Tesla, 'Passive' & Herding

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Performance of Trusts Coming Out of 1929

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Successful Stock Speculation (1922)

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I am so excited to share today’s post, so get yourself that cup of coffee and settle in for a deep dive.

You may have heard that tomorrow a certain electric vehicle manufacturer is entering the most popular domestic U.S. equity index: The S&P 500. Another topic of conversation this week surrounded the complaint against Robinhood brought forward in Massachusetts by the state’s securities regulators on December 16th. Today we are going to talk about the relationship between these two stories, as the speculative actions of Robinhood users – which regulators argue the company encourages – are directly tied to some of the key concerns many have on Tesla’s addition to the S&P 500 on Monday.

Let’s start with Robinhood and then circle back to Tesla’s index inclusion, which will include a deep dive into some early variations of index funds after the Great Depression that offer fascinating parallels to today.

Robinhood: An Improved Bucket Shop

In 1688, Joseph de la Vega described the market as a game:

“The Exchange business is comparable to a game. Some of the players behave like princes and combine strength with tenderness and amiability with intelligence, but there are some participants who lose their reputation and others who lack devotion to their business even before the play begins.

A witty man, observing the business on the Exchange, the studied impoliteness there, remarked that the gamble on the Exchange was like death in that it made all people equal.“

This week the Financial Times reported:

“The Massachusetts securities regulator has launched legal action against the online trading app Robinhood, accusing it of ‘gamifying’ investing and alleging the company did not put in place proper controls to safeguard inexperienced investors…

The enforcement office found that large portions of the Massachusetts public that Robinhood had approved to trade options had little or no investment knowledge, and that it had given the green light to some new traders even in violation of the company’s own policies…

‘As a broker-dealer, Robinhood has a duty to protect its customers and their money,’ said William Galvin, the Massachusetts secretary of the commonwealth. ‘Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical, but also falls far short of the standards we require in Massachusetts.’

Mr Galvin’s office also said that Robinhood had provided lists of securities that were the most popular among its customers in an effort to encourage trading on its app and site… ‘This is no different from a broker-dealer agent handing a list of securities to a customer, pretending to be surprised when the customer purchases securities from that list, and then proclaiming that he made no recommendations to the customer,‘…

The complaint singled out one customer that the regulator said had no investment experience who made 12,700 trades within a six-month period.“

The complicated issue with Robinhood is that while it has been a groundbreaking app in terms of getting millions of users to start investing (often for the first time), the company provides little to no resources or direction on how to go about doing so responsibly. In addition, it is obviously a benefit that Robinhood’s commission-free trading platform instigated an industry-wide race to zero commissions that culminated in November 2019 with all major discount brokerages offering commission-free trading.

Yet again, however, this has proved to be a double-edged sword. The elimination of trading commissions meant that one of the largest barriers to over trading – cost – had suddenly been removed. As we can see in the chart below, speculation boomed.

A few weeks ago I tweeted that the Finance TikTok community was a 2020 version of the Bucket Shop:

Upon thinking and reading about this further, however, I think that it is actually the Finance TikTok user’s favorite app that offers the best parallel for bucket shops: Robinhood. Now, for those that are sick of hearing an anti-Robinhood narrative, stick with me, because although there are obviously negative connotations associated with bucket shops, there are some positive parallels as well.

First, we should all understand what exactly Bucket Shops were, because the largest difference between them and Robinhood is the fact that bucket shop trades were fictitious.

“That struggle, which pitted the nation’s stock and commodity exchanges against thousands of bucket shops, began with the widespread adoption of the ticker, a low-cost and low-maintenance printing telegraph, in the late 1870s and lasted until about 1915. Bucket shops were places where customers wagered small sums on the price movements of stocks and commodities…

Bucket shops leased tickers from telegraph companies on the same terms as brokers did and used real-time quotations from exchange floors as the basis for customers’ wagers.

