30 Facts About The Stock Market

My son turned 4 years of age the other week and it was a weekend full of parties and eating. One of my son’s favourite toy is Lego. His imagination and creativity runs wild. I’m one of those dad’s that keeps the instruction manuals in a folder – I mean c’mon, how else will you know how to build the original toy Lego had designed with all those parts? Although I did recently find out that Lego’s website stores all the instructions. Maybe I’m just a little old fashioned…at 35 haha!

Anyway, this got me thinking about how often we, as investors, deviate from what the stock was always designed to do. We seem to lose the instruction manual too often and our imagination and creativity seems to run wild like my 4 year old son with his Lego.

So I decided to take the liberty and list 30 facts about the stock market. What it was designed to do, how it operates, it’s performance and behaviour, and some of the facts that many folk in our industry seem to ignore:

  1. Stock markets exist and were conceived in order to allow companies to raise equity from the public in exchange for shares in that company.
  2. For every seller of a company, there is a buyer.
  3. For every buyer of a company, there is a seller.
  4. Over the long-term, the Australian share market has returned 8.5% pa.
  5. On average, the number of times the stock market moves up or down 1% within a day is 57 times over one year. In 2017 we witnessed 20 +/-1% days, and in 2018 so far we’ve witnessed 6.
  6. Australia makes up 2.1% of the world’s stock market. The US makes up 52.2%.
  7. The Australian stock market is made up of 40% in banks, and 18% in mining.
  8. Since 1926, we’ve witnessed 10 bear markets (declines of 20% or more). On average, the decline has been 45% and lasted for just over 2 years. The shortest was 3 months, and the longest was 5 years.
  9. Since 1926, we’ve witnessed 11 bull markets (including the current). On average, the climb has been 159% and lasted for 3.5 years. The shortest was 13 months, and the longest 9.5 years.
  10. Since 1926, we’ve experienced 15 recessions. That’s 1 in every 6 years.
  11. The average recession lasts 15 months, and the average expansion lasts 47 months.
  12. Over long periods of time, small company stocks beat large company stocks.
  13. Over long periods of time, the average investor under performs the stock market by a about 5% pa.
  14. Over long periods of time, professional investors under perform the stock market 77% of the time.
  15. Over a rolling 10 year period, the stock market has not lost money.
  16. The biggest gains in stocks are made while the company is on the way to the top, not after the gains are made.
  17. The stock market returns double digit gains or losses in 70% of all calendar years.
  18. The stock market lost almost 90% of it’s value during the great depression.
  19. The Japanese stock market has done nothing since 1989.
  20. Dividends make up about 42% of an investor’s return.
  21. If you missed the best 10 days in the stock market over the last 20 years, your portfolio would have returned 67% less than the market. If you missed the best 40 days, your portfolio would have returned 114% less than the market.
  22. If you missed the worst 10 days in the stock market over the last 20 years, your portfolio would have returned 150% more than the market. If you missed the worst 40 days, your portfolio would have returned 952% more than the market.
  23. 90 days of the year generates around 95% of all the year’s gains.
  24. The US stock market rose 22% last year. 25% of that return came from 5 companies. 10 companies made up 35% of the return. 23 companies accounted for half the return. Apple’s return alone was responsible for of the index’s total return then the bottom 321 (of the S&P 500) companies combined.
  25. From 1980-2014, 40% of all the Russell 3000 stocks lost at least 70% of their value and never recovered.
  26. The stock market has experienced an average intra-year decline of 13.8% every year since 1980.
  27. The average return of stock markets are between 8-12%, yet stock markets see gains within this range only 5% of the time.
  28. The stock market produces a positive return 3 in every 4 years.
  29. The stock market produces a negative return 1 in every 4 years.
  30. Stocks go up most of the time.

The stock market needs to be looked at as owning a piece of a company, a business. The ownership or worth of a business represents it’s futures earnings power. I strongly believe that as technology progresses, as we become more innovative and efficient, profitability should increase, and therefore businesses become more profitable, and businesses become more valuable – on the whole. During this process, we’ll witness and many of us will experience default. But I believe this is part of the evolution and progress.

Returns on the stock market are not promised to anyone, nor are they guaranteed. Having said this, the track record of the stock market is compelling. If you’re patient and disciplined enough, you too may be able to participate in what it has to offer.

Source:

Index Fund Advisers

JP Morgan – The Agony & The Ecstacy

JP Morgan – Guide to Markets (Australia)

Vanguard/Andex

Morgan Housel

Ben Carlson

SPIVA

The Changing Face of Melbourne

Once upon a time in 1667, the Dutch East India Company, the most valuable company in the world at the time, wanted a monopoly on nutmeg – a spice that was worth considerably more than gold. During this time, Run island, a tropical island closer to Darwin than Jakarta, was prized as the home of nutmeg.

In July of 1667, the Dutch acquired Run island via a swap with the British. They agreed to trade New Amsterdam for Run island. The Dutch now had a global monopoly on nutmeg. It has been described as “the real estate deal of the millennium”.

