Stock market charts you never saw (2021)

Figures 6 and 9 look a lot like <a href="https:&#x2F;&#x2F;totalrealreturns.com&#x2F;" rel="nofollow">https:&#x2F;&#x2F;totalrealreturns.com&#x2F;</a> , especially with the trendlines on these figures, logarithmic y-axis, (disclosure: my side project, recomputed daily at market close)<p>It would be cool to merge in some longer-term historical data as the article author has done, instead of just using actually-tradable assets like I&#x27;ve done.<p>Per the article, the author considers these charts &quot;misleading&quot;:<p>&gt; Charts such as Figure 9, with their accompanying commentary, and combined with the distinctive behavior of the product function, may lead investors to mis-anchor their expectations about the future performance of bond and stock investments. Faced with a yawning visual gap, and apprised of the numerical dominance of stock returns (in Siegel 2014, estimated at 6.6% real versus 3.6% for bonds), an investor readily infers that bonds are never going to out-perform stocks over any lengthy period.<p>I&#x27;m not sure I agree with the conclusion. A log scale hides a lot of volatility, but it&#x27;s still fairly obvious that the stocks line has a lot more volatility, prolonged periods of substantial drowdowns (painful!)...<p>As another commenter points out, this article&#x27;s use of price-only data (even if adjusted for inflation) is intellectually dishonest, ignoring returns from dividends. And yes, your typical price-only, non-inflation-adjusted charts from Yahoo Finance &#x2F; Google Finance &#x2F; Apple Stocks should probably be considered intellectually dishonest, or at least confusing, in my opinion...

Revised follow-up paper <a href="https:&#x2F;&#x2F;papers.ssrn.com&#x2F;sol3&#x2F;papers.cfm?abstract_id=3805927" rel="nofollow">https:&#x2F;&#x2F;papers.ssrn.com&#x2F;sol3&#x2F;papers.cfm?abstract_id=3805927</a>

Until the beginning of the 20th century, stocks were viewed as a purely speculative investment. The idea that buy and hold will provide great returns is a modern one and is supported by the growth of the stock market in the 20th century.<p>There is also the issue of survivorship bias. The SP500 and Dow Jones indices regularly discard the losers and add new companies, so we don&#x27;t know the true results of holding companies for a long period of time.

An extremely interesting paper that puts into perspective a lot of investment &quot;knowledge&quot; shared at nauseom almost everywhere.<p>&gt; Investors have seen countless charts of US stock market performance which start in 1926 and end near the present. But US trading long predates 1926, and the foreshortened perspective that results from a focus on post-1926 data can be misleading.<p>&gt; The goal is to challenge shibboleths about the expected outcomes of buy-and-hold stock market investing, and to raise questions about the expected performance of stocks versus bonds over long periods.<p>&gt; Put another way, since 1928 dividends plus inflation accounted for 99.7% of the nominal wealth produced, as of 2008, by investing in stocks.<p>&gt; Total return measured on the century scale presumes an investor who never needs to spend the dividends or interest received. No real investor, individual or institution, has that luxury. And there is one class of individual investor, now of growing importance within the financial planning literature as the Baby Boom generation ages, for whom the total return metric is particularly malaprop: retirees. Once portfolio accumulation ceases with retirement, portfolio income must be spent to live. Under those circumstances real price return, over short periods lasting two or three decades, becomes an important metric. By that measure, an investment in stocks has been dicey indeed.<p>---<p>Just to whet your appetite some more:<p>&gt; Figure 4 [1] illuminates how much of the long-term return on stocks since 1926 has been due to sustained high inflation on the one hand, and to the favorable enhancement from re-investing dividends on the other. Under the one depiction, the portfolio returned about 9% compounded, from near the high in the Twenties to near the low in the Oughts; under the other, only about 1.5%.<p>&gt; Few contemporary investors expect a multi-decade return on their stock portfolios of 1 2% per year. They have no reason to expect such poor results, because most investors have never seen a post-1926 chart of inflation-adjusted, price-only returns, and have rarely seen any charts extending back past 1896.<p>[1] <a href="https:&#x2F;&#x2F;imgur.com&#x2F;a&#x2F;QCtugvC" rel="nofollow">https:&#x2F;&#x2F;imgur.com&#x2F;a&#x2F;QCtugvC</a>

