Human beings find it to learn from stock market history
Human beings find it to learn from stock market history
Nothing illustrates more clearly how hard human beings find it to learn from history than the repetitive history of stock market bubbles. Consider how readers of the Business Week magazine saw the world at two moments in time, separated by just twenty years. On 13 August 1979, the front cover featured a crumpled share certificate in the shape of a crashed paper dart under the headline: ‘The Death of Equities: How inflation is destroying the stock market’. Readers were left in no doubt about the magnitude of the crisis:
The masses long ago switched from stocks to investments having higher yields and more protection from inflation. Now the pension funds - the market’s last hope - have won permission to quit stocks and bonds for real estate, futures, gold, and even diamonds. The death of equities looks like an almost permanent condition.
On that day, the Dow Jones Industrial Average, the longest-running American stock market index, closed at 875, barely changed from its level ten years before, and nearly 17 per cent below its peak of 1052 in January 1973. Pessimism after a decade and half of disappointment was understandable. Yet, far from expiring, US equities were just a few years away from one of the great bull runs of modern times. Having touched bottom in August 1982 (777), the Dow proceeded to more than treble in the space of just five years, reaching a record high of 2,700 in the summer of 1987. After a short, sharp sell-off in October 1987, the index resumed its upward rise. After 1995, the pace of its ascent even quickened. On 27 September 1999, it closed at just under 10,395, meaning that the average price of a major US corporation had risen nearly twelve-fold in just twenty years. On that day, readers of Business Week read with excitement that:
Conditions don’t have to get a lot better to justify Dow 36,000, say James K. Glassman and Kevin A. Hassett in Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market. They argue that the market already merits 36K, and that stock prices will advance toward that target over the next 3 to 5 years as investors come to that conclusion, too… The market - even at a price-to-earnings ratio of 30 (A ratio of stock prices divided by earnings including dividends. The long-run average (since 1871) of the price-earnings ratio in the United States is 15.5. Its maximum was reached in 1999: 32.6. It currently stands at 18.6 (figures for the Standard and Poor’s 500 index, as extended back in time by Global Financial Data) - is a steal. By their estimates, a ‘perfectly reasonable price’ for the market… is 100 times earnings.
This article was published less than four months before the collapse of the dot-com bubble, which had been based on exaggerated expectations about the future earnings of technology companies. By October 2002 the Dow was down to 7,286, a level not seen since late 1997. At the time of writing (April 2008), it is still trading at one third of the level Glassman and Hassett predicted.