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Stock Market Returns Are Anything but Average

222 points by RickJWagner 6y ago

JackFr 6y ago
This is hand-wavy feel-good stuff, and it isn't terribly wrong but saying true things about long term returns is very difficult. Adjustments for inflation, interest rates, dividends, corporate tax rates, individual tax rates, index/portfolio construction, selection bias, etc. all need to be considered if you want to try to draw serious economic conclusions.
hpkuarg 6y ago
I mean, just look at last year, when the S&P 500 index plunged over 30%, then proceeded to nearly double from then until now, in the midst of a global pandemic that froze big chunks of the world economy. Stock market returns make no sense.
- ycombinete 6y ago
  I’ve made 15% on an 80/20 VWRA/IGLA split since September 2020. It scares me. It feels like too much. Like it’s going to pop.
  - thrower123 6y ago
    It's been a long, long run. If you ignore the drop from last March that was recouped within months, it's been a strong ramp ever since the second half of the Obama presidency. Vanguard tells me I've done better than 16% over that period, just invested in the boring VTSAX index fund.
  - xur17 6y ago
    I might agree that general stock market prices are quite high, but arguing that "they went up 15% in 6 months" doesn't seem particularly strong. That has occurred historically, and doesn't automatically mean it's overpriced.
    - ycombinete 6y ago
      I’m quite new to it, so that’s reassuring to hear. September was when I made my first purchase.
      - JohnPrine 6y ago
        just forget about it and never take the money out
- pydry 6y ago
  The jump was probably caused by the 2.3 trillion in MBSes and treasuries bought by the fed.
- tarruda 6y ago
  Instead of seeing as high returns, you can also look at it as money losing value due to excessive printing of last year.
  - sojournerc 6y ago
    Exactly. Same with housing. They are not more valuable, the dollar is less valuable relative to them and likely will only get worse as equities and real estate are the good hedges against inflation, causing a positive feedback loop. Higher interest rates would create an incentive for traditional savings, but would destroy companies (and gov) holding big debts.
    - TheHypnotist 6y ago
      I'm not sure where you are but housing over the last year is a real supply/demand market condition. They aren't arbitrarily being overbid 10%+ because the dollar is worth less suddenly.
      - sojournerc 6y ago
        Sure, but supply is limited in part because of the wealthy folks buying properties they will not use as a residence to hedge against inflation. That real-estate is the least risky manner to protect wealth is a result of low interests rates and inflationary monetary policy. Printing as many dollars in the last year as there were in existence before, has perturbed a "normal" real-estate market. More dollars flying around means overbidding 10% is possible, especially since the additional interest is relatively negligible (wealthy folks will still take a loan in such conditions since rates are at rock-bottom).
        jonfw 6y ago
        Supply is mostly limited because demand is up among millennials and material shortages have increased costs and delayed construction.
        6y ago
- achenatx 6y ago
  they totally make sense. The money supply increased from 12T to 20 trillion under trump. The money supply under biden is about to increase another 5T. We are seeing the effects of the increase in money supply as inflation in the price of equities.
- Someone1234 6y ago
  It starts to when you ask yourself: Where else are people meant to store money? Since interest rates and bond rates were at historical lows. So you have people who are looking at 10% YOY returns on one hand and 0.2%/2% on the other and making the rational decision. Does this make stocks overinflated? Yes. Is it going to suddenly pop? Unlikely, since the conditions that caused it won't suddenly change (e.g. certain bonds have ticked up 1%~ but taken months).
  - berkes 6y ago
    > Is it going to suddenly pop? Unlikely.. This is not financial advise, but an investor myself, I'm on the other end of the spectrum. "Is it going to suddenly pop? Certainly! We just don't know when, how much and for how long. It could be june 2021, it could be 10 years after the Great Sino-Russian war of 2038".
    - partiallypro 6y ago
      The saying is that "As Long as the Music Is Playing, You've Got to Get Up and Dance." You can't -not- invest because it doesn't make sense and the valuations are insane because you could miss the dance or the encore.
    - aynyc 6y ago
      the markets can remain irrational longer than you can remain solvent.
    - Nasrudith 6y ago
      That isn't sudden in the usual meaning. What is meant by the question "Are you going to suddenly die?"? If a safe falls on you death will be sudden but there isn't any reason to believe you will be around falling safes historically. You may have some hidden defect. Sure you will die eventually even if you were unaging, but what is usually meant is "Do you have any known fragility like say a weak heart, high risk of stroke, or a habit of using something volatile in dosage like speedballs or carfentanil? "
    - foobarian 6y ago
- rcMgD2BwE72F 6y ago
  Stocks market returns only represent the return of the companies that are listed on stock exchange. If the economy stagnates overall but the small (unlisted) companies suffer while the big (listed) ones boom, then the stock market returns increase in a stagnating economy but it makes sense. The problem here would be the belief that stock market is a mirror of the main economy. Personally, I believe the stock market represents very well the interest of the richest capitalists.
- nocommentguy 6y ago
  More like the value of the dollar has roughly halved due to record money-printing and this is reflected in capital assets firsts. https://fred.stlouisfed.org/graph/fredgraph.png?width=880&height=440&id=M1 https://fred.stlouisfed.org/graph/fredgraph.png?width=880&he... MMT apologists are the modern day petit bourgeois. Trust the experts!
  - clomond 6y ago
    The value of the dollar has not halved.... Against a basket of currencies, the US dollar index is approximately 10% lower than it was from the start of the pandemic. Pointing to the fed money supply chart as evidence is woefully misleading. Dollar index historical: https://tradingeconomics.com/united-states/currency https://tradingeconomics.com/united-states/currency
    - berkes 6y ago
      > Against a basket of currencies, Counterpoint would be that against "a basket of assets" it is decreasing in value rapidly. The EUR is probably tanking just as fast. What you are doing is like saying "shipping prices for steel have not increased, because the price to get a kilogram of steel across the ocean is hardly more than the price to get a kilogram of coal across the ocean".
  - Aunche 6y ago
    Much of the increase was just banks relabeling their M2 money as M1. This happened when banks stopped penalizing people from withdrawing from their savings account more 6 times a month.
    - imtringued 6y ago
      Yeah, it's annoying, it ruins the usefulness of the charts but it has no short term or long term significance.
- Tangokat 6y ago
  Stock market returns make sense only when you realize the currency is actually just losing value. All currency is being devalued so you don't see it in currency pairs but scarce assets go up quickly.
  - hamilyon2 6y ago
    I think that given how vast is USD influence, currencies all over the world will lose their value with dollar. But not every currency, economies that rely on mining natural resources more should have their currencies better against USD. This is not the case, as far as I can see.
    - Nasrudith 6y ago
      Why would mining help? Resource extraction is the low end of earning potential. You mostly need the terrain and a willingness to pollute to break into it. It isn't that scarce. Industry makes much more than resource extraction and advanced services make more than industry.
    - ivankolev 6y ago
      Actually CAD is trending up against USD
- nemothekid 6y ago
  I can never coalesce the whole pandemic and stock returns thing with the actual "fundamentals" of these companies. Yes - there was a pandemic, but the 5 largest companies in the index, Apple, Amazon, Microsoft, Facebook and Google, which make up nearly 20% of the index all had insane revenue growth. Amazon nearly doubled it's profits, Google growing as much as 30%. When every other investment vehicle, except maybe housing is cratering you have a one-two where stocks looks great to invest in, and are much better than everything else. If it were to ever pop it would be because other investment products started to get much healthier - which to me isn't a bad thing.
- hourislate 6y ago
  A Pandemic and multiple conflict zones were no more than a pot hole. The markets have pushed higher with no end in sight. The Fed and Treasury are making sure that if there is no one to buy stocks they will. There is no end to the support the Federal Reserve will shoulder for the markets. With Governments around the world determined to never let the Economy fall or stay down even if it means directly sending money to the population and spending trillions at a moments notice to support Wall St there is no chance that over the long term the market will ever fall and stay down again. Not even a WW or a natural disaster of the like we have never seen would keep the markets down. We would be naked, homeless and hungry and the market will continue to march higher. History is a perfect example of that.
  - nfRfqX5n 6y ago
    i've been thinking the same thing for a couple years now. lots of people keep harping on doomsday scenarios, but it seems too many people have too much invested in the market for it to fail
    - ed25519FUUU 6y ago
