Confused about where we are today?
A favorite exercise is to go back first principles and consider how we got to where we are. That is a way to find insight into where we are.
On the equity side, you have to go back a century or so. Equities were considered speculative endeavors, best suited for gamblers and punters. The exceptions? A handful of “Widows & Orphan” stocks, like Ma Bell, some railroads, utilities and a few rare banks that were not suffering regular runs.
There were no disclosure rules, insider trading was rampant, and market manipulation the norm. Rumors dominated the NYSE. It’s probably just the merest of coincidences that the 1929 crash and the Great Depression soon followed…
Soon after World War 2 broke out, and once that was resolved 40 million GI’s returned home with cash in their pocket and the GI bill paying for college. The build-out of suburbia the Interstate highway system the electronics industry automobile culture and even civilian aerospace were just part of the decades-long boom that followed.
In the 1960s, Merrill Lynch was bullish on America – they set their sales staff loose trying to sell the American dream to suburban households. The technology didn’t really exist to easily track performance or costs – we simply took it on faith that equities would do well over the long haul.
But trading was expensive, and the clubby brokerage industry had long indulged the large institutions at the expense of individuals. That changed on May 1, 1975, when the Securities and Exchange Commission mandated a change in commission structures. Deregulating the brokerage industry, SEC allowed trading fees to be set by market competition for the first time in more than 180 years.
And even still, trading fees and commissions remained a major cost.
Vanguard launched in 1974, to surprisingly little notice. They slowly accumulated some assets but hardly moved the needle on Wall Street.
In 1978, Congress enacted Internal Revenue Code Section 401(k), which allowed tax-deferred savings through a company-administered plan. It was little noticed at the time.
A new bull market broke out in 1982. It was “Morning in America,” and stocks had become attractive to an increasing portion of savers here. Over the next 18 years, the Dow would gain about 1000% — more than half of those gains came from multiple expansion.
Lower trading costs, a rampaging bull market, and tax-deferred investing led to millions of new entrants into markets. Even still, most people only had a rough idea of how they were performing. CRSP data was around, but not widely available; Bloomberg terminals were expensive and oriented for professionals. Data was expensive, professional analysis was complex, and a handful of companies like Morningstar and CCH. They mailed ou hard companies with updates about Funds or Stocks. When you wanted to buy or sell, you would call your stock broker on the phone to place an order.
But a small handful of academics had discovered that nearly all active fund managers were not earning their keep. Whatever gains they had over the benchmark were soon consumed by their relatively high costs.
Those costs would continue to fall: Over the next 25 years, commissions would fall from about 1.0% of the value of a buy or sell to around 0.25% of stock value. They continued to drift lower, until 2019, when Schwab became the first major firm to offer free trading.
Fidelity’s Peter Lynch was a rock-star stock picker and crushed all benchmarks over the next dozen or so years. Lots of other active managers did well. But again, there simply wasn’t an easy way to compare professional fund managers performance over the long haul relative to fees commissions and taxes.
Since being deregulated in the US in 1975, brokerage commissions had been falling. Between 1980 and 2000 they fell from around 1.0% of the value of stock traded to around 0.20%. This wasn’t devastating to brokerage firms because lower price drove higher demand, and trading volumes rose (a dynamic that has continued to the present day). But it wasn’t especially conducive to growth.
https://www.netinterest.co/p/the-cautionary-tale-of-equity-research
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