However, bucket shops did not place customers’ transactions on any of the stock and commodity exchanges, nor did bucket shop transactions affect the actual prices of stock shares or agricultural products. Such transactions were fictitious and did not result in delivery of stock certificates or commodities to their patrons.”

In short, bucket shops were places for people to paper trade the market in real time. So, what about the similarities?

The first commonality that Bucket Shops and Robinhood share is that they were heavily associated with “gambling”. In the late 19th century, many cities across the country had begun to outlaw bucket shops for being nothing more than “gambling dens”. However, as many smaller speculators that could only ‘participate’ in the markets through bucket shops quipped back, what was so different about their trades in bucket shops in comparison to the highly speculative investors on the more ‘prestigious’ stock exchange? As the second article in today’s post notes:

“In response to an imminent police crackdown on bucket shop proprietors based on the charge of ‘just plain ordinary gambling,’ a reporter for the New York Times wondered, ‘suppose some zealous citizen should come along and want to press the same sort of charge against the Stock Exchange’?“

Like the Massachusetts complaint filed this week, the concept of “gamification” was central to debates around speculation and gambling in the late 19th century:

“Economists who studied the nation’s financial markets expressed doubts about the distinction between speculation and gambling… economist Henry Crosby Emery claimed that “the gaming instinct” was integral to speculation, although “speculation is not mere gambling. Whether it is better or worse than gambling is a question on which opinions will long differ.”

Like any other “gambling den”, the operators of these bucket shops did everything they could to encourage further speculation from their patrons. Sound similar to the Robinhood complaint?

Yet, like Robinhood today, there were also positive aspects of the bucket shops, particularly as they relate to democratizing access to financial markets and encouraging broader market participation. This excerpt from Investment News explains more:

Thanks to the Internet and smartphones, investors today can place trades instantly from almost anywhere. But widespread access to stock ownership — for better and for worse — arguably began with another technology, one as revolutionary in its day as the Internet is today.

In 1863, electrician Edward A. Calahan invented the stock ticker, a telegraph receiver capable of printing letters and numbers onto paper tape. At first, almost all ticker customers were brokers and bankers. By around 1880, however, the ticker had spawned a new kind of business, called bucket shops.

Bucket shops were the equivalent of off-track betting parlors where customers placed wagers on the price movements of stocks, offering a kind of vicarious participation in the market. Although bucket shops subscribed to the same ticker service that bankers and brokers did, no securities changed hands and the wagers didn’t affect share prices on stock exchanges. Several hundred of these shops were operating around the country by the turn of the 20th century.

Before their rise, the public had typically viewed the stock market from the sidelines, as fascinated but disinterested spectators. Financial failure was something that high-profile speculators suffered, not ordinary people. The bucket shops changed that…

Ordinary investors couldn’t participate on the organized exchanges; no matter how savvy, they were barred by high margins, large lot sizes and brokers unwilling to take small trades. The Wall Street Journal estimated that in 1912 only 60,000 people placed trades on the New York Stock Exchange, and as late as 1916 only 80 out of the exchange’s 600 brokers accepted trades of less than 100 shares. Compare this to one bucket-shop chain, Haight & Freese [a bucket shop] which claimed to have more than 10,000 accounts in 1902 and which accepted “trades” as low as a few dollars…

By 1915, the bucket shop was dead. Many of the shops’ former patrons transferred their business to legitimate brokers who had come to realize that a vast, untapped customer base existed — the investor of modest means. Brokers increasingly welcomed the “odd lot” business that the stock ticker and the bucket shops had helped create, paving the way for today’s investor democracy.

See the parallels? Despite their association with “gambling dens” bucket shops were largely responsible for a massive uptick in the broader public’s interest and participation in stock markets. When bucket shops were finally shut down in 1915, the brokers on traditional exchanges realized that there was now an entirely new market of speculators and investors that no longer had a bucket shop to trade in, and exchange restrictions were relaxed to bring in these small-time speculators money to traditional exchanges.