      That type of intervention prolongs the inevitable, but certainly won’t stop a collapse.
- LatteLazy 6y ago
  The stock market is about future expectations. As soon as you know that, the last year makes perfect sense. Oh no, a plague = crash. Oh wait, it will be shitty for 6 to 24 months but actually not that bad and people are still buying stuff just as much as before = Boom.
- weeboid 6y ago
  When S&P plunges more than 10%, buybuybuy. 30%? Shit go full margin and back up the truck. I’m sitting on 2x since Dec. Protips. Saas is the thesis. Long term solar is a 100x-1000x easy-ish bet. Capture is “good enough”, we are going to solve storage. Transmission will significantly collapse into storage. Game will change. The entire energy game.
  - pc86 6y ago
    > Long term solar is a 100x-1000x easy-ish bet. This is WSB-level nonsense.
    - jonfw 6y ago
      Reminiscent of the dot com boom. People said "this internet thing really looks like it's on the up and up" and they were right. What they didn't understand is that investing in 'pets.com' didn't mean they were investing in the internet. Yes the solar industry could probably go up 100x. No, the companies we're investing in today won't track that.
      - weeboid 6y ago
        Ok, please put all your savings into shorting an index of all current solar companies
  - imtringued 6y ago
    100x? I think that is at the edge of what the EV market can accomplish.
ahelwer 6y ago
There are all sorts of interesting facts you can pull out of this, like how if you missed the top 10 best days in the market from 1999-2019, your return was cut in half. If you missed the top 20 best days, you actually lost money: https://www.fool.com/investing/2019/04/11/what-happens-when-you-miss-the-best-days-in-the-st.aspx https://www.fool.com/investing/2019/04/11/what-happens-when-... Basically never mistake annualized return over a long period of time for your expected return in a given year (or day, etc). There will be some really really good years, and a few really really bad years. If something grows consistently with low variance over a long period of time, that's a red flag! It's likely to be a "picking up pennies in front of a steamroller" type trade.
- sichtlinkair 6y ago
  > It's likely to be a "picking up pennies in front of a steamroller" type trade. What does that mean?
  - b0afc375b5 6y ago
    I think it means doing something high risk for low reward.
    - kccqzy 6y ago
      It means doing something high risk but the risk has low probability, and for low reward. No rational mind would do anything high risk low reward, unless the risk has low probability. Then it's just like selling insurance.
  - ahelwer 6y ago
    Think of a slowly advancing steamroller, with pennies scattered before it. You can run around picking up these pennies, for small but consistent gain over a long period of time. Just don't take your eye off the steamroller! The canonical example in recent times is the XIV blowup of 2018, which inversed VIX (a security tracking market volatility). So if you held XIV you basically bet that large market moves wouldn't happen - you're shorting volatility. Take a look at the graph to see how that ended up; the steamroller caught up to them! https://www.rcmalternatives.com/2018/02/why-did-xiv-implode/ https://www.rcmalternatives.com/2018/02/why-did-xiv-implode/
ArtTimeInvestor 6y ago
The author falls for the "past equals future" fallacy. The only way to truly take the randomness out of the stock market is to have a multi-decade time horizon. He says so after looking at the data of a few decades. That makes no sense. It is like looking at 3 people and saying "People come in groups no larger than 3". The whole article is based on that premise. He has something like 90 data points and assumes the next 90 data points will be alike. Is it possible the next 10 years will have a negative return? This is a very interesting question. But I doubt we can answer it by looking at historical returns. We need to look at the actual situation. What would have to happen in the world so we see negative returns? War? A natural desaster? Who says war and natural desasters cannot throw us back 100 years? 1000? 10000?
- ahelwer 6y ago
  I mean yes, past performance doesn't guarantee future results. But it does waggle its eyebrows suggestively at it, when you have a phenomenon that's gone unchallenged for probably a hundred years now. It isn't guaranteed. But nobody's lost their shirt betting it'll continue yet. People always bring up Japan in these discussions, of course. The Nikkei 225 peaked on 29 December 1989, still only at half that value over 30 years later.
  - bryanlarsen 6y ago
    Or the German stock market of 1914. An 1914 investor would have had to have held for 100 years to get his investment back. The major point is that only looking at 90 years of American stock market returns is very serious cherry picking. We can get a lot more data by including non-American stock markets. The last century was a century of American ascendance. 100 years from now America still might be at the top, but I wouldn't take that bet. Even if it is, we won't get the gains we got from rising to the top.
    - ahelwer 6y ago
      The ultimate point of these discussions is coming to a conclusion about "what should we do?". I can give you quite a few reasons why dumping all your money in market index funds could end in disaster. I'm not under the illusion these gains are guaranteed. But what the hell else am I going to do?
mumblemumble 6y ago
For that 2nd graph, he chose buckets that are uniquely poorly suited to evaluating his statement about whether returns tend toward 10%. It looks to me like, if he had instead made them (5%)-5%, 5%-15%, 15%-25%, etc., then the mode would indeed have been the 5-15% bracket.
- ricardobeat 6y ago
  The mode is already in the 10-20% bucket in the graph, changing the buckets would not affect the argument that follows, which does mention the 8-12% and 10-15% ranges: > If we look at the calendar year returns plus or minus 2% from the 10% average (so 8% to 12%) this has happened in just 5 calendar years > Just 18% of returns have been between 5% to 15% in any given year. The main point being that the odds of you seeing any returns near the 10% number are quite low (18/100). It's just a lot more spiky than most people realize and not a safe way to get 10% returns unless you're looking at 30+ year periods.
  - mumblemumble 6y ago
    Yes, that's all true, but none of it changes the point that it's a poorly constructed visualization that is ill-suited to how the author is trying to frame their story. Edward Tufte would weep.
    - ricardobeat 6y ago
      The first graph establishes that there is no clear trend or clustering in the data points. The second one lets you visualize just how many years are around the 10% average or not, and then the argument is expanded from there. They seem to serve their purpose pretty well. There's probably a nicer way to display that, and maybe combine them as one of Tufte's principles would suggest, but I don't see anything that would make him weep here :) What do you have in mind?
- ellisv 6y ago
  Agreed. I’ve seen that figure before (or some variation) and it is a bad way to try to argue his statement.
mabbo 6y ago
I decided to play with these numbers myself because I had some questions. I believe the data is the same as I found here[0] The average single-year return over that period was about 7.5%, not 10%- though in half of years, the market did better than 11%. But what happens if we bucketize by a larger period, like 5-year? My method was to take $1, multiply by the return for 5 years in a row, and then take the 5th root of the result, then convert to a percentage return per year by 5-year bucket. Overlapping 5-year buckets. The end result is as you'd expect. There are bad years, and there are good years, but the storm is pretty tame when smoothed out. In more than 75% of 5-year periods, the average return was positive. Only 69% of 1-year periods were positive. As a fun aside, if you invested in an S&P500 index fund the day Clinton was elected and sold it all the day Bush was elected, you'd have made close to 25% annual return on average. [0]https://www.macrotrends.net/2526/sp-500-historical-annual-returns https://www.macrotrends.net/2526/sp-500-historical-annual-re...
- wbc 6y ago
  Did you add in the dividends? https://www.multpl.com/s-p-500-dividend-yield/table/by-year https://www.multpl.com/s-p-500-dividend-yield/table/by-year
- BeetleB 6y ago
  ~7% is after adjusting for inflation. I suspect OP did not adjust.
  - thedufer 6y ago
    The linked data isn't adjusted, though - it's just raw open/close values for each year. The mistake here is ignoring dividends, which push returns up by 2-3% per year.
YZF 6y ago
Rather than looking at returns in isolation it might be more interesting to look at returns vs. P/E or vs. some other parameters like interest rates. e.g.: https://www.alger.com/AlgerDocuments/AOM_singleGreatestPredictor.pdf https://www.alger.com/AlgerDocuments/AOM_singleGreatestPredi... This is only a 20 year period which is pretty short, but hey, doesn't look as random any more.
- mortehu 6y ago
  Each data point covers 10 years, and there's only 20 years of data. There should be only two points on the graph. The other points are just blends of the two independent time periods. The implied decision is whether to invest over the next ten years, and the chart implies that you can make this decision every month.
  - YZF 6y ago
    The question is whether the current P/E impacts (long term) future returns. I think it does. Robert Shiller thinks it does (or at least the cyclically adjusted P/E). Having a data point per month is not unreasonable. Prices and earnings move. The 20 year period for a 10 year return horizon is clearly too short. I'd like to see the same data over longer periods.
    - mortehu 6y ago
