Global Financial Data
By Bryan Taylor, Chief Economist, Global Financial Data
With Google and Priceline surpassing $1000 (much less Berkshire Hathaway A shares trading at $175,000), people are amazed that stocks can trade at such high levels without being overvalued or losing liquidity, but in reality, compared with the past, most stocks are cheap nowadays.a In fact, the further you go back in time, the higher was the price of average stocks to most investors.a In terms of purchasing power, stocks are as cheap and as liquid as they have ever been.
Not only was the average price of stocks 200 years higher than they are today, but they were higher in terms of personal income.a Shares of the First Bank of the United States were issued at $400 in 1791 and shares of the Massachusetts Bank of Boston were issued at $500 in 1792. One share was equivalent to the average annual income of most people back then.a Most shares sold for $100, and some for $50 or $25, so how could investors afford stocks that make Google and Priceline look cheap?aaaaaaaaaaaaaa Even if a stock was at $100, this was equivalent to $10,000 today in terms of earning power.a Were there really that many rich people back then?a The answer is no, but the difference is in the way shares were issued and traded.
First, shares were rarely bought in round lots of 100 shares as they are today, but shares were traded individually. This means that even though the prices of individual shares has fallen, the average transaction size has not fallen as significantly.
Second, and most importantly, shares were often bought on the installment plan, at a discount, or in fractions in order to reduce the total cost of investing. It is this second point I want to concentrate on.