Value Investing

The Intelligent Investor – 150 Years Of Stock Market History

We continue with our discussion on the Intelligent Investor to apply the everlasting knowledge to the current market in order to avoid doing stupid things and take advantage of others’ stupid actions. Graham’s data go up to 1971 but so we will first look at his and later discuss the insight on the current situation.

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Stock Market History

The Intelligent Investor - 150 Years Of Stock Market History

Transcript

Good day for investors. A century or better to say a century and a half of stock market history. We continue with our discussion on the Intelligent Investor and Benjamin Grant's view on the world of investing his view in 1972 and we're trying to apply his everlasting knowledge and wisdom to the current market situation. The main point Graham emphasizes where we can learn so much from history are the following. In Chapter 3 of the book the varying relationship between stock prices and their earnings and dividends is crucial to understand if you are a long term investor varying relationship I emphasize the varying. It is important to understand the manner in which stocks have made their underlying advance to that many cycles of the past century and look at 10 year average earnings ten year average dividends and ten year average stock prices. So Graham's stake on the stock market when looking from the 19 01 deal 1971 period is that there have been 19 bear markets with declines from 15 to 86. Yes 86 and 89 percent for the P 500. This was the 1929 1933 period 89 percent down so Graham says that we have to really be careful what's going on except the volatility acceptor declines and even take advantage of other people stupid actions by us not doing stupid things. Let's dig into the book. So this is the chart from the chapter and Graham describes this patterns in the above. Stock market performance from the nineteen hundred till 1924 free to five year market cycles were the norm with the average return of just 40 percent per year over 24 years. The dividend was pretty much higher.

But that was a different era than 1924 to 1929. The crazy bull market that resulted in the 1929 1933 bear market which is very interesting is that the 1920s were the roaring 1920s one of the best e're us in human history. So after times are good usually the consequences aren't that good and that the ratios were also extremely high. Then formate didn't first defeat to 1949. There were a lot of fluctuations but the Dow and the S&P 500 reached the 1924 level. Only 25 years later and in nineteen forty nine there was absolutely no enthusiasm for stocks at all. So that's something difficult to understand now that we are all crazy about stocks. 1949 1961 greatest bull market in history with two short dips in 1950 seven and 1962. Similarly to 2000 and 2008 rings a bell. Well then the stock market advanced sixfold in 17 years or 11 percent per year. Not 1971 Graham's comment is few people have been bought by that thought that the very extent of the rise might indicate it had been overdone. He means the bull market. Apart from the interesting stock price movements Graham urges us with extreme importance even more important than the stock price movements to look at earnings dividends and fundamentals and look at them from a 10 year average perspective. So the average ratio goes from nine point five when it was great to buy stocks to levels of eighteen point one. Well it wasn't that great to buy stocks for the long term.

So always the price earnings ratio the cape ratio cyclically adjusted price earnings ratio that as a 10 year average is your big story then it's very interesting that the average dividend yield went from 6 percent down to free point three percent and now we are at 2 percent. So the dividend yield went down in history. Further what is crucial for long term investors and you will love it if you're a long term investor in the nine analyzed the decades only two decades have seen negative earnings growth. So on the whole stocks will deliver positive returns positive earnings positive growth over the long term. This is what we learn from the past 150 years of stock market history. So the message from the above is stocks will deliver growth over time. Only two out of nine decades have seen declining earnings and Brice earnings ratio went from six point three 1949 to twenty two point nine. In 1961 the evidence fell from 7 percent to 3 percent. Even if bond yields went from 2.5 to 4.5 percent. So grand describes it as the.