      Prices move, but the move from month 0 to month 12 is highly dependent on the move from month 1 to month 13. It's statistical nonsense to treat them as independent variables in a regression model. You could use any biased random walk as your price series with this approach and get a correlation p value of 0.00001.
      - YZF 6y ago
        If month 1 was the crash then 0 to 12 and 1 to 13 look very different. No? Aren't you basically saying your precise entry point to a 10 year period doesn't matter, e.g. if you enter at year zero or year 2, or January vs May in year zero? But clearly it matters a lot because the market can make huge moves in short periods. In other words, you're saying to look at 10 year returns we should just take each decade on its own with no overlap? Clearly if I pick 1970-1980, 1980-1990, 1990-2000, or pick 1975-1985, 1985-1995, 1995-2005 I'm gonna end up with very very different results? And sure, at some point the overlap becomes too fine. But saying that 2 decades is just 2 data points doesn't sound right either? I definitely would like to see an analysis over a much longer horizon, that'd be a more significant result. EDIT: Totally agree the points are not independent. But it feels like there's still residual value (which I can't quite put in mathematical terms) from this "moving window".
hansor 6y ago
US market should NOT be used as any scientific benchmark for anything - as it does not represent "all" typical possible scenarios for the stock market. Look for example(one of many) at Japanese NIKKEI index - it was going DOWN for like 20 years! So this theory does not work! Many people in Europe also quote multiple studies based on US market - but they are usually worthless on other markets(both bonds and stocks). If you add inflation and CPI - this theory is even more worthless. US market is special - as US is one of very few superpowers on Earth.
- verbify 6y ago
  The NIKKEI would've given you a positive return if you bought and held and reinvested dividends. And picking the worst point in one of the worst indices does not mean much - most investors are not investing a lump sum (they're usually putting into a pension over the course of decades) and they shouldn't be investing in just index/asset class (all-world diversification and having bonds as part of your portfolio is recommended).
- fnord77 6y ago
  > US market is special - as US is one of very few superpowers on Earth. For now. Look how rapidly the USSR lost its superpower status. What if the Capitol insurrection were successful?
  - boringg 6y ago
    Not even a relevant comparison, sorry. Russia was a competitor but didn't have the same built in advantages. US will remain a super power for the remainder of everyones lives on hacker news. It will diminish, but it will remain in power until we're all in the ground. Mainly stemming from its economic roots for the global financial system.
ellisv 6y ago
In many situations, few or none of the observations will have the average value. It’s been discussed here before — search for the “When U.S. air force discovered the flaw of averages” story
boringg 6y ago
I'm going to add that I did a rudimentary an analysis of the S&P 500 because everyone seems to be throwing their money into passive S&P500 low vehicle investments. I looked at every hold period since inception from 1 year holds / returns up to 40 year hold and returns. Timing is crucial for good returns - depending on when you put in and take out your money the returns can be negative (even in cases where you hold up to 15 years) and in other cases quite good (best cases inflation adjusted annualized returns of 12% over 40 years). I did it because I didn't buy the commentary that you should just put it in S&P 500 and that it will almost guarantee returns.
- snikeris 6y ago
  > Timing is crucial for good returns - depending on when you put in and take out your money the returns can be negative (even in cases where you hold up to 15 years) This is well captured in this guy's drawdown charts: https://portfoliocharts.com/portfolio/drawdowns/ https://portfoliocharts.com/portfolio/drawdowns/
  - boringg 6y ago
    This is slick.
- CarelessExpert 6y ago
  > depending on when you put in and take out your money the returns can be negative (even in cases where you hold up to 15 years) Sorry, but unless you're talking about truly black swan circumstances like the Great Depression or the 2008 crash, I don't believe for a second that, over a 15 year timespan, holding the S&P will result in negative returns frequently enough that a typical investor has to concern themselves with market timing. You need to prove your work for a statement that strong.
  - troydavis 6y ago
    For anyone interested in this topic, https://dqydj.com/sp-500-historical-return-calculator/ https://dqydj.com/sp-500-historical-return-calculator/ is a good place to start. As a starting point, accept the defaults and hit "Calculate Historical Returns." The minimum return and standard deviation are most relevant. (Note that it defaults to adjusting for inflation, but that's really the only metric that makes sense when comparing long periods, particularly those including the 1970s and 1980s, so that's probably what you want.)
kingsuper20 6y ago
The stock market is an odd duck. What to make of it now? There's both colors of swans at work in terms of the plague, excessive money printing, per Peter Turchin (cliodynamics) a peaking cycle in civic unrest, a potential loss of reserve currency status, big changes in tech that still haven't been digested, low cost of transactions. Lotsa opportunities for froth. I'm still uncomfortable with it as a store of value. Not many people even owned stocks in the past, which makes historical comparisons a little problematic. It took things like the government heavily encouraging parking money there (401k, IRA, tax law changes, corporate tax law) and greater ease of transaction to put us where we are. You could argue that the entire market is a mania. edit: Just to indulge my logorrhea for a minute, I wonder to what extent we are seeing an organic change in stock markets, a form of evolution really, that takes advantage of human nature. In the last 40 years or so, it was bound to gather up all the accoutrements of video poker. Marketing and blinkenlights, random payoffs, a house percentage getting scraped off, the fiction of player skill. The payoff is greater than 100% due to it riding the back of GDP growth (and the growth of large companies at the expense of the small) but the science of the casino is built deeply in the human psyche. The stock market has to act the way it does simply to remain attractive to all the primates.
- lotsofpulp 6y ago
  > You could argue that the entire market is a mania. Objectively, the big publicly listed companies are growing and have stellar financials. I can think of no better place for someone to invest, other than maybe diversifying into real estate with high demand, if they already have a significant amount invested in public equity markets. Public equity market prices are also backed by the federal government, at least on a 5+ year (maybe even 3+ year) timeframe per events over the last few decades.
  - kingsuper20 6y ago
    It's worth considering that what you are buying is a dividend stream and/or the possibility of a company being bought, which simply gives you more stock. When you essentially lend money to GOOGL or AMZN, what are you actually getting back besides a story? Don't get me wrong, in the timespan of an individual's life it may well make sense to heavily buy into this system. I'm just making the point that it's current form is rather new and appears loosely connected to the real world and is subject to change. To me, the current stock market seems like a fiat currency without the threat of physical force. Maybe the temptation will be to increasingly merge government with large companies in order to keep the plates spinning.
arisAlexis 6y ago
Taleb in his Black Swan book makes exactly the counter-point for this type of article that uses statistics and curves to predict and explain something that doesn't fit laws of averages and bell curves. Interesting read. The statistics of the article are just observational without any kind of predictive power or meaning.
- mordymoop 6y ago
  I think the way to phrase it is something like: We don't know what the heck is happening, actually. We call this "randomness." But it is not randomness in the sense of truly, fundamentally unpredictable, nonsensical things happening. It is randomness only in the sense that almost everybody fail to see important things coming. But usually you could, in principle, see important things coming. And often a handful of people do, but nobody listens to them. You use bell curves when you radically doubt your ability to see important things coming, and just assume that a sort of vaguely similar distribution of types of things will keep happening. Taleb argues, correctly, that this is actually a pretty stupid assumption because new, weird, statistically unpredictable important things happen all the time. I like Taleb's critique but I'm not satisfied with his answer. Radical skepticism in your ability to see important things coming ... probably shouldn't stop you from trying anyway, using whatever tools you decide, using your reason, are the most useful. You can't predict black swans but you have to try. One of the tools here would be leveraging statistical regularities in past performance. Another would be having some kind of thesis about how solar power, or crypto, is gonna be big, for Reasons, which violates past statistical behavior. It definitely seems suggestive that hedge funds don't seem to outperform index funds, over almost any timescale you care to choose. Everybody is doing the best they can; Taleb points out that this still isn't very good; he's right, but what else are you gonna do?
weeboid 6y ago
