. “The Behaviour of Stock-Market Prices.” Journal of Business 38 (1): 34–105.CrossRefGoogle Scholar
Fama, Eugene F. 1965b. “Random Walks in Stock-Market Prices.” Financial Analysts Journal 21 (5): 55–59.CrossRefGoogle Scholar
Fama, Eugene F. 1970. “Efficient Capital Markets: A Review of Theory and Empirical Work.” Journal of Finance 25 (2): 383–417.CrossRefGoogle Scholar
Fisher, Irving. 1930a. The Theory of Interest. New York: Macmillan.Google Scholar
Fisher, Irving. 1930b. The Stock Market Crash—and After. New York: Macmillan.Google Scholar
Fisher, Irving, et al. 1912. How to Invest When Prices Are Rising. Scranton, PA: G Lynn Sumner & Company. (Reprinted in the Leopold Classic Library.)Google Scholar
Galbraith, John K. 1954. The Great Crash 1929. London: Hamish Hamilton.Google Scholar
Garcia-Mata, Carlos, and Shaffner, Felix. 1934. “Solar and Economic Relationships: A Preliminary Report.” Quarterly Journal of Economics 49 (1) 1–51.CrossRefGoogle Scholar
Graham, Benjamin. 1973. The Intelligent Investor. Fourth edition. New York: John Wiley.Google Scholar
Graham, Benjamin. 1996. Benjamin Graham: The Memoirs of the Dean of Wall Street. Edited by Chatman, S.. New York: McGraw–Hill.Google Scholar
Graham, Benjamin, and Dodd, David. 1934. Security Analysis. New York: McGraw–Hill.Google Scholar
Harold, Gilbert. 1934. “A Reconsideration of the Common-Stock Theory.” The Journal of Business of the University of Chicago 7 (1): 42–59.CrossRefGoogle Scholar
Herwitz, H. K. 1925. “Review of Common Stocks as Long Term Investments.” Journal of the American Statistical Association 20 (152): 576–577.CrossRefGoogle Scholar
Hodgson, Tracy M., et al. 2000. “The Concept of Investment Efficiency and its Application to Investment Management Structures.” British Actuarial Journal 6 (3): 451–545.CrossRefGoogle Scholar
Jackson, James Roy. 1925. “Review of Common Stocks as Long Term Investments.” Journal of Political Economy 33 (6): 689–691.CrossRefGoogle Scholar
Keynes, John Maynard. 1925. “An American Study of Shares versus Bonds as Permanent Investments.” The Nation and Athenæum, 2 May 1925. Reprinted in Collected Writings. Volume XII, Economic Articles and Correspondence Investment and Editorial. Edited by Moggridge, D.. Cambridge: Cambridge University Press, pp. 247–252.Google Scholar
Keynes, John Maynard. 1937. “The General Theory of Employment.” Quarterly Journal of Economics 51 (2): 209–223.CrossRefGoogle Scholar
Keynes, John Maynard. 1983. Collected Writings. Volume XII, Economic Articles and Correspondence Investment and Editorial. Edited by Moggridge, D.. Cambridge: Cambridge University Press.Google Scholar
Markowitz, Harry M. 1952. “Portfolio Selection.” Journal of Finance 37 (1): 77–91.Google Scholar
Markowitz, Harry M. 1959. Portfolio Selection. New Haven: Yale University Press.Google Scholar
Markowitz, Harry M. 1987. Mean-Variance Analysis in Portfolio Choice and Capital Markets. Oxford: Basil Blackwell.Google Scholar
Mehra, Rajnish, and Prescott, Edward C.. 2003. “The Equity Premium in Retrospect.” In Constantinides, G. M., Harris, M., and Stulz, R.., eds., Handbook of the Economics of Finance. Amsterdam: Elsevier, pp. 889–938.Google Scholar
Nelson, Milton N. 1925. “Review of Common Stocks as Long Term Investments.” American Economic Review 15 (2): 326–328.Google Scholar
New York Times. 1971. “Obituary: Edgar Lawrence Smith.” 20 June 1971.CrossRefGoogle Scholar
Raynes, Harold E. 1928. “The Place of Ordinary Stocks and Shares (as Distinct from Fixed Interest Bearing Securities) in the Investment of Life Assurance Funds.” Journal of the Institute of Actuaries 59 (1): 21–50.CrossRefGoogle Scholar
Raynes, Harold E. 1937. “Equities and Fixed Interest Stocks During Twenty-Five Years.” Journal of the Institute of Actuaries 68 (4): 483–507.CrossRefGoogle Scholar
Samuelson, Paul A. 1965. “Proof That Properly Anticipated Prices Fluctuate Randomly.” Industrial Management Review 6: 41–49.Google Scholar
Scott, Peter. 2002. “Towards the ‘Cult of the Equity’? Insurance Companies and the Interwar Capital Market.” Economic History Review 55 (1): 78–104.CrossRefGoogle Scholar
Shiller, Robert J. 2014. “Speculative Asset Prices.” American Economic Review 104 (6): 1486–1517.CrossRefGoogle Scholar
Smith, Edgar Lawrence. 1924. Common Stocks as Long Term Investments. New York: Macmillan.Google Scholar
Smith, Edgar Lawrence. 1925. “New Tests Show Stocks Excel Bonds in Yield.” New York Times, 22 February 1925, p. 164.Google Scholar
Smith, Edgar Lawrence. 1927. “The Market Value of Industrial Equities.” Review of Economics and Statistics 9 (1): 37–40.CrossRefGoogle Scholar
Smith, Edgar Lawrence. 1931. “Tests Applied to an Index of the Price Level for Industrial Stocks.” Journal of the American Statistical Association 26 (173): 127–135.Google Scholar
Smith, Edgar Lawrence. 1939. Tides in the Affairs of Men. New York: The Macmillan Company.Google Scholar
Smith, Edgar Lawrence. 1959. Common Stocks and Business Cycles. New York: The William–Frederick Press.Google Scholar
Smith, Edgar Lawrence. 1963. “Low Tide in Sunspots.” Financial Analysts Journal 19 (4): 91–92.CrossRefGoogle Scholar
UBS. 2017. Pension Fund Indicators. London: UBS Asset Management (UK) Ltd.Google Scholar
Strum, Van, Kenneth, S. 1925. Investing in Purchasing Power. New York: Barron’s.Google Scholar
White, Eugene N. 1990. “The Stock Market Boom and Crash of 1929 Revisited.” Journal of Economic Perspectives 4 (2): 67–83.CrossRefGoogle Scholar
Woods, John E. 2013. “On Keynes as an Investor.” Cambridge Journal of Economics 37 (2): 423–442.CrossRefGoogle Scholar