In his Wall Street Journal column from Saturday, Jason Zweig asks Does Stock-Market Data Really Go Back 200 Years? My head immediately fills with responses.
Why would you think it did?
Who could possibly care?
The title of the column isn’t a trick or a pun. It is really a serious examination of the quality of the stock market data prior to 1845. That was a period when the the “stock” in New York Stock Exchange mostly meant what we today call Treasury bonds. Corporations were rare, each was specifically chartered by a state legislature, and they were widely considered to be a sinister product of financial engineering gone amuck.
Be that as it may, apparently the data that Prof. Jeremy Siegel has used to construct stock market returns for the years 1802 to 1820 included only seven companies, all banks. And the data he used for 1820 to 1845 isn’t much better. Shocking.
This is important, Zweig tells us, because “brokers and financial planners keep reminding us, there’s almost never been a 30-year period since 1802 when stocks have underperformed bonds” and they base this on Siegel’s research. Best I can tell, that reassuring “almost never” becomes “hardly ever” if you use data without Siegel’s distorted and rosy view of the returns from American equities in the early 19th Century.
This is amusing, but it illustrates a serious and widespread failing, the unwillingness, even of experts, to think critically and subjectively about investing.
Suppose it were true that in the 207 years since 1802 there have been no 30 year periods in which equities failed to beat government bonds. Then what? Are we to believe that it is some law of nature that such a thing could never happen? There are several 25 year periods in which bonds did beat stocks, for example the one ending just now. But some powerful force will kick in around year 26 and keep a 30 year period from occurring? Never has happened means never can happen?
I’ve written before on The Black Box Theory of The Stock Market, the idea that what drives the market is unknowable, so all we can do is make simple extrapolations from what it has done in the past. This is another example of this thinking, and a rather extreme one at that. Rather than make reasonable suppositions based on thoughtful analysis of the stock market, we prefer to carry out commercial archaeology.
Yes, the institution now known as the New York Stock Exchange did exist in 1802. It met in a coffee house. New York harbor was then filled with sailboats. The docks were worked by slaves. Business leaders sometimes settled disputes with duels. And yet Zweig, Siegel, and “brokers and financial planners” think that the price movements of the few stocks traded on this proto-market are a legitimate indication of what might happen in the 21st Century?