I have a theory. The last 100 years has seen govt spending as percent of gdp increase to ever greater levels. People are expecting more and more handouts and no one wants to pay for it. Without the ability to pay for it via taxes, the govt will eventually have to default on it&#x27;s currency and thus real returns on fixed income&#x2F;bonds will have to become increasingly negative.<p>Their article already shows a slight widening between bonds&#x2F;equities post 1950. My theorey is that for the next 100 years, we&#x27;ll see a much larger widening between the returns of bonds and equities as more and more governments default on their currency. Thoughts?<p>EDIT: the article I referenced was the one the other poster mentioned: <a href="https:&#x2F;&#x2F;economics.harvard.edu&#x2F;files&#x2F;economics&#x2F;files&#x2F;ms28533.pdf" rel="nofollow">https:&#x2F;&#x2F;economics.harvard.edu&#x2F;files&#x2F;economics&#x2F;files&#x2F;ms28533....</a><p>Also, equity returns should in the long term be equal to Producivity per capita + population growth + inflation + dividends. And If you look at each of those for the last 100 years and the next 100 years for the US, you&#x27;ll see a pattern. Pop growth down to 0.4 from 1.3. Per capita growth down several percent in the last 20 years vs the 100 years before that and with current PEs where they are, dividends are down to 1.3% from a historical 4.5%. Translation: Future equity returns will be much much closer to inflation than they have been in the past.

You&#x27;ll want to download the PDF and then scroll to page 43 to see the charts. The previous pages are about methodology, I think, I scrolled past them to see the pretty pictures.<p>Interesting look at truly long term results from the US stock market and bond market. Back ot the 1850s. Also looks at when stocks and bonds lagged &quot;the average&quot; or performed poorly for decades.<p>I guess my question is: where else are you going to go to invest your savings? Maybe real estate (but it can be a lot of work), maybe cash (but you can lose a lot to inflation)?<p>Government pension or annuities can be an option, but then you&#x27;re essentially giving up some upside and pushing the same decisions onto another person (though they have more options, since they have much more money).<p>Just another argument for a diversified portfolio, rebalanced regularly.

For modern computing&#x2F;finance type of people (I was but now have reformed) the lack of financial data is a problem. Even if you can get access to every trade, which is hard, the amount of data is not what modern machine learning types require.<p>Thr EMH is a hard mistress too. There is no amount of data that can help you solve unsolvable equations.<p>So alot fall into this trap, synthetic data. Some of the best statisticians on the planet have. It is so tempting to believe that there is money to be made by being cleaver trader I markets.<p>General, there is not. Buy and hold is not a shibolith it is a strategy. It is the only strategy that can be replicated.<p>Synthesizing data to disprove buy and hold is wishful thinking. Data snooping.

A paper on a similar topic but with much better execution: The Rate of Return on Everything, 1870–2015, <a href="https:&#x2F;&#x2F;economics.harvard.edu&#x2F;files&#x2F;economics&#x2F;files&#x2F;ms28533.pdf" rel="nofollow">https:&#x2F;&#x2F;economics.harvard.edu&#x2F;files&#x2F;economics&#x2F;files&#x2F;ms28533....</a>. Among other things, it spans multiple countries, and includes housing in the comparison.

The Titanic was built a bit over 100 years ago for 1.5m pounds -- today that&#x27;d buy you a nice London two-bedroom apartment.<p>I wonder if in 100 years from now, people will casually be talking about their nice (but modest) London two-bedroom apartment they bought for 100m pounds.

How is data before 1950 even relevant in today&#x27;s investing world?<p>Between MMT, finanicialization of the economy, stock buy backs, Bretton Woods, tax codes, robo investing and indexing...<p>Interesting stuff but really not super helpful in assessing risk.

This is an interesting analysis, but leaves out a big point: the structural evolution of markets over time<p>Back in 19th century, accounting standards weren’t as strict, information was not as widely available, and central banks didn’t exist. It was the Wild West so no wonder you had bubbles and long periods of draw downs<p>Today the US fed would quickly intervene to turn markets around. When Japan crashed in late 80s, they didn’t know QE was the answer so they struggled for a decade. When the US crashed for similar reasons in 2008, they knew QE would help and jumped on it. The stock market was back on track in a freaking year. It didn’t recover to the heights but it was trending on right direction.<p>To believe we would have similar long draw downs like the 19th century, you’d have to believe that something structural would change where current valuations would decrease: a shrinking economy (very unlikely), or capital flight elsewhere (also very unlikely given US track record).<p>The US economy has a lot of advantages and I’m having a hard time seeing a long term bear case for it

&quot;The market can remain irrational longer than you can remain solvent.&quot;

The reason all the stock market charts you see start in 1926 is because they come from CRSP data, which starts in 1926.<p>If you are a student at a university almost anywhere in the world that offers an MBA or other advanced degree in business or finance, it subscribes to the CRSP data service with 95+% probability. If you are an engineering or a CS student, the university contract covers you! You&#x27;ll probably have to talk to someone over at the business school, but they&#x27;ll get you access for all your ML research needs!<p>The main advantage over other data providers is that they publish their methodology and formulas, and have a full-time staff dedicated to data quality. Oh, and they&#x27;re cheaper than everyone else (it&#x27;s a service run by the University of Chicago instead of a for-profit corporation), so it has become the default academic data source. If you publish research using some other data, colleagues will want to know why.

