Thursday, May 2, 1996
Before the Fools
by MF Runkle

Last week my wife bought an old book for me at the library. It was a reprint of a 1903 tome by S.A. Nelson entitled, "The ABC of Stock Speculation." The investment advice was a little muddy, but it was interesting to see how many things have changed, and how many have stayed the same. Did you know that the volume on the NYSE reached 3 million shares a day in 1901? Mr. Nelson wasn't sure if this record would ever be broken.

Some things have changed a lot since 1903. The stock market back then was mostly railroads, with industrials being relatively new. And while there were plenty of different businesses, very few required a great amount of capital from public investment. There were no international restaurant chains, Coca Cola was in its infancy, and the telephone was the highest tech instrument of the day. Market manipulation was legal, and practiced regularly by syndicates. Mr. Nelson went into great detail describing how they operated.

Today, we small investors can play with the big boys through discount brokers. But in 1903, the small investor was stuck with a "bucket shop." In this type of establishment, you bet on the rise or fall of a security without ever buying it. What happened in a bull market when all the bucket shop clientele bet on winners? Simple, the owner shut the place down and took their money.

Of course, other things haven't changed much at all. Newsletters regularly advertised, as they still do, unbelievable returns if you followed their methods. Mr. Nelson, perhaps an early Fool, cautioned his readers to avoid them. "Corrupt and inspired articles," he wrote, "are easily detected. Should the alleged facts not be verified; should the prophet prove to be a false prophet; should the hand of the press-agent be in plain view, know then that you are following an unreliable and dishonest guide." Well, we don't have that kind of correspondent anymore, do we?

They had the Wise, too, in 1903. They pushed discretionary accounts, along with newsletters, brokers tips, and so on. Discretionary accounts still exist, but were pushed in 1903 like mutual funds. Mr. Nelson asks, quite astutely, why a broker would trade someone else's account for 1/8 commissions when he could make millions for himself. Hmm, good question. Today, we have mutual funds, which bring in huge management fees to underperform the average of the market. Well, at least we've increased our scale of idiocy.

Too bad it took 93 years for Fooldom to evolve. But then again, for Fooldom to happen it took the vast enterprises financed by the markets in 1903 and since. Where would we be if the capital had never been available to finance IBM? Would Boeing have ever been able to develop the first commercial jet airliner? How big would Intel be today without the market to finance its growth? Now, the developments financed by the stock markets of the 20th century have brought us into Fooldom.

What will we and future Fools bring about 93 years from now?

Transmitted: 5/2/96 5:22 AM