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Written by: John Waggoner | John Waggoner Blog
You may seek it with thimbles—and seek it with care; You may hunt it with forks and hope; You may threaten its life with a railway-share; You may charm it with smiles and soap—‘ Lewis Carroll, The Hunting of the SnarkOne of the most ubiquitous sayings in personal finance is that stocks always fare best in the long run. Certainly, for nearly anyone alive in the United States, this has been true, according to figures from Ibbotson Associates. From January 1, 1926 through July 31, 2019, large-company U.S. stocks have jetted at an average 10.14% a year. Government bonds, in contrast, have strolled along at a 5.54% rate and Treasury bills have crawled at a 3.33% annual pace during the same period. A remarkable set of papers reminds us, however, how very lucky we are to have lived when we have lived and where we have lived. The first, by Edward F. McQuarrie, Professor Emeritus of the Leavey School of Business at Santa Clara University, presents a total return index of U.S. stocks from 1830 through 1870, a period of rapid expansion and technological innovation in America. We’ll look at the second paper, which deals with long-term world stock returns, tomorrow. One would think that investing in U.S. stocks from 1830 to 1870 would have been astonishingly lucrative. It was an era that saw the rise of the steam engine, enormous territorial expansion and gargantuan discoveries of minerals, particularly gold and silver. Still, one would be wrong to think that stock prices in emerging America were a great investment. Price appreciation for stocks averaged 1.22% a year from 1831 through 1870. Dividends, however, were more generous in those days, and raised the total return – adjusted for inflation – to 6.67% during that period, still much less than today. But investing for the long term during most of the 19th century was a mug’s game — something that current investors in emerging markets can appreciate. Diversified emerging markets stocks have averaged a 1.06% return the past five years, according to Morningstar. When the U.S. was an emerging market, stocks went nowhere for more than a century, McQuarrie says. “There were bull moves and bear moves aplenty, with several opportunities to double one’s money, or more; and conversely, other opportunities to lose half one’s wealth, in both cases within a short span of years. But the salient feature of this earlier epoch in US stock market history is that all advances in price, no matter how great, were eventually given back, in 1920 and 1932 no less than in 1857 and 1877. There was fluctuation but not appreciation.” Much of stock market returns depends on where you start. An investor who began in March 2000 has fared far worse than one who began in March 2009. Similarly, if you put the bear market of 1929-1932 at the end of a 100-year chart, you see it not as a singular, unfortunate event, but an event of depressing frequency. “In short, for the century through 1932 the US stock market was range-bound, returning to approximately the same lows time after time. In fact, it took 65 years, not until early in the 20th century, for the peaks seen just before the panic of 1837 to be decisively breached,” McQuarie says. Finding stock data before 1926 is arduous work, and McQuarie spends a fair amount of time discussing how he got his data, what he included, and what he didn’t. Detractors will note that nearly all the data is for railroad stocks; supporters will note that railroad stocks were pretty much all of the stock market during the period. (One should also note that the mortality rate for the average railroad stock was pretty high, and survivorship bias is extremely high any index of 19th-century stocks.) Most of the banks were wiped out in the 1837 depression. And 19th-century finance was, to be charitable, pretty loose. Some extremely lucrative companies remained private, and speculators were allowed to do things that would get you arrested for thinking about them today. We’d like to think that our market will never return to the kind of high-volatility, low-return days of the 19th century. Let’s hope so. But high stock market returns are neither a divine nor a human right, and if we look at long-term worldwide returns, as we will tomorrow, we’ll see that prolonged periods of high stock market returns are also extremely rare.