As with many new innovations and movements, they are often a double-edged sword. Both Robinhood in the 21st century and Bucket Shops in the 20th century are associated with gambling and speculative behavior, but on the other hand they are also clearly responsible for democratizing access to financial markets and encouraging small-time investors to put their money in the market.

Tesla & Passive Indices

Wow, all that and we still haven’t even gotten to Tesla! I won’t spend too much time talking about the company itself – as I feel this is a topic that’s been beaten to death this year – but rather the narratives and broader themes associated with the company’s inclusion in the S&P 500 as of tomorrow.

First, I think it is interesting to consider how the topic of the previous section, Robinhood, is so central to the Tesla / S&P 500 story. The fervor for Tesla’s soaring stock price by Robinhood traders has been written about ad nauseum (I am guilty myself) this year. While there were immediate complaints about Tesla’s inclusion in the index when the S&P’s committee announced its inclusion in November, the speculative mania driving Tesla shares higher have only increased concerns of how it’s inclusion will affect the index . After all, the company is entering the index with a market capitalization of $659 Billion, and will be the 6th largest position.

As we all know, much of this rapid increase in market capitalization has been the result of speculators buying up shares in the belief that the company’s index inclusion bodes well for future returns. This same logic helped drive Tesla’s stock up significantly following the announcement that it would execute a stock split.

Some have argued that the decision to include Tesla after the stock has already risen 730% year-to-date is an example of S&P Index committee members getting similarly swept away by the speculative hype this year. On May 1st, Tesla CEO Elon Musk tweeted that the company’s share price was too high:

Since this tweet, the stock has gained 344%. Why does this matter? Well, as we all know there are issues with the weighting methodologies used by popular indices like the S&P 500, which weight companies on their float-adjusted market capitalization. In other words, how big the company is. At a market capitalization of $659 Billion, and is the 6th largest position in the index, the company’s returns will have some serious impact on the broader index. This is problematic because with Tesla entering the index at such an astronomically high valuation, there are legitimate concerns that the company is more likely to decline from this peak than soar higher. The index committee’s decision to add Tesla at such an inflated size following a year of excess speculation in its stock could ultimately prove to be an incredibly poor active decision for a passive index.

Fixed Trusts & Blurring The Active/Passive Line

Fixed Trust Ads

That last point in the previous paragraph is where I want to close out this lengthy introduction. I spent an embarrassing amount of hours reading through The Economist Archive to learn more about the “Fixed Trust” movement that took place following the 1929 Crash. These investment vehicles are fascinating because of their similarities with the modern index fund. I realize that seeing all these snippets may seem daunting to read, but I promise you that they are worth reading.

Before going further I’ll just briefly describe what these Fixed Trusts were. Essentially, following the 1929 crash many investors had become angry and disillusioned with the performance of actively managed trusts and how they performed in the crash. Many had felt that the reason they paid fees to these active managers was so that they could avoid getting caught up in such crashes. Enter the Fixed Trust, an early form of Index Funds predicated on the belief that human judgement was getting in the way of good investment outcomes. These trusts were funds that invested in a list of securities printed in their initial prospectus, and were ‘fixed’ in that they could not deviate from this initial list. Investors could then purchase ‘units’ of this trust similar to how a share of an ETF today provides partial ownership of the S&P 500 index.

I will provide some guiding commentary, but these screenshots honestly tell the narrative better than I could so I’ll let you enjoy them for what they are.

Reasons Behind The Fixed Trust Movement

As it turns out, S&P has a long history of being interested in index products. Check out this quote from “The Standard Statistics Company” (S&P Predecessor) in 1931:

The quote below perfectly sums up how those that support index funds as a whole but not the inclusion of Tesla might feel. It also encapsulates the reasons for direct indexing’s popularity today:

“When buying a shop window, however, you are bound to buy some articles which you do not favor or which you do not particularly prize.”

Passive “Fixed” trusts start to becoming increasingly active… the screenshot below discusses how Fixed Trust funds were adding new provisions that allowed them to be more discretionary in replacing securities in the original index…

Again, this is a similar complaint to those levied against the S&P Index committee today, is it truly passive if a committee is making active decisions on who gets added / removed from the index?

