GFD Guide to Total Returns: Market History - and Future?

The markets are closed and I am outta here for some fish tacos, some beach, some surf, and some bbqing. If you need some weekend reading, here goes...

This post below reminds me of Question #2 from Fisher's book:

"What can you fathom that others find unfathomable?"

Really interesting piece on market history from GFD Guide to Total Returns. From the doc:

"These facts allow us to make several general statements about investing in financial assets during the 1800s:

1. Most people invested in bonds, not stocks
2. Virtually all of an equity investor’s returns came in the form of dividends, not capital gains
3. There was little difference in the returns to stocks and bonds
4. Since the government did not issue treasury bills and deposits were not federally insured, there was no “risk free” investment available to investors
5. Bond and dividend yields declined over the course of the century as the risk to investors and inflation declined.
6. Although prices rose and fell in any given year, from 1815 to 1914, there was no overall inflation in the US and in most countries on the Gold Standard.

What is interesting about these points, which would have been taken as given before 1914, is that during the 20th Century none of these assumptions proved to be true. By the end of the 20th Century, most investors were investing in stocks, not bonds, depended on capital gains, not dividends, received a large premium on stocks over bonds, had risk-free investment alternatives, saw interest rates rise during most of the 20th Century, and suffered from the worst inflation in human history.

This makes us wonder how reliable the assumptions that investor make today will be for the next 100 years. Will everything that we assume to be true about investing today prove to be false by the end of the 21st Century, and why was it that the rules for investors changed so radically over the course of the 20th Century?"

Without poaching too much from the site, a few more great quotes from Ten Lessons for the Twenty-first Century Investor by Dr. Bryan Taylor:

In the 1970s, when Asian markets were emerging, they also displayed these volatile tendencies. The Hang Seng index rose 880% between 1971 and February of 1973, only to collapse 91% by the end of 1974. Poland, Russia and other stock markets went through similar bubbles and crashes when they emerged from Communist rule in the 1990s. Market timing is everything in these markets.

You know I agree with him on the market timing comment.

If you could imagine how the 21st Century will be different, what would you speculate? Leave a comment. . .

Comments

[Indexor:]

Another excellent post Mebane. Just wondering if you subscribe to GFD and if so, have you found it to offer real value for the dollar as it appears pretty pricey in our internet world of free research?

2008 Jul 04 12:01 PM

[ACEMAN:]

What Y'all missed here is an opportunity to review how gold has been understood or better mis-understood in economic and personal terms. Moreover the very conundrum of gold's relationship to interest rates in the US from the early 19th century to the present even confounded the great economist JM Keynes. Gold's relationship to interest rates and gold's counter intuitive economic rise and fall and rise again in the early 21st century can be best understood by reading a paper by Larry Summers of Harvard in 1968. Y'all can learn something from this.

2008 Jul 04 12:08 PM

[jjason:]

Mebame,

First, I don't speculate. I try to do research and then make investment decisions based upon my research.

Second, A good dividend payout or interest payment with capital preservation and long term capital gains is a goal.

Third, It is not easy to achieve one's goals.

Fourth, There are too many hazards in investing in stocks and bonds. The biggest hazard is dishonest and untrustworthy people ( eg. ENRON, WORLDCOM, etc.) The next hazard is incompetent management ( CFC, Bear Sterns, WM, WB and others ).

Fifth, I spent time in business school studying Benjamin Graham and then Warren Buffet.

Six, Over a lifetime of say 40 years there is a lot to learn in life, love, investing, etc. Balance is important. Some people learn from their mistakes and others don't.

Seven, Too many corporate executives do not care about paying dividends and therefore an investor must invest like Buffet did. For those people who did not do what Buffet did there is no comfortable retirement.

So, the past does not predict the future. I am interested in companies like ACAS where there is good, honest, management: a dividend yield of 8 to 14%, long term capital gain potential and safety of principal.

I liked the Canadian Income Trusts when the Finance Minister, Jim Flaherty caused a huge drop in unit prices. ( but I sold them at the 52 week highs last month ).

I also like MLP's in the pipeline industry like TCLP which pays me an 8% yield.

I have no opinion about the 21st century because I live in the present and my sense is that the future is unpredictable.

I do, however concern myself with short term (one to four years ) and medium term (four to ten years) trends. I forsaw the crash of the real estate bubble, the problems in the Ibanks, banking and mortgage industry and the recession.

I think commodities will be the next crash because of many different reasons. I do not know if the US will be in a depression. I hope not. This recession is hard enough.

Thanks for your article.

2008 Jul 05 07:22 AM