Isn’t it the case that for *any* arbitrary 30 year period of S&P, the worst you could do is 2x, and the best 1000x? And the mode something like 10x For 20 years it reduces where I think some periods could actually produce flat or slightly negative, but the best and mode are still up in that range. Hey, yeah. Investing is “risky”. Keep “working on your career”, and squirrel away into 401ks then.
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nunez 6y ago
Based on the bell curve centering around 10%-20% average returns, I'd say that returns from the stock market are pretty average.
thehappypm 6y ago
Stocks are backstopped by the fact that companies are highly highly incentivized to keep the prices high. If suddenly the bubble pops and stocks fall 90%, every CEO suddenly has a very real fiduciary incentive to get the stock back up. Cut cost to yield dividends, buybacks, whatever it takes.
kragen 6y ago
This article suffers from hindsight bias by virtue of focusing on the US stock market, for which this has been an exceptionally good century. If you were to include the markets of Britain, the Netherlands, Japan, Germany, France, Poland, China, Argentina, and Switzerland, the picture doesn't look so rosy. Anything you invested in the Giełda Pieniężna w Warszawie in 01926, for example, would have evaporated in 01939; despite the "liberation" of Poland in 01945, no stock exchange would reopen there for 50 years. Poland is an extreme case, but so is the US—I don't think any other country's stocks did so well during the 20th century. If someone were to write an article about how well Esso/ExxonMobil stock has done from 01926 to 02021 (11.9% I think), it would be easy to understand that this wasn't a recommendation to hold ExxonMobil for the next century, much less some other arbitrary stock; obviously the investors 95 years ago in the F.W. Woolworth Company and the Kennecott Mines Company didn't do quite as well, which is precisely why nobody would write an article today about buying and holding Woolworth's stock. Will the US do so well over the next century? The spectacular bungling of the covid pandemic suggests that it may not.
- deleted 6y ago
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- sec400 6y ago
  OT: why do you prefix the year with a 0?
  - LiveTheDream 6y ago
    The 5-place date is meant to draw attention to a longer view of time, a position advocated for by the Long Now Foundation.[0] [0] https://blog.longnow.org/02013/12/31/long-now-years-five-digit-dates-and-10k-compliance-at-home/ https://blog.longnow.org/02013/12/31/long-now-years-five-dig...
    - sec400 6y ago
      Thanks, interesting. I will of course now 1-up and use a double 00 prefix on any publicly posted dates.
jplr8922 6y ago
The author is doing a lot of work to explain that the statistical average takes a long time to converge to the expected return because the distribution is volatile (high stdv, skewness, kurtosis, etc). Do note however that his analysis only concerns itself with the US. Including other countries would show that US is one of the few countries where stock markets were never interupted for a long period of time because of its political stability. If you dont beliveve it will keep going this way in the future, invest in other countries.
cryptica 6y ago
The stock market has more or less monopolized the global fiat monetary system. Politicians can decide what the returns will be in any given year because they control the currency. The returns are only meaningful in the short term while everyone is in a trance thinking that fiat currency is worth the same as it was before... The longer everyone can stay in this trance, the more 'real' the numbers are. However, it's my opinion that the real value creators of our economy (the backbone of all economic value) don't have much incentive to believe in the fiat numbers anymore. That's why they're moving towards Bitcoin and crypto. The next decade is going to be interesting; we're going to find out if all the hype about 'automation' and 'big data' was genuine or if it was just moral cover for the elite to justify their monopolization of everything. If the corporate elite have managed to automate the economy to a degree that people and non-corporate entities cannot compete with their machines, then fiat will continue to thrive. If it turns out that non-corporate entities still have the competitive upper hand, then fiat will deteriorate and Bitcoin will take over. My PoV as a developer who has worked for many big tech companies is that the corporate sphere has been deteriorating for years and most advancements have been vaporware. I believe that apparent growth in profits and market cap are a trick of the money printers and the numbers are not grounded in real economic value; they are extremely fragile and the only reason that the stock market doesn't collapse along with fiat is because of extreme herd mentality among investors who have been primed to believe in the supremacy of fiat currencies for their entire lives.
- SilurianWenlock 6y ago
  I cannot understand the thinking behind your 2nd and 3rd from last paragraphs
  - cryptica 6y ago
    The narrative about automation is used to justify Big Tech monopolies. I.e. there are huge tech monopolies nowadays because big tech is automating everything and driving all local brick-and-mortar shops out of business and people are going out of work because of automation. The narrative about big data is used to justify Big Tech's (e.g. Facebook) high profits. I.e. Advertising wasn't lucrative before but now thanks to big data (targeted advertising), it's very lucrative. What if an alternative explanation to the first narrative is not that Big Tech is automating everything, but instead, that their monopolies are simply a result of them having preferential access to large amounts of newly created capital (e.g. at lower interest rates or via shell company revenue laundering schemes); their access to the money printers creates an asymmetric playing field which allows them to beat all the competition in spite of their inefficiencies. What if an alternative explanation to the second narrative is that the real reason why advertising has become so profitable is not because of Big Data, but simply because businesses are desperate to protect their wealth from inflation and for lack of a better alternative, they decide that consumer mindshare is the most valuable asset... So companies which monopolize consumer attention/mindshare (social media companies) end up flooded with money from all sectors of the economy. If most of the Big Tech growth we've seen is artificial, then what will happen to inflation when large numbers of investors start selling shares and spending their money to buy real productive businesses instead (I.e. if they all give up on the false automation and big data narratives)?
Traster 6y ago
Isn't this kind of... stupid? > So around 5% of all years since 1926 have seen average returns. In fact, there have been just as many yearly returns above 40% as returns in the 8% to 12% range. Well yeah sure but 3 of the 5 years that saw those >40% returns were 3 consecutive years 100 years ago. I think all we can take from this article is that there are a multitude of factors that drive the value of the stock market and if you don't think about any of them in any detail then you're going to spot lots of statistical patterns that don't mean anything.
fallingfrog 6y ago
He’s not taking inflation into account, which makes the whole exercise rather suspect.
aerosmile 6y ago
A really interesting thing happened in March 2020. The market crashed and we all remember how gloomy everything looked. Needless to say, some businesses were going to be directly affected by Covid (eg: travel, hospitality) and their stocks went down as much as 80%. But it also became clear that many stocks were just collateral damage (eg: most of the tech stocks), and that they were going to recover more quickly than others. I bought all the tech stocks I could and things worked out great. If anything, I gave myself too much time to execute on this strategy - as a way to protect against the market tanking even further, I decided to dollar-cost average and make my investments over a 6-week period between mid March and end of April. As is obvious in hindsight, the mid-March cohort outperformed the late April cohort by a wide margin. Writing about this in April 2021 doesn't seem so surprising, but I can tell you that in April 2020 I was shocked how fast the market was improving even though the global news only kept getting worse and worse. I am close with many people who run their own businesses, and many of them had their worst weeks in April. I guess the market was recovering following the same rationale that I used, so I shouldn't be too surprised about its behavior, but it was still interesting considering how my risk profile is so different from the majority of other people. Would I recommend timing the market? Most of the time, no. But a lot of people talk about the impact of the 10 best or worst days in the last 20 years, and I would say those "insane periods" do exhibit somewhat recognizable patterns that makes it possible to identify them and take advantage of.
- qeternity 6y ago
  This has nothing to do with your company thesis and everything to do with the Fed.
  - aerosmile 6y ago
    I get the gist of your response and it certainly has some merit. But I would push back on the black or white presentation of your point - stock allocations certainly do matter, as you can easily confirm by playing with a few what-if scenarios in the past 12 months. The high-level point of my parent comment was to not run away from market crashes, and instead to buy stocks that are a part of the collateral damage as opposed to those that are directly connected to the root cause of the sell-off. I think this strategy will work regardless of Fed's actions, within reason (eg: the financial system doesn't collapse altogether).
theknocker 6y ago
Cool to see everyone gearing up for "it's totally not overtly hostile to the citizenry if elitists crash a domestic economy to help global markets behave more efficiently twenty years from now."