Unfortunately for the Dutch, the price of nutmeg eventually collapsed. The British stole seedlings and dramatically increased supply by growing them in other parts of the world. Furthermore, the arrival of other stimulants such as coffee, tea, and tobacco didn’t aid the Dutch’s situation.

Today, Run island has a population of around 2,050, and still grows nutmeg. New Amsterdam was renamed New York, and the rest is history. All of this within a very short period of time – 351 years to be exact.

They say investors have a three year time horizon, last year, this year, and next year. As human beings we’re wired in such a way that makes it difficult for us to be able to see so far into the future. Take the city of Melbourne for example.

Here’s the evolution of Melbourne city over 130 years, in images, taken from the top end of town – Spring Street:

And here’s Melbourne today – a very different picture to that of the first.

 

Between 1% and 3% of a city is demolished and rebuilt each year, such that over almost a lifetime, a city is completely transformed and almost recognizable.. Incremental change is so difficult for us to recognize, however over long-periods of time, it’s clear as day.

Here’s a different perspective, one that most of us can recall. Southbank, in the blink of an eye is completely transformed.

Today is no different. With not only the unprecedented level of construction within the city of Melbourne, but also the density of construction, the public are outraged that we are killing our cities. Our cities have never stopped growing, have never stopped evolving, and have never stopped progressing.

This is what progress looks like. Just because it’s new, just because this wasn’t how it used to be, just because this isn’t how we grew up, doesn’t mean we should fear what the future holds.

Melbourne was founded on the 30th of August 1835. A lot has changed since then. A city which is 183 years young, houses a population of around 4.725 million. Contrast this to the city the Dutch swapped for their nutmeg monopoly in 1667. New York City, founded in 1624 is now around 394 years young, housing a population of around 8.625 million.

By the year 2046, Melbourne’s population is expected to increase by 2.8 million people. Here’s what Melbourne’s skyline looks like looking up from the south:

Here’s what the same skyline starts to look like when Melbourne houses 10 million people:

And if you were to take all the buildings on Manhattan Island and placed them into the city of Melbourne, this is what it would look like:

Although quite staggering, it can be done.

As investors we need to fight the minute by minute news headlines that try and grab our attention each and every day. Although we are not wired to, we know deep down that true, significant, and sustainable wealth is created over long periods of time – yet we want it all now. We need to change the way we think about, and invest not only our money but in ourselves. We seem to be attracted to complexity and complication when in fact simplicity yields a more favourable outcome. We seem to prefer to make significant and material changes less frequently, when in fact small, incremental changes made more frequently, which may seem insignificant to us today, compound to and have a far greater impact than we could have ever imagined. It’s like a freight train that gains momentum – it becomes unstoppable.

Try and add 5+5+5+5+5+5+5+5+5+5 in your head. It’s pretty easy, you can do it right? The answer is 50. What if I asked you to multiply instead of add in your head, 5x5x5x5x5x5x5x5x5x5? There’s no way you’ll be able to do it, in fact, I don’t even think you’ll be able to wrap your head around it (by the way, the answer is 9,765,625).

As investors we underestimate the long-term. We underappreciate the power of compounding. Because it isn’t intuitive, we ignore it, and try to solve problems through other means. Next time you’re planning ahead, stop and think about the long-term. Stop and think about the potential of compounding.

Thanks to Tony Crabb of Cushman & Wakefield for the inspiration.

The Great Melbourne Land Boom

Melbourne’s population had boomed, and it had not only become one of the wealthiest cities in the world, but had also developed an international reputation as one of the greatest cities in the world.

Melbourne was in the midst of a land and property boom. Cable trams ferried crowds through the streets and the young and fashionable ‘did the Block’, promenading the footpaths and arcades of Collins Street. Telephone and electric light were novelties and Melbourne’s first skyscrapers appeared. Theatres and opera houses drew large audiences through the weekend evenings.

Melbourne showed itself off to the world by hosting major international exhibitions of industrial, scientific and artistic progress from all corners of the globe.

I’m talking about Melbourne in the 1880’s – it was dubbed ‘Marvelous Melbourne’ by British journalist George Augustus Sala when he visited in 1885. Here we are in 2018, and the tune hasn’t changed in 133 years.

Between then and now however, Melbourne witnessed some of the most severe economic collapses which are now simply buried in history books.

Bubbles, in any market, have a tendency to burst. Not long after, in fact within a decade, Melbourne’s Land Boom crashed in the early 1890’s – it caused a depression that rippled through all the Australian colonies.

Rather than building high-density apartment blocks like the European cities, Melbourne expanded wide and far. Real estate during the 1880’s was ‘The Land of Promise’, as proclaimed by this sales poster for Moreland Road, Brunswick (click for larger image):

Source: Moreland Road, The Land of Promise, West Brunswick, close to Essendon, 1888 (Dyer collection of auctioneers’ plans, Melbourne and suburbs State Library of Victoria)

Investors would buy up farms and subdivide them. They would then lure buyers with free railway passes out to the new estates, feed them and serve champagne before bidding got underway.

By 1889, the value of land in parts of Melbourne was as high as London. The Argus, a daily Melbourne newspaper wrote, ‘[The hunger] that has seized hold of so many people is the result not of an hallucination, but of an awakening to the value of land as a safe, a sound, and a profitable investment.’

