Edgar Lawrence Smith

Overview

Edgar Lawrence Smith was an economist and author, best known for his 1924 book Common Stocks as Long Term Investments. His work fundamentally changed how investors and economists viewed the stock market, shifting the preference from bonds to stocks.

2019 Relevance

In the 2019 Letter, Warren Buffett cited Smith's book as the intellectual foundation for understanding the power of Retained Earnings. Smith's "novel" realization was that well-managed companies do not distribute their entire earnings to shareholders. Instead, they retain a portion to reinvest in the business, which compounds over time. John Maynard Keynes reviewed the book and highlighted this "compound interest" effect as its most important contribution.

Buffett used Smith's thesis to explain why Berkshire's minority stakes in companies like Apple are so valuable: even though Berkshire only reports the dividends as operating earnings, the retained earnings of those companies are constantly increasing their intrinsic value.

🔗 Connections

• Concepts: Retained Earnings, Value Investing
• Sources: 2019 Letter