One of the charts you don&#x27;t see is the performance of the stock market from say 1900-1950 for countries like Russia, Japan, France or Germany. We have this point of view that the US is a good place to invest, but to an investor in 1900 that might not have been such an obvious choice. Looking back 50 years from now it may seem like it was obvious the US was going to collapse from some political issue and clear that you belong in the stock market of Brazil, Indonesia, or I don&#x27;t know what.

I read a few books on early 20th century finance and trading last years, some stories are quite fascinating to say the least. I really like this period of time, everything both in the economy and finance &#x2F; stocks was quite reckless, it still is today of course but it was on a whole other level with bucket shops, insider trading, fake tips, etc.<p>This work is interesting because few people were really doing charts at the time. Prices were recorded as quotes (price+volume) on a &quot;tape&quot; and most people would just read numbers. &quot;Indices&quot; would barely exist and people would construct their own with a poor understanding of how to weight companies in an average (most averages were weighted by stock prices, instead of market capitalisation). And people would talk in $ moves a lot instead of %, meaning that for a lot of people gaining $1 on a $30 stock would be the same as gaining $1 on a $100 stock.

Amazing: a giant (and informative) thread on markets, investing, and value with many asking the same question - &quot;but what else are you going to invest in?&quot; - and not a single mention of building soil, and in turn health, or even &quot;goats&quot;...and I heavily expected goats to be at least mentioned.

Historical economists have done this going as far back as the 1600s. It can be tracked with records. Records in in the Netherlands are known to be meticulous.

Geometric mean<p>I’m surprised to see no mention of <i>geometric mean</i>.<p>People far too often incorrectly use Arithmetic Mean (“average”), which doesn’t compute correctly due to the compounding nature of the stock market.<p><a href="https:&#x2F;&#x2F;www.investopedia.com&#x2F;articles&#x2F;investing&#x2F;071113&#x2F;breaking-down-geometric-mean.asp" rel="nofollow">https:&#x2F;&#x2F;www.investopedia.com&#x2F;articles&#x2F;investing&#x2F;071113&#x2F;break...</a>

TLDR: interest rates used to be higher.

Off-topic...<p>I was looking up NRGV, the fraudulent energy storage company (the one with concrete blocks and cranes) which hit $2.4B last year and then fell to a sixth that, before drifting up a bit.<p>According to analysts, if I read the summary right, it should be considered worth $1B, short-term, and $0, long term. Last I checked it had $90M in cash, down from $100M a few weeks ago.<p>Now, with $90M they could buy an actually viable energy storage technology to (most likely) run into the ground.<p>What are these analysts thinking, recommending BUY of a fraudulent company with no better prospects than your average fusion start-up or Hyperloop, and already trading at several times its objective value? Is it a judgment about where ignorant investors will take a no-future company that has been well-hyped, a la Tesla? And, could they be right?

My primary criticism is that it took me several minutes to see a chart. The exposition is very interesting. I don&#x27;t judge a paper by its cover, but it kinda took a lot of work to read something that was described as visual!<p>Is there a nuance to this publishing process that makes this make sense?

If I was alive in 1923 and stashed away $8 million in ̶c̶a̶s̶h̶ (Edit: 100y bonds) would only be worth about $140 million today.<p>Had I put it into some fancy ETF (Recall Vanguard dates back only to 1975, but whatever) I&#x27;d be a billionaire.<p>That&#x27;s it, that is the entire difference of less than an order of magnitude. Don&#x27;t reckon the nickels and the dimes matter much to centenarians.<p>Most people don&#x27;t even have $8000 to invest so they plow it all into crypto and beanie babies and we scoff at them trying to x10. Food for thought. Memento Mori.<p>Edit for clarity: I obviously didn&#x27;t mean stash cash under the mattress. Sorry for the confusion.

It’s very common nowadays to see people suggest investing into S&amp;P500 ETFs and keep them forever. More then 20% of US population owns stocks.<p>I think we are near a change into this paradigm.

The reason this kind of analysis is irrelevant is that human civilization has only been exploiting oil since ~ early 1900s.<p>Sure, fossil fuels in the form of coal has been exploited before, but nothing on the scale of coal&#x2F;gas&#x2F;oil use that started after the Great Depression and ramped up to peak per capita consumption circa 1970s if memory serves.<p>So you always have to look at that historic period discounting that, and the massive population growth that came with it.<p>Tech advancements are slowing down and so is population growth.