The rise in popularity of new financial products often coincides with the rising popularity of stocks. And if one takes off, you’re bound to get more.

One of the first examples of this in the U.S. was investment trusts in the 1920s. Investment trusts are a type of fund that got their start in the U.K. in the 1860s.

The first trust of any significance was created in the U.S. in 1924. One of the main selling points was the benefit of a professional investing your money for you. As the 1920s rolled on, another point emerged on how trusts would be a stabilizing force for the stock market during a decline.

Trusts were not an immediate hit. Only $175 million were in investment trusts in 1927. That all changed within a year. The number jumped to $790 million in 1928. Then it hit $2.25 billion in 1929 and represented 22% of all stock issues. In fact, the number of investment trusts more than doubled from 172 at the start of 1929 to over 400 by the end of August of the same year. And more investment trust securities were offered in September 1929 than in August.

But the love affair investors had with investment trusts was short-lived. Like many investment fads, there are always a few bad apples that spoil the bunch. Of all the investment trusts, one stands out as the most egregious. Continue Reading…

Everything aligned perfectly for Frank Taplin. He owned shares in a small railroad, controlling a strategic corridor, in the merger mania of 1929. The battle for Taplin’s little railroad is a story of the excesses of the late 1920s stock market frenzy.

The New Era of the late 1920s saw demand for stocks like no other. Investment banks supplied the demand in innovative ways. One way was through the use of a holding company.

A holding company is exactly like sounds. It produces nothing. It provides no services. It simply holds and votes the shares of other businesses. In return, the holding company issues shares to the public supplying the demand for more shares.

One such holding company was the Allegany Corporation. It was created by the Van Sweringen brothers, with the help of J.P. Morgan and Company in January 1929. Its purpose was to hold railroad interests.

The Allegany Corporation was unique in that it wasn’t offered to the public but to J.P. Morgan’s “preferred list.” It was a who’s who of men in power and influence in the country. J.P. Morgan offered shares at cost to those on the list, with the understanding that the stock would be trading on the public market, at a profit, in the very near future. No strings attached. Continue Reading…

Here’s what I’ve been reading for the past three months:

• Deep Simplicity: Bringing Order to Chaos and Complexity – John Gibbin explains how simple rules often describe the complexity and chaos found in math, physics, biology, and more. The book was not an easy read at times — portions of it went over my head and I’m still working through it.
• Successful Stock Speculation – The 1922 classic sits as an introduction to investing. The author, a stockbroker, presents some of the basic investing principles everyone should be aware of — especially today — before putting money to work in the market. (notes)
• The Cycles of Speculation – Thomas Gibson recognized how investors bounced from one speculative frenzy to another throughout the 1800s with the rise and fall of the market cycle. He briefly describes the early cycles and the many errors investors made along the way. (notes)
• Systemantics: How Systems Work and Especially How They Fail – John Gall humorously describes how complex systems work…or do not work. His long list of systems axioms highlight the many potential failure points in any complex system.
• The Splendid and the Vile – Erik Larson tells the story of Winston Churchill’s early days of WWII during the London blitz. I struggled to find a book that held my interest over the past few months. This book came recommended, so I just started it.

Continue Reading…

What do fortunetellers, psychics, and stock market forecasters have in common? They all claim to know what happens next…for a price.

But how good are they? Horrible! Yet some investors pay for it anyways. It’s a lesson investors can learn from history.

Alfred Cowles was one of the first to put market forecasters to the test almost a century ago. He conducted two studies, the first in 1932 and again in 1944.

The first study was based on the period from 1928 to 1932. Cowles first looked at how successful 20 insurance companies and 16 financial services were at picking stocks that would outperform the market. He next looked at the accuracy of 25 financial publications in predicting the movements of the markets. He also included the 26-year record of the editor of the Wall Street Journal, Peter William Hamilton.

The results were not surprising. Continue Reading…