222 points by RickJWagner 6y ago

This is hand-wavy feel-good stuff, and it isn't terribly wrong but saying true things about long term returns is very difficult. Adjustments for inflation, interest rates, dividends, corporate tax rates, individual tax rates, index/portfolio construction, selection bias, etc. all need to be considered if you want to try to draw serious economic conclusions.

hpkuarg 6y ago

I mean, just look at last year, when the S&P 500 index plunged over 30%, then proceeded to nearly double from then until now, in the midst of a global pandemic that froze big chunks of the world economy. Stock market returns make no sense.

ycombinete 6y ago
I’ve made 15% on an 80/20 VWRA/IGLA split since September 2020. It scares me. It feels like too much. Like it’s going to pop.
- thrower123 6y ago
  It's been a long, long run. If you ignore the drop from last March that was recouped within months, it's been a strong ramp ever since the second half of the Obama presidency. Vanguard tells me I've done better than 16% over that period, just invested in the boring VTSAX index fund.
- xur17 6y ago
  I might agree that general stock market prices are quite high, but arguing that "they went up 15% in 6 months" doesn't seem particularly strong. That has occurred historically, and doesn't automatically mean it's overpriced.
  - ycombinete 6y ago
    I’m quite new to it, so that’s reassuring to hear. September was when I made my first purchase.
    - JohnPrine 6y ago
      just forget about it and never take the money out
pydry 6y ago
The jump was probably caused by the 2.3 trillion in MBSes and treasuries bought by the fed.
tarruda 6y ago
Instead of seeing as high returns, you can also look at it as money losing value due to excessive printing of last year.
- sojournerc 6y ago
  Exactly. Same with housing. They are not more valuable, the dollar is less valuable relative to them and likely will only get worse as equities and real estate are the good hedges against inflation, causing a positive feedback loop. Higher interest rates would create an incentive for traditional savings, but would destroy companies (and gov) holding big debts.
  - TheHypnotist 6y ago
    I'm not sure where you are but housing over the last year is a real supply/demand market condition. They aren't arbitrarily being overbid 10%+ because the dollar is worth less suddenly.
    - sojournerc 6y ago
      Sure, but supply is limited in part because of the wealthy folks buying properties they will not use as a residence to hedge against inflation. That real-estate is the least risky manner to protect wealth is a result of low interests rates and inflationary monetary policy. Printing as many dollars in the last year as there were in existence before, has perturbed a "normal" real-estate market. More dollars flying around means overbidding 10% is possible, especially since the additional interest is relatively negligible (wealthy folks will still take a loan in such conditions since rates are at rock-bottom).
      - jonfw 6y ago
        Supply is mostly limited because demand is up among millennials and material shortages have increased costs and delayed construction.
        6y ago
achenatx 6y ago
they totally make sense. The money supply increased from 12T to 20 trillion under trump. The money supply under biden is about to increase another 5T. We are seeing the effects of the increase in money supply as inflation in the price of equities.
Someone1234 6y ago
It starts to when you ask yourself: Where else are people meant to store money? Since interest rates and bond rates were at historical lows. So you have people who are looking at 10% YOY returns on one hand and 0.2%/2% on the other and making the rational decision. Does this make stocks overinflated? Yes. Is it going to suddenly pop? Unlikely, since the conditions that caused it won't suddenly change (e.g. certain bonds have ticked up 1%~ but taken months).
- berkes 6y ago
  > Is it going to suddenly pop? Unlikely.. This is not financial advise, but an investor myself, I'm on the other end of the spectrum. "Is it going to suddenly pop? Certainly! We just don't know when, how much and for how long. It could be june 2021, it could be 10 years after the Great Sino-Russian war of 2038".
  - partiallypro 6y ago
    The saying is that "As Long as the Music Is Playing, You've Got to Get Up and Dance." You can't -not- invest because it doesn't make sense and the valuations are insane because you could miss the dance or the encore.
  - aynyc 6y ago
    the markets can remain irrational longer than you can remain solvent.
  - Nasrudith 6y ago
    That isn't sudden in the usual meaning. What is meant by the question "Are you going to suddenly die?"? If a safe falls on you death will be sudden but there isn't any reason to believe you will be around falling safes historically. You may have some hidden defect. Sure you will die eventually even if you were unaging, but what is usually meant is "Do you have any known fragility like say a weak heart, high risk of stroke, or a habit of using something volatile in dosage like speedballs or carfentanil? "
  - foobarian 6y ago
rcMgD2BwE72F 6y ago
Stocks market returns only represent the return of the companies that are listed on stock exchange. If the economy stagnates overall but the small (unlisted) companies suffer while the big (listed) ones boom, then the stock market returns increase in a stagnating economy but it makes sense. The problem here would be the belief that stock market is a mirror of the main economy. Personally, I believe the stock market represents very well the interest of the richest capitalists.
nocommentguy 6y ago
More like the value of the dollar has roughly halved due to record money-printing and this is reflected in capital assets firsts. https://fred.stlouisfed.org/graph/fredgraph.png?width=880&height=440&id=M1 https://fred.stlouisfed.org/graph/fredgraph.png?width=880&he... MMT apologists are the modern day petit bourgeois. Trust the experts!
- clomond 6y ago
  The value of the dollar has not halved.... Against a basket of currencies, the US dollar index is approximately 10% lower than it was from the start of the pandemic. Pointing to the fed money supply chart as evidence is woefully misleading. Dollar index historical: https://tradingeconomics.com/united-states/currency https://tradingeconomics.com/united-states/currency
  - berkes 6y ago
    > Against a basket of currencies, Counterpoint would be that against "a basket of assets" it is decreasing in value rapidly. The EUR is probably tanking just as fast. What you are doing is like saying "shipping prices for steel have not increased, because the price to get a kilogram of steel across the ocean is hardly more than the price to get a kilogram of coal across the ocean".
- Aunche 6y ago
  Much of the increase was just banks relabeling their M2 money as M1. This happened when banks stopped penalizing people from withdrawing from their savings account more 6 times a month.
  - imtringued 6y ago
    Yeah, it's annoying, it ruins the usefulness of the charts but it has no short term or long term significance.
Tangokat 6y ago
Stock market returns make sense only when you realize the currency is actually just losing value. All currency is being devalued so you don't see it in currency pairs but scarce assets go up quickly.
- hamilyon2 6y ago
  I think that given how vast is USD influence, currencies all over the world will lose their value with dollar. But not every currency, economies that rely on mining natural resources more should have their currencies better against USD. This is not the case, as far as I can see.
  - Nasrudith 6y ago
    Why would mining help? Resource extraction is the low end of earning potential. You mostly need the terrain and a willingness to pollute to break into it. It isn't that scarce. Industry makes much more than resource extraction and advanced services make more than industry.
  - ivankolev 6y ago
    Actually CAD is trending up against USD
nemothekid 6y ago
I can never coalesce the whole pandemic and stock returns thing with the actual "fundamentals" of these companies. Yes - there was a pandemic, but the 5 largest companies in the index, Apple, Amazon, Microsoft, Facebook and Google, which make up nearly 20% of the index all had insane revenue growth. Amazon nearly doubled it's profits, Google growing as much as 30%. When every other investment vehicle, except maybe housing is cratering you have a one-two where stocks looks great to invest in, and are much better than everything else. If it were to ever pop it would be because other investment products started to get much healthier - which to me isn't a bad thing.
hourislate 6y ago
A Pandemic and multiple conflict zones were no more than a pot hole. The markets have pushed higher with no end in sight. The Fed and Treasury are making sure that if there is no one to buy stocks they will. There is no end to the support the Federal Reserve will shoulder for the markets. With Governments around the world determined to never let the Economy fall or stay down even if it means directly sending money to the population and spending trillions at a moments notice to support Wall St there is no chance that over the long term the market will ever fall and stay down again. Not even a WW or a natural disaster of the like we have never seen would keep the markets down. We would be naked, homeless and hungry and the market will continue to march higher. History is a perfect example of that.
- nfRfqX5n 6y ago
  i've been thinking the same thing for a couple years now. lots of people keep harping on doomsday scenarios, but it seems too many people have too much invested in the market for it to fail
  - ed25519FUUU 6y ago
    That type of intervention prolongs the inevitable, but certainly won’t stop a collapse.
LatteLazy 6y ago
The stock market is about future expectations. As soon as you know that, the last year makes perfect sense. Oh no, a plague = crash. Oh wait, it will be shitty for 6 to 24 months but actually not that bad and people are still buying stuff just as much as before = Boom.
weeboid 6y ago
When S&P plunges more than 10%, buybuybuy. 30%? Shit go full margin and back up the truck. I’m sitting on 2x since Dec. Protips. Saas is the thesis. Long term solar is a 100x-1000x easy-ish bet. Capture is “good enough”, we are going to solve storage. Transmission will significantly collapse into storage. Game will change. The entire energy game.
- pc86 6y ago
  > Long term solar is a 100x-1000x easy-ish bet. This is WSB-level nonsense.
  - jonfw 6y ago
    Reminiscent of the dot com boom. People said "this internet thing really looks like it's on the up and up" and they were right. What they didn't understand is that investing in 'pets.com' didn't mean they were investing in the internet. Yes the solar industry could probably go up 100x. No, the companies we're investing in today won't track that.
    - weeboid 6y ago
      Ok, please put all your savings into shorting an index of all current solar companies
- imtringued 6y ago
  100x? I think that is at the edge of what the EV market can accomplish.

