Stock Performance over Centuries: Global Financial Data

Here are some informative tweets from Global Financial Data since the stock markets exist.

Cool chart using @GlobalFinData 's Developed World Index stretching back to 1602.

Even on this long-term scale it's interesting to see the blips of major events like 1720 and 1929.

Cc: @WallStCynic @jasonzweigwsj @WGoetzmann pic.twitter.com/UHpM6DKIno

— Jamie Catherwood (@InvestorAmnesia) September 6, 2020

Here is a price version of the Developed World Index showing performance from 1602 to 2019. The total return was 8.17% in the 1600s, 5.39% in the 1700s, 6.33% in the 1800s and 9.67% in the 1900s. and 7.3% from 1602 to 2019 pic.twitter.com/9RgRXDdPRn

— Global Financial Data (@GlobalFinData) September 6, 2020

The compound rates of return were 8.17% in the 1600s, 5.39% in the 1700s, 6.33% in the 1800s and 9.67% in the 1900s, though after inflation the returns were 5.1% in 1700s, 6.2% in 1800s and 6.29% in 1900s. Total return 1602 to 2019 was 7.3%.

— Global Financial Data (@GlobalFinData) September 6, 2020

As we are looking at a 4 century span and some readers maybe unfamiliar with the history of financialization, I give a few more details below.

Rise of Capitalism: from Merchant Trade to Industry

Risky capital has been earning slightly above 5% to 8% during the whole period, which makes sense at a time when safe capital held by landlord yielded 5%. In the 20th century, the switch to fiat money made headline returns higher at 9% but only 6% above inflation.

Stock market existed because limited liability was enabled by anonymous bearer stocks. Those started to help finance the most risky ventures: dutch, then english and french merchant ships and colonial trade. It was only in the 19th century that this risk friendly limited liability was used towards harnessing industrial progress and founding corporations.

The Triumph of the Optimist, except for Wars

This assumes that investors were able to diversify their assets across jurisdictions to ensure their capital was safe. This was not the case during the world wars. Russian, Ottoman, Chinese, German, Japanese, Austrian, Italian, French investors did not see 5% returns over 20th century.

Bond vs Stocks

Stocks are inherently more risky and have outperformed bonds since stocks exist. It should be noted that bonds had guaranteed return in gold backed currency.

The 20th century finally exited the gold standard because of wars and arguably, because of increases in productivity in the 20s due to combustion engine and electricity that caused the economic output to outgrow what even what gold South-Africa and America could mine.

From the 1930 century, it became clear that the bonds only give the illusion of safety by guaranteeing a fixed income in a fiat currency that depreciates every year. Those who invested in bonds for added safety saw their wealth wiped out by inflation, whereas equities kept value provided that corporations remain profitable.

Even inflation protected bonds look like a scam as the inflation index underestimates actual inflation by 2% to 3% due to hedonic adjustments.

Arguably, bond investments from 1600 to 1914 were a much safer of investment than bonds after 1914 whereas stocks did not change as much.