In April of 1893 the Commercial Bank of Australia, who had lent substantial money to those involved in property speculation, closed it’s doors. The bubble had popped, and the boom was over. It’s estimated that Melbourne’s unemployment rate jumped to 20% during the 1890’s. Property prices dropped almost 40% (Melbourne) within years. This compares to a drop of 20% during the 1930’s depression.

Following the collapse of the 1890’s, it wasn’t until the boom of the 1950’s that would see prices return to levels reached during the 1890’s. It would take Melbourne 60 years to recover in price.

Here’s an aerial shot of a new housing estate in 1948, known at the time as ‘Heidelberg’.

Source: Charles Daniel Pratt 1892-1968 Photographer/State Library of Victoria/H91.160/376

Every bubble is different. Their formation varies from duration, magnitude, and cause. It was higher interest rates that would eventually pop the bubble of the 1890’s, and the banks’ failure to take security for loans written during this frenzy would lead to the collapse of a number of them. With bank lending having soared since 2012, prices having doubled during this time, and interest rates at an all time low, could we be facing another crisis like the one that has been buried in history books for decades? Of course not, it’s different this time. Right?

I Sat Down With One of The Wealthiest Families in The Country – Here is Their Advice

Have you ever wondered how you could be as financially successful as the country’s wealthiest? I recently sat down with a family member of one of the wealthiest families in our country and asked them what they believe are the ingredients for long-term, sustainable wealth. Here is their advice.

1. Values

Be clear on your values. What is most important to you? Family, freedom, happiness, joy, growth, contribution? Spend time clarifying your values, and discuss them with your family and children.

Spend time uncovering what it is that your children value also, and why. And then dig even deeper. What are the rules for your values – what needs to happen for you to feel joy, to feel happiness, for you to feel as though you’ve made a contribution?

Your values are your blueprint. Your values shape your beliefs and your beliefs influence your decisions, so be clear on them.

2. Goals & vision

Once you have clarified your values, start setting your goals. Break them up into short (1-2 years), medium (3-5 years), and long-term (5+ years) goals. Put a time frame next to them, and a value. Most importantly, write them down! These should be revisited and reviewed regularly – at least once, possibly twice a year depending on your situation.

We spend so much time setting goals for our businesses, and we spend more time planning our annual holidays than we do our money and finances.

A Harvard Business School MBA study asked one single question about life goals, “Have you set written goals and created a plan for their attainment?”

Prior to graduation, it was determined that:

  • 84% of the entire class had set no goals at all,
  • 13% of the class had set written goals but had no concrete plans, and
  • 3% of the class had both written goals and concrete plans.

The results?

Well, you’ve likely somewhat guessed it. 10 years later, the 13% of the class that had set written goals but had not created plans, were making twice as much money as the 84% of the class that had set no goals at all.

However, the kicker is that the 3% of the class that had both written goals and a plan, were making ten times as much as the rest of the 97% of the class.

3. Talk to you children about money

We can never be too sure whether its right to talk to our children about money, let alone when is the right time – it can be a little embarrassing.

The advice is to talk to your children. Whether it’s around the dinner table, or while watching the footy, you’re already spending time together, so add it to the agenda – it helps instill strong values earlier on in their lives.

We allow our children to ride their bike without training wheels, we allow them to drive their (sometimes our) car once they’re legally allowed to, and we allow them to head out into all hours of the morning, yet we tell ourselves they’re not mature enough to have input into financial decisions. They’re likely to eventually end up with it anyway, so it’s our responsibility to ensure a sustainable wealth transfer – use your wealth as an enabler, not a dis-abler.

Historically, 70% of inter-generational wealth transfers fail due to lack of communication, so it’s on you to get it right.

4. Structure and planning

Once you’re clear on your values and have written down your goals, it’s time to put in place the structure and strategy to drive your vision – your game plan.

This ensures investment decisions can be made while looking through the right lens, and that your decisions are driven by your vision and by achieving yours goals, not by the Fear of Missing Out (FOMO), tax, or other distractions. Unfortunately, far too many people lead their decision making with the product or investment first, when in fact you should be driven by your goals and plans.

5. Take the long view

Some of the wealthiest families in the world have been riding through the ups and downs of investment markets for decades. Patience and remaining disciplined are important traits in order to be successful. You need to allow time for your strategies to unfold. The corporate and investment world is so focused on the performance and outcomes over the next “quarter” (3 months of the year), you too should focus on the next quarter, the next quarter of a century that is.

Finally, stop focusing on stock picking and get your asset allocation right – it represents and generates 90% of your return, whereas stock selection generates 5%. We spend 90% of our time on the thing that generates 5%, and 5% of our time on the thing that generates 90%.

You can’t know everything about everything. They say that a man who represents himself in court has a fool for a client. Find someone who can provide you with expertise. Someone who can help you make sound, unemotional decisions, someone you can use as a sounding board, someone who can help you see the forest for the trees, someone who can introduce you to and work with other subject matter experts when required. If you do all these things, you too can be an overnight billionaire.

If successful investing and sustainable wealth was easy to attain, everyone would be wealthy.