ahelwer 6y ago

There are all sorts of interesting facts you can pull out of this, like how if you missed the top 10 best days in the market from 1999-2019, your return was cut in half. If you missed the top 20 best days, you actually lost money: https://www.fool.com/investing/2019/04/11/what-happens-when-you-miss-the-best-days-in-the-st.aspx https://www.fool.com/investing/2019/04/11/what-happens-when-... Basically never mistake annualized return over a long period of time for your expected return in a given year (or day, etc). There will be some really really good years, and a few really really bad years. If something grows consistently with low variance over a long period of time, that's a red flag! It's likely to be a "picking up pennies in front of a steamroller" type trade.

sichtlinkair 6y ago
> It's likely to be a "picking up pennies in front of a steamroller" type trade. What does that mean?
- b0afc375b5 6y ago
  I think it means doing something high risk for low reward.
  - kccqzy 6y ago
    It means doing something high risk but the risk has low probability, and for low reward. No rational mind would do anything high risk low reward, unless the risk has low probability. Then it's just like selling insurance.
- ahelwer 6y ago
  Think of a slowly advancing steamroller, with pennies scattered before it. You can run around picking up these pennies, for small but consistent gain over a long period of time. Just don't take your eye off the steamroller! The canonical example in recent times is the XIV blowup of 2018, which inversed VIX (a security tracking market volatility). So if you held XIV you basically bet that large market moves wouldn't happen - you're shorting volatility. Take a look at the graph to see how that ended up; the steamroller caught up to them! https://www.rcmalternatives.com/2018/02/why-did-xiv-implode/ https://www.rcmalternatives.com/2018/02/why-did-xiv-implode/

ArtTimeInvestor 6y ago

The author falls for the "past equals future" fallacy. The only way to truly take the randomness out of the stock market is to have a multi-decade time horizon. He says so after looking at the data of a few decades. That makes no sense. It is like looking at 3 people and saying "People come in groups no larger than 3". The whole article is based on that premise. He has something like 90 data points and assumes the next 90 data points will be alike. Is it possible the next 10 years will have a negative return? This is a very interesting question. But I doubt we can answer it by looking at historical returns. We need to look at the actual situation. What would have to happen in the world so we see negative returns? War? A natural desaster? Who says war and natural desasters cannot throw us back 100 years? 1000? 10000?

ahelwer 6y ago
I mean yes, past performance doesn't guarantee future results. But it does waggle its eyebrows suggestively at it, when you have a phenomenon that's gone unchallenged for probably a hundred years now. It isn't guaranteed. But nobody's lost their shirt betting it'll continue yet. People always bring up Japan in these discussions, of course. The Nikkei 225 peaked on 29 December 1989, still only at half that value over 30 years later.
- bryanlarsen 6y ago
  Or the German stock market of 1914. An 1914 investor would have had to have held for 100 years to get his investment back. The major point is that only looking at 90 years of American stock market returns is very serious cherry picking. We can get a lot more data by including non-American stock markets. The last century was a century of American ascendance. 100 years from now America still might be at the top, but I wouldn't take that bet. Even if it is, we won't get the gains we got from rising to the top.
  - ahelwer 6y ago
    The ultimate point of these discussions is coming to a conclusion about "what should we do?". I can give you quite a few reasons why dumping all your money in market index funds could end in disaster. I'm not under the illusion these gains are guaranteed. But what the hell else am I going to do?

mumblemumble 6y ago

For that 2nd graph, he chose buckets that are uniquely poorly suited to evaluating his statement about whether returns tend toward 10%. It looks to me like, if he had instead made them (5%)-5%, 5%-15%, 15%-25%, etc., then the mode would indeed have been the 5-15% bracket.

ricardobeat 6y ago
The mode is already in the 10-20% bucket in the graph, changing the buckets would not affect the argument that follows, which does mention the 8-12% and 10-15% ranges: > If we look at the calendar year returns plus or minus 2% from the 10% average (so 8% to 12%) this has happened in just 5 calendar years > Just 18% of returns have been between 5% to 15% in any given year. The main point being that the odds of you seeing any returns near the 10% number are quite low (18/100). It's just a lot more spiky than most people realize and not a safe way to get 10% returns unless you're looking at 30+ year periods.
- mumblemumble 6y ago
  Yes, that's all true, but none of it changes the point that it's a poorly constructed visualization that is ill-suited to how the author is trying to frame their story. Edward Tufte would weep.
  - ricardobeat 6y ago
    The first graph establishes that there is no clear trend or clustering in the data points. The second one lets you visualize just how many years are around the 10% average or not, and then the argument is expanded from there. They seem to serve their purpose pretty well. There's probably a nicer way to display that, and maybe combine them as one of Tufte's principles would suggest, but I don't see anything that would make him weep here :) What do you have in mind?
ellisv 6y ago
Agreed. I’ve seen that figure before (or some variation) and it is a bad way to try to argue his statement.

mabbo 6y ago

I decided to play with these numbers myself because I had some questions. I believe the data is the same as I found here[0] The average single-year return over that period was about 7.5%, not 10%- though in half of years, the market did better than 11%. But what happens if we bucketize by a larger period, like 5-year? My method was to take $1, multiply by the return for 5 years in a row, and then take the 5th root of the result, then convert to a percentage return per year by 5-year bucket. Overlapping 5-year buckets. The end result is as you'd expect. There are bad years, and there are good years, but the storm is pretty tame when smoothed out. In more than 75% of 5-year periods, the average return was positive. Only 69% of 1-year periods were positive. As a fun aside, if you invested in an S&P500 index fund the day Clinton was elected and sold it all the day Bush was elected, you'd have made close to 25% annual return on average. [0]https://www.macrotrends.net/2526/sp-500-historical-annual-returns https://www.macrotrends.net/2526/sp-500-historical-annual-re...

wbc 6y ago
Did you add in the dividends? https://www.multpl.com/s-p-500-dividend-yield/table/by-year https://www.multpl.com/s-p-500-dividend-yield/table/by-year
BeetleB 6y ago
~7% is after adjusting for inflation. I suspect OP did not adjust.
- thedufer 6y ago
  The linked data isn't adjusted, though - it's just raw open/close values for each year. The mistake here is ignoring dividends, which push returns up by 2-3% per year.

