The History of Investing
Investing as we know it today is a fairly modern phenomena. The first essential part to the ability to invest is the ability to own or property rights. Though the ability to own property has existed since the earliest recorded history, such a right has not been available to the general public as a historic norm. Even today in some fairly modern countries the ability to own property does not exist for the public at large. The concept of everyone within the society having the ability to own property really began with the birth of the United States, but was not even truly realized in the U.S. until the end of the Civil War and the womens rights movement. Adam Smith, who many consider the father of modern finance, essentially conceptualized a society founded in the economics of Capitalism which was an extension of Mercantilism. This economic foundation was essentially an extension of the "Inalienable" Rights of the U.S. Constitution, but Smith characterized how such an economic system might actually work to the benefit of the entire society in his landmark book, The Wealth of Nations. This book, though based on many of the principles for "rights" formulated by other contemporaries, was revolutionary in the field of economics. In fact, it was considered by some as a heretical text by its proposed elimination of the widely accepted "class" economic system.
Another revolutionary element in the development of investing was the establishment of markets for fair trading. In the late 1800's there were merely twenty or so companies that were publicly traded on the exchanges, however, these were the beginnings of efficient markets for public investing.The initial markets began to grow in efficiency in the early 1900's, unfortunately there was little regulation in place to prevent unscrupulous use of the markets for personal gain. Such lack of regulation lead to various types of insider market manipulation, and the insuing market panics that followed including the "Crash of 29." Fortunately regulation was set in place to help ensure a fair playing field for all. With this ongoing regulation to ensure fair trade based on supply and demand, the field of modern finance was established, and academic minds such as Markowitz, Ibbotson, Sinquefield, Fama, French, and others were able to build from the original works of Adam Smith.
These concepts are the keystones of a belief system that guides Archetype's approach to portfolio design and our asset selection process. Today, the investment industry takes for granted the calculation of rates of return and the availability of comparative universes for professionally managed funds. But before the mid 1960s, there was neither a generally accepted way to calculate a total return nor a way to compare the returns of different funds. This all changed with the advent of computers and the collection of data for mutual funds as well as for individual stocks and bonds.
Rigorous testing by financial economists of that seminal era led to the development of asset pricing models to evaluate the risk/return characteristics of securities and portfolios, and also led to a theory of market efficiency that suggested excess returns were only achievable by taking on above-market risk. Studies documenting the failure of active managers to outperform market indexes gave rise in the early 1970s to passively managed index funds that relied on capital markets as the source of investment returns.
Further research and data compilation over several decades led to the identification of the multiple equity asset classes and risk dimensions that form the basis of Archetype’s strategies. Strategies that go well beyond mere indexing to provide strategic asset class portfolio design based on sound academics!