Why Stocks and Bonds Exist

The story of stocks and bonds is that of entrepreneurship. In the United States alone, over 500,000 new businesses are started every year.┬áI suppose, having a “boss” is not an easy thing for many people.

army
A popular US Army recruiting slogan created in 1980. It was changed to “Army of One” just before the real wars began in Afghanistan and Iraq.

If anything, the urge to start businesses is stronger than ever before. A recent survey of millennial college kids showed that roughly 2/3rd of them would like to be entrepreneurs – to “be all that you can be” in the words of Uncle Sam above.

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Buy and Hold on … (to your Amygdala)

The purpose of any financial investment is to grow your money, pure and simple. But there is a bit more to what “making money” really means. Suppose you invested $10,000 ten years ago and today that investment is worth $12,000. That sounds like a good thing. But what if all the stuff you could buy for $10,000 back then now costs $14,000? No longer sounds like a good thing. Inflation is the hot sun that keeps melting away the ice-cream of your investments.

How do we know how much inflation there is? The Federal Government, helpful as always, has been publishing the inflation rate since 1947 through the Bureau of Labor Statistics (BLS). The number they provide is known as the Consumer Price Index (CPI). How they get to this figure is rather involved : they first make an educated guess as to what the average American family consumes and then measure how the price of this stuff is changing every month. If you want to know what the Government thinks your household budget looks like, take a peek at the graphic below:

cpi2015

The big one is housing of course, taking a 43% bite out of the family budget.

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The Age of Mutual Funds

The concept of a stock is not a new one.┬áNearly four hundred years ago, shares were issued by the East India Company to help pay for its voyages and colonial conquests in Asia. In America, the New York Stock Exchange (NYSE) was formed in 1792 when a group of brokers signed the Buttonwood agreement – named after a large Buttonwood tree which existed on Wall St at that time. In those innocent times brokers conducted trading under that shady tree, scampering to the nearby Tontine coffee house during inclement weather. But before we get too misty-eyed it is worth noting that the Tontine coffee house was also a hub of many other forms of trading, including African slaves who were registered there before being sent off to the cotton plantations.

The NYSE has certainly experienced remarkable growth but the idea of paying someone else to pick a portfolio of stocks did not come into its own until the 1920s, when the first mutual funds were launched. An interesting bit of history here is the Wellington Fund, launched during that time which still exists today (ticker: VWELX). It was managed for a while by John Bogle who is the founder of Vanguard investment company, prolific author, and one of the few true pioneers of the investment industry. By a quirk of fate, both Mr. Bogle and the Wellington Fund are approximately equally old, about 86 years.

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Masters of the Universe…?

wolfcollageThe term “Wall Street” is a bit of an anachronism at this point. The actual Wall St in New York’s financial district ceased to be the hub of financial firms decades ago. The action is now shared with midtown Manhattan, Connecticut, Chicago and oddly enough, the la-la land of Southern California. The New York Stock Exchange (NYSE) remains a Wall St fixture but it competes with the Nasdaq located at Times Square as well as other niche exchanges and the so-called dark pools. In any event, the NYSE does not trade bonds, commodities or foreign exchange each of which is by itself a larger market than stocks.

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