The History Of Investing

Published in Investing on 17 February 2011

How stock markets fared through some of the most momentous periods of the 20th Century.

The financial services industry reduces the past to so many one, three, five and ten-year rolling time slices, which it can then pick and choose from to best sell its products.

The rest of us see human history: Kings and queens, tanks rolling into Paris, missiles in Cuba, Woodstock and punk rock, and Facebook founder Mark Zuckerberg making a billion before he's 25.

In an interesting attempt to bridge the divide between database crunchers and Oxford history dons, Credit Suisse's recently-released Global Investment Returns Sourcebook 2011 ran the numbers on ten crucial historical periods from the past 110 years.

The resultant table shows the real rate of return in percentage terms in various territories over the periods cited in the leftmost column.

YearsPeriod     US    UKFranceGermanyJapanWorld
1914-18World War I-18-36-50-6666-21
1919-28Post-WWI recovery3722341711830208
1929-31Wall Street Crash-60-31-44-5911-53
1939-48World War II2434-41-88-96-19
1949-59Post-WWII recovery4262122694,0941,565562
1973-74Oil shock/ recession-52-71-40-26-49-47
1980-89Expansionary 1980s184319297272431255
1990-99Nineties/tech boom279188218148-42114
2000-02Internet 'bust'-42-40-46-58-49-44
2008Credit/banking crash-37-32-43-43-41-40

Source: Credit Suisse Global Investment Returns Sourcebook 2011

Calendar year returns may be arbitrary, but the flipside of the historical approach is subjectivity. No doubt there's been some a cherry-picking with the periods selected here. Did World War II really end in 1948? And why divide the expansion in the 1980s from the early part of the 1990s, which had little to do with the tech boom that followed?

Still, the various peaks and troughs are pretty fascinating.

Buying the aftermath

Looking at extreme stock market returns through the prism of historical events is especially interesting because it's not entirely about fear/greed.

World War II, for example, was terrible for Germany and its companies' earnings -- you didn't have to be a pessimistic investor to believe that, you just had to look at its flattened cities.

Yet look at the returns made by Germany (and Japan, too) in the period following World War II. A 4,000% return was theoretically delivered in a decade to anyone who had invested across the German stock market in 1949.

Clearly, against a backdrop of airlifts to beat the blockade of newly-divided Berlin, a country overrun with foreign troops, and the State and its people starving and shattered, you'd have had to be an extraordinarily flinty-eyed investor to even try to find a way to put your money into the German stock market after the war. I'm not even sure if it was feasible.

But there's still an old lesson here. When the situation was bleakest, investors proved too pessimistic. Returns from the German stock market were absolutely extraordinary as the industrious nation was pulled out of the mire.

A 50/50 bet

If like some TV historian we now pan back to view the turbulent 20th century as a whole, we can consider how such emotional perspectives may have impacted returns across the entire 100-year period.

Like football, the 20th century was a game of two halves. With global trade booming, European nations enjoying the fruits of Empire, the US coming into its own, and all kinds of invention and industry promising to improve our lot, investors were doubtless optimistic on 31 December, 1899.

As the Credit Suisse Sourcebook authors put it:

"Only a pessimist would have believed that the next 50 years would involve widespread civil and international wars, the Wall Street Crash, the Great Depression, episodes of hyperinflation, the spread of communism, and the start of the Cold War."

The result of all this upheaval -- compounded perhaps by investor complacency at the start of the century? From 1900-1949, the annualised real return on the world equity index was 3.4%.

In contrast, consider how you'd feel come 1950.

Assuming you even thought it was worth investing in shares under the shadow of imminent nuclear destruction, with World War II still fresh in your mind and with Reds under every bed, you'd surely have been cautious and unlikely to overpay.

Optimists like Warren Buffett -- who began investing professionally in 1952 -- must have been thin on the ground. Yet the annualised real return from the world index over this subsequent 50-year period was a mighty 9%!

Historically unprecedented

The obvious question is what will the next 50 years have in store? Should we be optimistic or pessimistic?

Unfortunately, while history may repeat itself, it doesn't do so to a timetable. Just as the stock market is unpredictable, so are the events of the next five decades unknowable.

Personally, I'll settle for lower stock market returns if it means avoiding death by global warming, mass starvation, or World War III with China. But then I'm sentimental like that.

More from Owain Bennallack:


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rober00 17 Feb 2011 , 5:12pm

From Justin Rowletts programmes about the Chinese expansion, I would fear the United States reaction to the Chinese rather than the Chinse themselves.

The United States military build up in the pacific must give cause for concern, not least on the possibilty of military mstakes as the two come more and more into political/military contact in the next few years.

BarrenFluffit 17 Feb 2011 , 6:46pm

Good article. Its an interesting study.

jaizan 18 Feb 2011 , 9:51pm

A very interesting article. Thank you.

TMFFlaneur 21 Feb 2011 , 2:41pm

Cheers guys!

WickedWillie 29 Dec 2014 , 12:38am

A lot of people lost their shirts in the stock market crash of 08, but by now at least now they know better than to lose it again by doing the same things they did last time.

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