Course Curator: Dr. G. Danford (London Business School MBA, Helsinki School of Economics PhD)
The only proven method for measuring learning is to take a pre-quiz and post-quiz of the content covered.
Stock Market History
Humans have always invested for the future. Furthermore, they’ve made the same mistakes, enjoyed the same highs and suffered the same lows. What can investors learn from this human experience?
It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.
‘One of the problems that investors face is that they learn too much from that experience. So the end of the 1990’s, people knew that shares would always go up. By the end of the 2000s, they knew that shares were a bad idea. What the historian can do is enable them to learn from the critical decade that their parents had.’ A primitive stock market existed in ancient Rome. The first brokers however, were the ‘courretiers de change’, who managed farm debts for French banks in the 12th century. Venetian bankers started trading in government securities in the 14th Century. In the 15th Century commodities were traded in the Netherlands.In 1602 the Dutch East India Company founded the first stock exchange, in Amsterdam and following that, trading developed in Paris and London.
The First Crash
The first crash was caused by the emerging middle classes’ unlikely obsession with tulips. ‘They were very rare, they were new to Europe in the middle of the 16th Century. The top price for tulips were 9,000 euros (you could buy a house in Amsterdam for that amount). On February 1637 the world’s first recorded speculative bubble burst and prices crashed.
‘When you look back at different stages in Stock Market History, you see a repeatable pattern which is: markets crash and they crash frequently. Having a real depth insight into the sheer magnitude of some of those falls and the frequency with which the occur is really critical. The most important lesson that investors should take from history is that they should learn from history and often the problem is that they don’t learn from history and that so many of the swings in asset valuations that we’ve seen, we’ve seen it all before. A classic example of that would have been the technology bubble in the late 90s where on very standard valuation ratio models, it looked as if stocks were looking for a correction but people managed to convince themselves that this time it’s different.’But let’s not forget the context of Tulip Mania. Yes, it was a very painful experience for many investors.’
Markets Crash…Recover…and Crash (3:30)
NOTE: this video will start and stop at the pre-assigned times 00:44-4:04
That 1637 crisis was followed by many years of healthy investment returns. ‘After a crash there’s hope because after every crash there’s been a recovery. It might be smaller or larger, but in the end markets tend to inexorably go up.
Crashes are inevitable, and we need to be prepared for them. More importantly however, are the periods in between, the long-term trends. People ought to be thinking about investing in the longer term and not get so excited about what happens day to day.
The first contemporary global financial crisis unfolded in the autumn of 1987 on a day known infamously as “Black Monday. A chain reaction of market distress sent global stock exchanges plummeting in a matter of hours. In the United States, the Dow Jones Industrial Average (DJIA) dropped 22.6 percent in a single trading session, a loss that remains the largest one-day stock market decline in history. At the time, it also marked the sharpest market downturn in the United States since the Great Depression.
The Black Monday events served to underscore the concept of “globalization,” which was still quite new at the time, by demonstrating the unprecedented extent to which financial markets worldwide had become intertwined and technologically interconnected.
Stock markets quickly recovered a majority of their Black Monday losses. In just two trading sessions, the DJIA gained back 288 points, or 57 percent, of the total Black Monday downturn. Less than two years later, US stock markets surpassed their pre-crash highs.’ (Source: Fereral Reserve History).
The Great Crash 1929 (3:00)
NOTE: this video will start and stop at the pre-assigned times 07:16-9:17
200 Year Returns
Jeremy Siegel’s (Stocks For The Long Run) data-set finds returns of 6.5%-7% for stocks for the past 200 years. However, stock declines are neither predictable nor fun, but they are a fact of life and the necessary evil for having the benefit of stocks in your portfolio. Leo Tolstoy is quoted as saying, “All happy families are alike, each unhappy family is unhappy in its own way”: the same is true of the stock market and market declines. Markets fall based on numerous factors (economic–inflation, deflation, declining economic growth, political crisis— or shocks to the financial markets). Each of these unique conditions require different approach to asset allocation, speculation and timing.
Equities Offer Superior Returns? (6:30)
NOTE: this video will start and stop at the pre-assigned times 12:02-18:50
‘Industries are a key investment factor. As one example, over the past 115 years, U.S. tobacco stocks returned an average of 14.6% annually, compared with 9.6% for U.S. stocks. Many countries’ stock markets are highly concentrated within a few industries, while many industries are concentrated within a few countries’.
To exploit diversification opportunities to the full, investors need to diversify across a wide spread of industries and countries. Both matter, although there is evidence that globalization has led to a decline in the relative importance of countries, with industries assuming greater importance. However, industries have risen and fallen over the years as technology has advanced.
‘It is interesting to see which industries have done best and worst, but this tells us little about the future. The industrial landscape will change during the 21st century perhaps even more radically than in the past. there will continue to be a wide variation between the returns on different industries. It will remain hard to predict the likely winners and losers, but industries and their weightings will continue to matter.’ (Source: Credit Suisse 2015, Professor Paul Marsh, Elroy Dimson, Mike Staunton, London Business School)
Recommended Reading: PDF File Link Credit Suisse Global Investments Returns Yearbook 2015 (Credit Suisse)