Monday, September 22, 2008

Third Chapter: A century of stock market history

The third chapter shows the manner in which stocks have advanced through many ups and downs in the past century. It shows the stock market picture in terms of 10-year averages with respect to earnings, dividends and stock prices. From 1900 to 1970, there are 3 patterns each covering a third of the 70 years. The first pattern begins in 1900 and finishes in 1924. Annual advance in this period averaged approximately 3% (S&P).

The Great Depression began in 1929 and there were irregular fluctuations in the stock market till 1949. The annual advance was 1.5% (S&P). 1949 marked the end of the second pattern.

The third pattern was in the midst of a great bull market from 1949 to 1968. Annual advance rate was 11% to early 1966 (S&P).
Such a return caused investors to expect similar results in the future and on the contrary, the market declined 36% by 1970 (S&P).

As far as earnings and dividends go, only 2 decades out of the 9 decades had a decrease in earnings (1891-1900 and 1931-1940). There is no decade after 1900 that shows a decrease in average dividends. The rates of growth in all these periods were far from a steady number. An investor can't tell what gain he/she would expect in future by looking at these different periods.

By looking at the past-century history of the stock market, there is no guarantee of any return going into the future. Each investor must make his own decision and accept his investing responsibility. The investor should not borrow money to buy stocks. He should also reduce stock holdings in his portfolio to a maximum of 50% of the portfolio. The other 50% would go to bonds.

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