In fact, one fund started offering to convert their passive Fixed Trust into an Actively Managed Trust!

And FINALLY, I’ll end this introduction with a crazy example of someone predicting the future. The author of this “Letter to the Editor” in 1935 correctly predicts what we now term active proxy voting. Yeah, Larry Fink, your letter about being more active via index funds was cool, but this guy was like a century ahead of you.

Now let’s dive in!!

What Makes Uninformed Traders Tick?

I recently discussed aspects of this paper in an interview with Michael Green as a part of the Real Vision Festival of Learning, and it seems like a relevant article for today’s topic. One of the main takeaways is that even with greater access to information through technological innovations (in this case the ticker, but could be Robinhood, etc. today), uninformed traders will actually demonstrate increased herding behavior and pile into the same stocks despite having more information on a broader pool of stocks to select from. Feels similar to the recent speculative boom by retail investors that seems to have focused heavily on Tesla and Apple.

This piece on ticker subscriptions and price efficiency is also one of the most fascinating articles I’ve read in months because of its modern implications for passive investing and price discovery. While the parallel is not immediately obvious, the period covered in this paper and recent decades both involve the rise of a new ‘technology’ with the potential to affect pricing efficiency and co-movements in prices.

For example, this quote from Michael Green in a recent article on passive investing states:

‘Each new dollar invested into passive index funds must purchase the securities in the benchmark index. These purchases exert an inexorable influence on the underlying securities. Per Sharpe’s own work, these are not passive investors – they are mindless systematic active investors with zero interest in the fundamentals of the securities they purchase.

If incremental investor dollars were increasingly flowing into market capitalization indices, we would expect to see two clear phenomena. First, we would expect to see momentum rewarded as securities that rose in price would capture an increasing fraction of each incremental investment dollar. Second, we would expect to see a rise in correlation as securities become increasingly traded as a group.‘

In that same vein, the authors of this article looks at some of these same issues in relation to the ticker:

‘How does access to information affect price efficiency? We address this question by studying the stock ticker; a device that disseminated price changes to brokerage offices with a ticker subscription. We find that an increased number of ticker subscriptions in a state strengthened the return continuation and return co-movement of firms headquartered in the state. Therefore, the increased dissemination of price changes appears to have decreased price efficiency by increasing uninformed trend chasing. Our results challenge the assumption that greater access to information improves price efficiency.‘

Co-Movement

The article specifically looks at ‘return co-movement to determine whether uninformed trading explains return continuation.’

‘The positive β1 coefficients in Panel A of Table 7 indicate that an increased number of ticker subscriptions in a state increases the average local beta of firms in the state, which indicates greater return co-movement among local stocks… This positive coefficient indicates that greater price dissemination in a state is associated with higher return co-movement in the state.’

Their analysis also yielded an interesting insight on ‘local’ investment biases:

‘The positive state-level relation between ticker subscriptions and return co-movement also suggests that the stock ticker did not mitigate local investment bias. Instead, investors appear to have continued to focus their trading on “familiar” local firms despite gaining exposure to non-local firms via the stock ticker. Note that the ticker subscription did not confer any informational advantage that would justify the continuation of local investment bias.’

The authors conclude:

‘In summary, recall that the stock ticker disseminated price changes, not information on fundamentals. Furthermore, any decrease in trading costs associated with ticker subscriptions is predicted to increase informed trading by facilitating arbitrage activity and therefore lowering return co-movement. Overall, the positive relation between ticker subscriptions and return co-movement indicates that greater uninformed trend chasing, not greater liquidity, explains the positive impact of ticker subscriptions on return continuation.‘

Cost

There is an even more direct linkage between the Ticker and Passive Funds: Cost. Tell me this doesn’t sound familiar:

‘Ticker subscriptions had an inverse relation with the cost of transmitting data to the ticker’s location. We find that lower operating costs for a stock ticker increased ticker subscriptions and strengthened both the return continuation as well as the return co-movement of firms in the state. Intuitively, lower data transmission costs reduced price efficiency as the associated increase in investor access to price changes increased trend chasing.’