YZF 6y ago

Rather than looking at returns in isolation it might be more interesting to look at returns vs. P/E or vs. some other parameters like interest rates. e.g.: https://www.alger.com/AlgerDocuments/AOM_singleGreatestPredictor.pdf https://www.alger.com/AlgerDocuments/AOM_singleGreatestPredi... This is only a 20 year period which is pretty short, but hey, doesn't look as random any more.

mortehu 6y ago
Each data point covers 10 years, and there's only 20 years of data. There should be only two points on the graph. The other points are just blends of the two independent time periods. The implied decision is whether to invest over the next ten years, and the chart implies that you can make this decision every month.
- YZF 6y ago
  The question is whether the current P/E impacts (long term) future returns. I think it does. Robert Shiller thinks it does (or at least the cyclically adjusted P/E). Having a data point per month is not unreasonable. Prices and earnings move. The 20 year period for a 10 year return horizon is clearly too short. I'd like to see the same data over longer periods.
  - mortehu 6y ago
    Prices move, but the move from month 0 to month 12 is highly dependent on the move from month 1 to month 13. It's statistical nonsense to treat them as independent variables in a regression model. You could use any biased random walk as your price series with this approach and get a correlation p value of 0.00001.
    - YZF 6y ago
      If month 1 was the crash then 0 to 12 and 1 to 13 look very different. No? Aren't you basically saying your precise entry point to a 10 year period doesn't matter, e.g. if you enter at year zero or year 2, or January vs May in year zero? But clearly it matters a lot because the market can make huge moves in short periods. In other words, you're saying to look at 10 year returns we should just take each decade on its own with no overlap? Clearly if I pick 1970-1980, 1980-1990, 1990-2000, or pick 1975-1985, 1985-1995, 1995-2005 I'm gonna end up with very very different results? And sure, at some point the overlap becomes too fine. But saying that 2 decades is just 2 data points doesn't sound right either? I definitely would like to see an analysis over a much longer horizon, that'd be a more significant result. EDIT: Totally agree the points are not independent. But it feels like there's still residual value (which I can't quite put in mathematical terms) from this "moving window".

hansor 6y ago

US market should NOT be used as any scientific benchmark for anything - as it does not represent "all" typical possible scenarios for the stock market. Look for example(one of many) at Japanese NIKKEI index - it was going DOWN for like 20 years! So this theory does not work! Many people in Europe also quote multiple studies based on US market - but they are usually worthless on other markets(both bonds and stocks). If you add inflation and CPI - this theory is even more worthless. US market is special - as US is one of very few superpowers on Earth.

verbify 6y ago
The NIKKEI would've given you a positive return if you bought and held and reinvested dividends. And picking the worst point in one of the worst indices does not mean much - most investors are not investing a lump sum (they're usually putting into a pension over the course of decades) and they shouldn't be investing in just index/asset class (all-world diversification and having bonds as part of your portfolio is recommended).
fnord77 6y ago
> US market is special - as US is one of very few superpowers on Earth. For now. Look how rapidly the USSR lost its superpower status. What if the Capitol insurrection were successful?
- boringg 6y ago
  Not even a relevant comparison, sorry. Russia was a competitor but didn't have the same built in advantages. US will remain a super power for the remainder of everyones lives on hacker news. It will diminish, but it will remain in power until we're all in the ground. Mainly stemming from its economic roots for the global financial system.

ellisv 6y ago

In many situations, few or none of the observations will have the average value. It’s been discussed here before — search for the “When U.S. air force discovered the flaw of averages” story

boringg 6y ago

I'm going to add that I did a rudimentary an analysis of the S&P 500 because everyone seems to be throwing their money into passive S&P500 low vehicle investments. I looked at every hold period since inception from 1 year holds / returns up to 40 year hold and returns. Timing is crucial for good returns - depending on when you put in and take out your money the returns can be negative (even in cases where you hold up to 15 years) and in other cases quite good (best cases inflation adjusted annualized returns of 12% over 40 years). I did it because I didn't buy the commentary that you should just put it in S&P 500 and that it will almost guarantee returns.

snikeris 6y ago
> Timing is crucial for good returns - depending on when you put in and take out your money the returns can be negative (even in cases where you hold up to 15 years) This is well captured in this guy's drawdown charts: https://portfoliocharts.com/portfolio/drawdowns/ https://portfoliocharts.com/portfolio/drawdowns/
- boringg 6y ago
  This is slick.
CarelessExpert 6y ago
> depending on when you put in and take out your money the returns can be negative (even in cases where you hold up to 15 years) Sorry, but unless you're talking about truly black swan circumstances like the Great Depression or the 2008 crash, I don't believe for a second that, over a 15 year timespan, holding the S&P will result in negative returns frequently enough that a typical investor has to concern themselves with market timing. You need to prove your work for a statement that strong.
- troydavis 6y ago
  For anyone interested in this topic, https://dqydj.com/sp-500-historical-return-calculator/ https://dqydj.com/sp-500-historical-return-calculator/ is a good place to start. As a starting point, accept the defaults and hit "Calculate Historical Returns." The minimum return and standard deviation are most relevant. (Note that it defaults to adjusting for inflation, but that's really the only metric that makes sense when comparing long periods, particularly those including the 1970s and 1980s, so that's probably what you want.)

kingsuper20 6y ago

The stock market is an odd duck. What to make of it now? There's both colors of swans at work in terms of the plague, excessive money printing, per Peter Turchin (cliodynamics) a peaking cycle in civic unrest, a potential loss of reserve currency status, big changes in tech that still haven't been digested, low cost of transactions. Lotsa opportunities for froth. I'm still uncomfortable with it as a store of value. Not many people even owned stocks in the past, which makes historical comparisons a little problematic. It took things like the government heavily encouraging parking money there (401k, IRA, tax law changes, corporate tax law) and greater ease of transaction to put us where we are. You could argue that the entire market is a mania. edit: Just to indulge my logorrhea for a minute, I wonder to what extent we are seeing an organic change in stock markets, a form of evolution really, that takes advantage of human nature. In the last 40 years or so, it was bound to gather up all the accoutrements of video poker. Marketing and blinkenlights, random payoffs, a house percentage getting scraped off, the fiction of player skill. The payoff is greater than 100% due to it riding the back of GDP growth (and the growth of large companies at the expense of the small) but the science of the casino is built deeply in the human psyche. The stock market has to act the way it does simply to remain attractive to all the primates.

lotsofpulp 6y ago
> You could argue that the entire market is a mania. Objectively, the big publicly listed companies are growing and have stellar financials. I can think of no better place for someone to invest, other than maybe diversifying into real estate with high demand, if they already have a significant amount invested in public equity markets. Public equity market prices are also backed by the federal government, at least on a 5+ year (maybe even 3+ year) timeframe per events over the last few decades.
- kingsuper20 6y ago
  It's worth considering that what you are buying is a dividend stream and/or the possibility of a company being bought, which simply gives you more stock. When you essentially lend money to GOOGL or AMZN, what are you actually getting back besides a story? Don't get me wrong, in the timespan of an individual's life it may well make sense to heavily buy into this system. I'm just making the point that it's current form is rather new and appears loosely connected to the real world and is subject to change. To me, the current stock market seems like a fiat currency without the threat of physical force. Maybe the temptation will be to increasingly merge government with large companies in order to keep the plates spinning.

arisAlexis 6y ago

Taleb in his Black Swan book makes exactly the counter-point for this type of article that uses statistics and curves to predict and explain something that doesn't fit laws of averages and bell curves. Interesting read. The statistics of the article are just observational without any kind of predictive power or meaning.

mordymoop 6y ago
I think the way to phrase it is something like: We don't know what the heck is happening, actually. We call this "randomness." But it is not randomness in the sense of truly, fundamentally unpredictable, nonsensical things happening. It is randomness only in the sense that almost everybody fail to see important things coming. But usually you could, in principle, see important things coming. And often a handful of people do, but nobody listens to them. You use bell curves when you radically doubt your ability to see important things coming, and just assume that a sort of vaguely similar distribution of types of things will keep happening. Taleb argues, correctly, that this is actually a pretty stupid assumption because new, weird, statistically unpredictable important things happen all the time. I like Taleb's critique but I'm not satisfied with his answer. Radical skepticism in your ability to see important things coming ... probably shouldn't stop you from trying anyway, using whatever tools you decide, using your reason, are the most useful. You can't predict black swans but you have to try. One of the tools here would be leveraging statistical regularities in past performance. Another would be having some kind of thesis about how solar power, or crypto, is gonna be big, for Reasons, which violates past statistical behavior. It definitely seems suggestive that hedge funds don't seem to outperform index funds, over almost any timescale you care to choose. Everybody is doing the best they can; Taleb points out that this still isn't very good; he's right, but what else are you gonna do?

weeboid 6y ago

Isn’t it the case that for *any* arbitrary 30 year period of S&P, the worst you could do is 2x, and the best 1000x? And the mode something like 10x For 20 years it reduces where I think some periods could actually produce flat or slightly negative, but the best and mode are still up in that range. Hey, yeah. Investing is “risky”. Keep “working on your career”, and squirrel away into 401ks then.

