“One minor conclusion from all this data and experience is that the very small investor is the most inveterate bargain hunter in the world” It is the small investor who always wants 100 percent on his money and who is willing to take the most astounding chances to get it.” Does this magazine quote sound like the typical small investor today” It’s not: it is from a popular magazine in 1911. A comparison of U.S. investors then to those of today shows that despite more and faster information, today’s investors suffer from the same biases and foibles as those who invested at the beginning of the 20th century.
“Today’s investors are more rapidly informed than their predecessors a century ago, but they are neither better informed nor better behaved,” concluded Meir Statman, finance professor at Santa Clara University in California in a 2002 paper titled “A Century of Investors.” Statman compared questions from individual investors to The World’s Work magazine in the early 20th century to popular press coverage of investors today. He found remarkable similarities. “Today’s investors, like their predecessors, want to be secure while they want to be rich, want to save while they are tempted to spend, want to avoid regret and escape taxes,” he wrote. The beginning of the 20th century, like its end, saw large volatility and speculation in start-up companies. Then investors speculated in mining stock; in the late 1990s, Internet stocks. Comments about investors taking a beating in mining stocks in 1910 resemble those about investors who sank money into dot com stocks in the 1990s and lost, Statman found.
Investors then also had unreasonable expectations for high returns at low risk. “Can’t you find me an investment that is perfectly safe, and that will give me $5,000 a year?” one investor asked in 1907. “I find I can’t get along with less and I don’t want to touch my principal.” Statman notes that another investor wrote Money magazine in 1996 and wanted to know how to draw a “safe” income of $75,000 from a $725,000 portfolio. The World’s Work received many letters from small investors seeking to jump on the technology bandwagons of the day, just as investors today do. “Perhaps the worst mistake an investor can make is to become possessed of the idea that he should back a new invention,” the magazine said in 1908.
Investors also made familiar mistakes when buying bonds, Statman found. Buyers thought of bonds with high yields as free lunches: “Why should I invest money at four and a half percent when I can get six percent with the same security?” asked a World’s Work reader. Bond investors in 1910 lost money in a high yielding bond that backed an airline scheme, while in 1998 investors lost money in a government income bond fund that speculated on high yielding bonds.
Easy access to credit got early 20th century savers in trouble just as credit cards get them in trouble today. Installment loans from Sears Roebuck and Montgomery Ward tempted buyers to extend themselves for catalog items, according to The World’s Work.
Statman’s conclusion is simple: “Investment warnings then were similar to warnings today and lessons that should have been learned then need to be repeated today.”