In other words, lower costs increased the prevalence of tickers, which increased uninformed trading, which decreased price discovery and increased co-movement in returns.

You can see how easy it would be for one to apply this logic to passive funds today. With access to low-cost (or even free) passive ETFs or mutual funds, assets in passive vehicles have exploded. In turn, critics argue that this has produced a ‘momentum’ effect and increased in return co-movements. Food for thought.

‘Overall, the instrumental variable procedure confirms that increasing the access of investors to price changes decreases price efficiency by increasing trend chasing.’

Definitely take the time to read this article.

Learning from One Another’s Mistakes: Investment Trusts in The UK and The US

This fascinating article discusses the early UK and US investment trusts between the 1880s and 1930s.

The first notable British trust was the Foreign & Colonial Government Trust, which I wrote about here. You should definitely take the time to read the entire article, but I’ll provide a few high level takeaways. The first, is that British investment trusts largely learned their lessons after the Barings Crisis in the 1890s wiped many of them out, and exhibited the flaws in their structure. Consequently, more conservative measures were put in place to avoid experiencing such a crisis again. The funds were much more heavily weighted in fixed interest securities, and had smaller allocations to equities. Capital gains were also set aside so that if a crisis should occur again, there would be ‘rainy day’ funds to pay out dividends.

In contrast, American investment trusts took a more ‘grip it and rip it’ approach, which utilized higher amounts of leverage, almost 100% allocations to equities, and more.

“The different management styles of British and American investment trust managers reflected a different attitude to investment. By the 1920s, Americans were happy to invest in equities and expected fund managers to seek to achieve capital gain through leverage, market timing and ‘expert’ stock selection. In the UK, retail investors preferred the security of fixed-interest securities and were content with a relatively low return in the form of income yield in return for safety through a conservative approach to reserves and an emphasis on a relatively passive investment strategy.”

However, interestingly, shareholders in some of these funds had more power than their British counterparts. For example, shareholders could force the Portfolio Manager of the fund they were invested in to sell a security that the PM had purchased:

“In the Alexander Fund, if ‘dissatisfied with a security purchased may go to a Board of Overseers elected by the shareholders from among themselves and, if they agree with him, can force the manager to sell the security.”

As we all know, the American investment trust companies were decimated by the 1929 Crash, as their leveraged structures gave way to the plummeting market.

“By the end of the boom, more than $7 billion was invested in 675 investment companies of all types, of which 193 were investment ‘management’ companies, with assets of $2.7 billion, including 19 open-ended funds, accounting for a mere $140 million. This meteoric rise was followed by a crash which was nothing if not spectacular. The Economist reported that the Standard Statistics index of the common stocks of 30 leading American investment trusts showed a fall of no less than 75 per cent from their peak, whereas the Institute of Actuaries index of the common stocks of the 15 leading British investment trusts showed a fall between their peak (March 1928) and March 1931 of only 17 per cent… By the end of 1937, an average dollar invested in July 1929 in an index of leveraged investment trust common stocks was worth 5 cents, compared with 48 cents for the common stock of an index of non-leveraged investment trusts.”

The most interesting aspect of this article, however, is its relevance to the modern Active / Passive debate. Like today, there were serious questions raised about the merits of active management following a substantial market crash (1929 and 2008). Articles in 1931 from outlets like The Economist reported the calls of many investors for a security that would “remove the human factor” from investing by offering “a security based on the best available selection of American shares… [that] should be known to every subscriber, and should be subsequently unalterable.” This sounds an awful lot like the modern index fund. However, there were also many that felt there was merit in paying for active management:

“American investment trust managers were credited both with stock selection and with market timing skills. The British concept of just buying a large number of stocks as they were issued and then holding them to maturity was considered ‘plodding’. The Americans argued that ‘superior management was a desirable substitute for diversification’, with Leibson recommending ‘a field staff of experts throughout the world’. American investment managers were expected to buy and sell rather than just buy and hold: ‘the investment trust manager who devotes his time to whether oils or motors are the more attractive group…is certainly performing one of the essential functions of management’.”