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nunez 6y ago

Based on the bell curve centering around 10%-20% average returns, I'd say that returns from the stock market are pretty average.

thehappypm 6y ago

Stocks are backstopped by the fact that companies are highly highly incentivized to keep the prices high. If suddenly the bubble pops and stocks fall 90%, every CEO suddenly has a very real fiduciary incentive to get the stock back up. Cut cost to yield dividends, buybacks, whatever it takes.

kragen 6y ago

This article suffers from hindsight bias by virtue of focusing on the US stock market, for which this has been an exceptionally good century. If you were to include the markets of Britain, the Netherlands, Japan, Germany, France, Poland, China, Argentina, and Switzerland, the picture doesn't look so rosy. Anything you invested in the Giełda Pieniężna w Warszawie in 01926, for example, would have evaporated in 01939; despite the "liberation" of Poland in 01945, no stock exchange would reopen there for 50 years. Poland is an extreme case, but so is the US—I don't think any other country's stocks did so well during the 20th century. If someone were to write an article about how well Esso/ExxonMobil stock has done from 01926 to 02021 (11.9% I think), it would be easy to understand that this wasn't a recommendation to hold ExxonMobil for the next century, much less some other arbitrary stock; obviously the investors 95 years ago in the F.W. Woolworth Company and the Kennecott Mines Company didn't do quite as well, which is precisely why nobody would write an article today about buying and holding Woolworth's stock. Will the US do so well over the next century? The spectacular bungling of the covid pandemic suggests that it may not.

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sec400 6y ago
OT: why do you prefix the year with a 0?
- LiveTheDream 6y ago
  The 5-place date is meant to draw attention to a longer view of time, a position advocated for by the Long Now Foundation.[0] [0] https://blog.longnow.org/02013/12/31/long-now-years-five-digit-dates-and-10k-compliance-at-home/ https://blog.longnow.org/02013/12/31/long-now-years-five-dig...
  - sec400 6y ago
    Thanks, interesting. I will of course now 1-up and use a double 00 prefix on any publicly posted dates.

jplr8922 6y ago

The author is doing a lot of work to explain that the statistical average takes a long time to converge to the expected return because the distribution is volatile (high stdv, skewness, kurtosis, etc). Do note however that his analysis only concerns itself with the US. Including other countries would show that US is one of the few countries where stock markets were never interupted for a long period of time because of its political stability. If you dont beliveve it will keep going this way in the future, invest in other countries.

cryptica 6y ago

The stock market has more or less monopolized the global fiat monetary system. Politicians can decide what the returns will be in any given year because they control the currency. The returns are only meaningful in the short term while everyone is in a trance thinking that fiat currency is worth the same as it was before... The longer everyone can stay in this trance, the more 'real' the numbers are. However, it's my opinion that the real value creators of our economy (the backbone of all economic value) don't have much incentive to believe in the fiat numbers anymore. That's why they're moving towards Bitcoin and crypto. The next decade is going to be interesting; we're going to find out if all the hype about 'automation' and 'big data' was genuine or if it was just moral cover for the elite to justify their monopolization of everything. If the corporate elite have managed to automate the economy to a degree that people and non-corporate entities cannot compete with their machines, then fiat will continue to thrive. If it turns out that non-corporate entities still have the competitive upper hand, then fiat will deteriorate and Bitcoin will take over. My PoV as a developer who has worked for many big tech companies is that the corporate sphere has been deteriorating for years and most advancements have been vaporware. I believe that apparent growth in profits and market cap are a trick of the money printers and the numbers are not grounded in real economic value; they are extremely fragile and the only reason that the stock market doesn't collapse along with fiat is because of extreme herd mentality among investors who have been primed to believe in the supremacy of fiat currencies for their entire lives.

SilurianWenlock 6y ago
I cannot understand the thinking behind your 2nd and 3rd from last paragraphs
- cryptica 6y ago
  The narrative about automation is used to justify Big Tech monopolies. I.e. there are huge tech monopolies nowadays because big tech is automating everything and driving all local brick-and-mortar shops out of business and people are going out of work because of automation. The narrative about big data is used to justify Big Tech's (e.g. Facebook) high profits. I.e. Advertising wasn't lucrative before but now thanks to big data (targeted advertising), it's very lucrative. What if an alternative explanation to the first narrative is not that Big Tech is automating everything, but instead, that their monopolies are simply a result of them having preferential access to large amounts of newly created capital (e.g. at lower interest rates or via shell company revenue laundering schemes); their access to the money printers creates an asymmetric playing field which allows them to beat all the competition in spite of their inefficiencies. What if an alternative explanation to the second narrative is that the real reason why advertising has become so profitable is not because of Big Data, but simply because businesses are desperate to protect their wealth from inflation and for lack of a better alternative, they decide that consumer mindshare is the most valuable asset... So companies which monopolize consumer attention/mindshare (social media companies) end up flooded with money from all sectors of the economy. If most of the Big Tech growth we've seen is artificial, then what will happen to inflation when large numbers of investors start selling shares and spending their money to buy real productive businesses instead (I.e. if they all give up on the false automation and big data narratives)?

Traster 6y ago

Isn't this kind of... stupid? > So around 5% of all years since 1926 have seen average returns. In fact, there have been just as many yearly returns above 40% as returns in the 8% to 12% range. Well yeah sure but 3 of the 5 years that saw those >40% returns were 3 consecutive years 100 years ago. I think all we can take from this article is that there are a multitude of factors that drive the value of the stock market and if you don't think about any of them in any detail then you're going to spot lots of statistical patterns that don't mean anything.

fallingfrog 6y ago

He’s not taking inflation into account, which makes the whole exercise rather suspect.

aerosmile 6y ago

A really interesting thing happened in March 2020. The market crashed and we all remember how gloomy everything looked. Needless to say, some businesses were going to be directly affected by Covid (eg: travel, hospitality) and their stocks went down as much as 80%. But it also became clear that many stocks were just collateral damage (eg: most of the tech stocks), and that they were going to recover more quickly than others. I bought all the tech stocks I could and things worked out great. If anything, I gave myself too much time to execute on this strategy - as a way to protect against the market tanking even further, I decided to dollar-cost average and make my investments over a 6-week period between mid March and end of April. As is obvious in hindsight, the mid-March cohort outperformed the late April cohort by a wide margin. Writing about this in April 2021 doesn't seem so surprising, but I can tell you that in April 2020 I was shocked how fast the market was improving even though the global news only kept getting worse and worse. I am close with many people who run their own businesses, and many of them had their worst weeks in April. I guess the market was recovering following the same rationale that I used, so I shouldn't be too surprised about its behavior, but it was still interesting considering how my risk profile is so different from the majority of other people. Would I recommend timing the market? Most of the time, no. But a lot of people talk about the impact of the 10 best or worst days in the last 20 years, and I would say those "insane periods" do exhibit somewhat recognizable patterns that makes it possible to identify them and take advantage of.

qeternity 6y ago
This has nothing to do with your company thesis and everything to do with the Fed.
- aerosmile 6y ago
  I get the gist of your response and it certainly has some merit. But I would push back on the black or white presentation of your point - stock allocations certainly do matter, as you can easily confirm by playing with a few what-if scenarios in the past 12 months. The high-level point of my parent comment was to not run away from market crashes, and instead to buy stocks that are a part of the collateral damage as opposed to those that are directly connected to the root cause of the sell-off. I think this strategy will work regardless of Fed's actions, within reason (eg: the financial system doesn't collapse altogether).

theknocker 6y ago

Cool to see everyone gearing up for "it's totally not overtly hostile to the citizenry if elitists crash a domestic economy to help global markets behave more efficiently twenty years from now."