History Of The Stock Market

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How ’bout them stock markets?  Hmmmm…not so good?  Well, whatever you do – don’t wimp out and switch your equities to cash, however tempting as it might be.  Why is that you ask?  To answer that I’m going to go into one of the main lessons of the Four Pillars of Investingknow the history of the markets.  This doesn’t mean memorizing any boring dates or who was present at some document signing but rather taking a look at some past market bubbles…and more importantly, some past market crashes.  The idea here is to put that famous expression “those who cannot learn from the past are doomed to repeat it” to rest!

Investing in stock markets has a huge behavioural component to it – balance sheets and price/equity ratios are all fine and dandy, but the real question is – can you avoid pulling the trigger on the ‘sell’ button when the markets take a nose dive?  Some investors talk of buying when stocks are “cheap” – don’t forget that not selling is the same as buying.  If you take a big loss on your investments and sell, then you have locked in your losses and have no chance of profiting from future stock market gains.

William Bernstein, author of The Four Pillars of Investing, has completed a lot of research which show how the stock markets always come back from the depths.  His advice is “when things look bleakest, future returns are highest“.

Let’s take a look at two examples from his book:

1929 stock market crash

This is undoubtedly the most famous stock market crash of all time – over the course of almost 3 years, the Dow Jones Industrial Average lost about 90% of its peak value from Sept 3, 1929 to July 8, 1932.  Needless to say, this event was quite devastating and many former investors swore off equities forever.  Investors who stayed in equities were rewarded however, since the markets returned 15.4% annually for the 20 years following the 1932 bottom.

1973-1974 crash

This market crash followed a period of great market returns due to the phenomenon of the “nifty fifty” companies.  Unfortunately the “fifty” weren’t so “nifty” after all and the Dow Jones lost almost half its value (sound familiar?) from the beginning of 1973 to the end of 1974.  Bernstein introduces an interesting statistic – in the late 1960’s, which was the middle of a huge bull market, 30% of American households owned stocks.  By the late 1970’s and early 1980’s which was after the big crash, only 15% of of households owned any stocks.  It is unfortunate that so many investors chose to leave the market when the going got rough, because the market returned 15.1% annually for the 20 years following the 1974 bottom.

Stock market prediction time

I’m no economist or stock picker but one of the interesting things I recently found out about the 1929 crash was that the Dow Jones had increased approximately 350% (not including dividends) in the 5 years prior to crash.  350% in five years is absolutely amazing and it shouldn’t be a huge surprise that a bubble had formed.  The aftermath of that bubble was that the equity markets lost 90% of their value (from the peak).  Is this happening again?  I doubt it, the returns of the US equity markets have been relatively modest in the past few years so it is hard to believe that a major bubble had formed.  My grand prediction?  The US equity markets will not lose 90% of their peak value, but rather a lesser number – hopefully much less.


Switching your equity investments to cash after they go down is not a good way to invest.  After events like the markets we have suffered through this year, there is nothing wrong with revisiting your asset allocation but the best thing you can do is to learn more about investing.  Study past market history, read investing books, blogs (especially this one) and keep track of your investments.  If you have an advisor then talk to them frequently and make sure you know what you are invested in.  Stock markets go up and down – the more you are prepared for it, the easier it will be to ride out both the good times and the bad times.

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  1. EXACTLY. It’s funny how it works—I was going to write an articles about this very thing last week, then I saw this article in the NY Times and said, “Well, that says it all.”

    Hopefully people will get the point. This is a classic case of history helping us (pardon the cliché answer but) “avoid future mistakes by looking at the ones we’ve already made.”

  2. Nice, there we a few comments here this morning and now there’s just one. What happened? Are we now censoring the comments or did something get lost?

  3. It is very important to know the history of the stock market especially in times like this. If you don’t have the right timing or don’t do your due diligence research on the stocks that you buy, you can end up losing a lot of money.

  4. @DavidK: I’ve only seen the one from Writer’s Coin. I don’t censor comments (unless they are just downright profane, and even then I just edit out words).

  5. Well, something happened. It looks like the comments page reverted to an earlier set of comments as I had added a comment along with the two that were there already.

    Anyway, my post was about using http://www.djindexes.com to look at how the stock market is doing. If you look at the 10y trend, it does appear that the market had gotten somewhat inflated and is currently adjusting itself once again. Looking back at late-1999 and late-2002/early-2003, we can see that the market is actually at the same place it was back then. It also picked up shortly after that. Of course, if we listen to the Chicken Littles out there, then the market still has a ways to fall. Depends on whom you listen to: pundits or history itself.

  6. This makes a really nice contrast to the media which tends to extremes to generate sales.
    And I was just wondering about past market activity but didn’t have the time to research it.

  7. The original purpose of a stock market (and this was in the very distant past) was to enable business owners to buy, sell, and trade “stock” in shipping expeditions or other business ventures. People started to do this in Europe around the end of the Middle Ages, although there’s evidence to suggest that organized share based investment occurred in ancient China and Babylon as well. Participation in this kind of investment was by definition limited to wealthy insiders who knew and trusted each other, because there wasn’t much regulation. Anyone who invested in a venture was responsible for finding out about the risks and understanding them. Similarly, they took it upon themselves to learn not only about the business venture being proposed but also about the people involved and their level of honesty and reliability. That didn’t always work, because then (as now) not everybody who sold shares in a business was honest. Unsophisticated or poorly connected investors did exist, but they tended to not last very long.

    Later on, more formal brokering arrangements became common simply because the demand for them grew. The “market” became too big for person-to-person transactions, and so brokerage became a legitimate business. Unfortunately, the rise of brokerage as an industry enabled investors to become less personally sophisticated and less directly involved with their investments. That trend continued, and even accelerated, into the 20th and 21st centuries. In recent years, particularly in the USA, the majority of the regulatory laws that affect the stock market, investment, and brokerage industries have been designed to make it easier and more practical for an unsophisticated investor to buy and sell shares in companies they know nothing about.

    I am probably alone in thinking that this is a bad idea, and that the best way to invest money is in something that the investor can understand and control. Examples may include a small business, a farm, or income producing land or real estate. If an investor takes the time and trouble to research each stock and the management team of the company before buying shares in it, and to educate himself or herself well enough to understand the risks and the rewards, there’s no reason why a person’s chosen area couldn’t be the stock market. Yet I’m not seeing why the market should somehow be considered a suitable place for “everyone” to invest.

  8. 7500 will be the magic number for me… If it hits that, then I’ll go crazy buying stuff 🙂
    Huge sale 🙂

    I’ve already bought some, and upped the 401K, and am looking at what to buy next. My conservative stuff just hasn’t dropped much tho.

  9. I purchased an energy mutual fund $2 below its lifetime peak this summer after watching it all year. Down it went, worth well less than half of what I purchased it for. Never fear. If it goes down a little more I will buy more shares. I feel that energy will go up as China and India are demanding more by the day.


  11. I couldn’t agree with you more. I don’t think that it would be good for people to stop investing all together, however I think that people should do their homework and make sure that the things they are investing in are safe- great advice I received by reading Jose Roncal and Jose Abbo’s newest book, “The Big Gamble.”