Where the Common People Could Speculate

“That struggle, which pitted the nation’s stock and commodity exchanges against thousands of bucket shops, began with the widespread adoption of the ticker, a low-cost and low-maintenance printing telegraph, in the late 1870s and lasted until about 1915. Bucket shops were places where customers wagered small sums on the price movements of stocks and commodities. The term “bucket shop” apparently originated in early nineteenth-century England. Poor youths drained beer kegs thrown out by pubs and sold the collected dregs in abandoned shops. In the late 1870s the term was applied to shops where customers could wager on the price movements of stocks and commodities. Bucket shops leased tickers from telegraph companies on the same terms as brokers did and used real-time quotations from exchange floors as the basis for customers’ wagers.

However, bucket shops did not place customers’ transactions on any of the stock and commodity exchanges, nor did bucket shop transactions affect the actual prices of stock shares or agricultural products. Such transactions were fictitious and did not result in delivery of stock certificates or commodities to their patrons. Indeed, by the 1880s nearly every state had outlawed bucket shops as gambling dens. Unlike brokers, who acted as customers’ agents in placing their trades, bucket shops were customers’ adversaries; a customer’s winnings were a bucket shop’s losses. Despite the fictitious nature of bucket shop transactions, the shops functioned as a shadow market by providing a cheap and accessible way for people of limited means to speculate, however vicariously, in stocks and commodities.

The history of the bucket shops and of the exchanges’ efforts to stamp them out reframes our understanding of the development of modern finance capitalism by showing how one of its key features—broad public participation in financial markets—emerged. Business and social historians have shown that the rise of modern financial institutions depended on innovations in banking, currency, and corporate organization, and cultural historians have explained Americans’ ambivalent embrace of gambling and risk taking and their complex relationship to the market. But neither business nor cultural history has explained how ordinary Americans became market participants nor how their increased participation exposed and redefined the troublesome moral and economic connections between gambling and the marketplace.”

Dow Jones’s 22,000 Point Mistake

IBM Office (1924)

In a week that was full of discussions over index “inclusions” (Tesla), there is no better time to re-share this fantastic Global Financial Data article demonstrating just how much of an impact the decision to include / remove a stock from an index can have.

This article is interesting for two reasons. First, as clearly demonstrated by the chart from earlier in today’s post that compared returns for FAANG Stocks and the S&P 500 Ex-FAANG, an index’s returns can be heavily influenced by just a few stocks. Using their extensive data on historical returns for individual stocks, GFD was able to study how just one stock may impact an index (or not, in this example).

“One of the long-term components of the Dow Jones Industrial Average has been IBM. The company was originally added to the Dow Jones Industrials on March 26, 1932 in a reshuffle involving eight stocks including Coca-Cola, Nash Motors (later American Motors) and Proctor & Gamble. On March 13, 1939, however, both IBM and Nash Motors were removed from the average and replaced by American Telephone & Telegraph and United Aircraft Corp. (now United Technologies).

AT&T was in the Dow Jones Utilities Average until June 1, 1938. Until then, the Dow committee had interpreted utilities in a broader sense to include electric, gas, and communications companies as providers of essential services. In 1938, the Dow Jones committee decided to restrict membership in the Utilities Average to power utilities.

The resulting reshuffle removed nine stocks, including AT&T, International Telephone & Telegraph, and Western Union, all of which were communications utilities rather than power utilities, from the Dow Jones Utilities Average. Since AT&T was such a huge company, it was moved over to the Dow Jones Industrial Average which required that another stock be removed to make room for AT&T. Thus, IBM was kicked out of the Dow Jones Industrial Average.”

