Warren Buffett began his 2019 Shareholder Letter with a review of a short but groundbreaking book. The findings would change what the author, and everyone along with him, believed ever since.
Edgar Lawrence Smith set out to prove a theory that bonds were better investments than stocks during periods of deflation, while stocks were better than bonds during inflation.
Instead, he found that stocks were better investments all around. His work, Common Stocks as Long Term Investments would be published in 1924. The ideas didn’t catch on until John Maynard Keynes popularized the book with a written review in May of 1925.
Smith’s findings completely upended the widespread view that bonds were “safe” and stocks were speculative. And the book would go on to play a role in the ensuing market bubble that burst in 1929. Continue Reading…