To summarize, changes to the Dow Jones Utilities Average requirements kicked out AT&T. Since it was such a large company, and now suddenly eligible for the Dow Jones Industrial Average, IBM was booted from the DJIA in order to substitute in AT&T. Well, we’ve seen how much of an influence 5 FAANG stocks can have on the S&P 500’s returns, but what was the impact of a single stock, replacing IBM with AT&T?

“What if IBM had stayed in the Dow Jones Industrial Average between March 13, 1939 when it was removed and June 29, 1979 when IBM replaced Chrysler in the Dow Jones Industrials? Obviously, the Dow Jones Industrials would be higher than it is today, but how much higher?

… IBM has been one of the best performers on the stock exchange in history. If you had invested $1 in IBM when it started trading OTC in August 1911, it would have grown to $40,000 today on a price basis. If you had reinvested your dividends, your $1 investment would have grown to $1,434,300. In the past 100 years, IBM has given over a million-fold return…

AT&T incorporated in New York on March 3, 1885 and began trading on the NYSE in May 1900 after it had acquired American Bell Telephone Co. in March 1900. The company was forced to split up into “Ma Bell” and the “Baby Bells” by the U.S. Government on December 31, 1983. On November 18, 2005, AT&T Corp. (“Ma Bell”) was acquired by one of the Baby Bells, SBC Communications, which then changed its name to AT&T Inc. in a reverse acquisition.

AT&T has not performed as well as IBM over the past 100 years. If you had invested $1 in AT&T in May 1900, your investment would have grown to only $4.26 on a price basis, or $639 if you had reinvested all of your dividends back in the company, by the time AT&T was broken up in February 1984.

So what if the Dow Jones Committee had kept IBM in the Dow Jones Average between March 1939 and June 1979 and had never admitted AT&T, keeping it in the Utilities Average? What would the result have been?… The DJIA stood at 151.1 on March 14, 1939 and 841.98 on June 29, 1979. Since the DJIA is price weighted, you can remove the impact of AT&T on the DJIA by subtracting out the price of AT&T allowing for the splits, and replacing this amount with the value of IBM stock, allowing for the splits in IBM. If you do this, you would find that the DJIA would have been at 23,582 in June 1979, not 841.98. In other words, IBM would have added 22,740 points to the DJIA had it never been removed.”

So, a pretty big impact, right? This brings me to the second reason why this article is interesting and relevant: innovation and competition.

Global Financial Data’s long-term returns for IBM clearly show that the stock was a power-house, and more generally, IBM was once a leading technology company that was considered forward-thinking and innovative. In the company’s more recent history, however, “Big Blue” has lagged behind while other tech giants have dominated. While it is a complicated issue, I think that IBM is an example of how a company that can appear unassailable, can be disrupted by other innovators. Just as it’s hard for any of us to imagine a scenario where Amazon isn’t dominating the world, many would have said the same thing about Sears. Food for thought.

Who Owned Citibank? Familiarity Bias and Business Network Influences on Stock Purchases,

“We study factors influencing individuals’ decisions to purchase Citibank stock during the 1920s. Ownership was encouraged by proximity to New York and higher wealth. Lack of familiarity was also an important barrier. The establishment of Citibank branches within a U.S. county or a foreign country was associated with a large increase in share ownership in that location, ceteris paribus. Within the New York City metropolitan area, individual characteristics related to wealth, knowledge, and one’s influence within the New York City Business network increased the probability of becoming a Citibank shareholder. Business associates in the network were an important influence on purchase decisions.

Connections with Citibank officers and directors, or with people who had such connections, increased the probability of buying Citibank shares. Connections with other Citibank shareholders also increased the probability of buying Citibank shares. Connections with officers and directors of other large New York banks reduced the probability of owning Citibank, presumably because it increased familiarity with a close substitute for Citibank shares.

Network influence reflected more than the transmission of inside information; executives imitated other’s stock buying behavior, which provides evidence of the importance of familiarity for purchases. The role of some network influences, like other identifiable influences, became less important during the price boom of 1928-1929, perhaps reflecting the rising importance of other means of increasing familiarity during the price boom (i.e., media coverage).”