Generating an 85,000% Return
125 years ago, Charles Dow created the Dow Jones Industrial Average (DJIA) - a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the US.
The DJIA looks very different today than when it was first published on May 26, 1896. None of the original 12 constituents remain, and it's 30 constituents now include heavyweights such as Apple, Microsoft, Visa, Walmart, and Johnson & Johnson.
The index has endured anything and everything the financial and economic world has thrown at it - recessions, depressions, booms, and busts, yet the index has risen an average of 7.69% each year and notched up 1,464 record highs. It climbed above 100 in 1906, topped 1,000 in 1972 and crossed 10,000 in 1999. And this year, the Dow jumped from 31,000 to 34,000 according to the WSJ. In fact, it's up 84,795% since it's inception. Boom.
I've plotted the Dow's price chart below. Try and spot the 1929 crash, it's merely a blip on this long-term chart. One of the other interesting things that stands out to me, is how frequently the economy faced recessions as well as their longer duration - far more frequent and prolonged than what we have experienced post WWII.
I've also crunched some numbers on the S&P500 from around 1926, which is probably the most comment index used globally.
1-Year Total Return: +45.98%
3-Year Annualised Return: +18.67% pa
5-Year Annualised Return: +17.42% pa
10-Year Annualised Return: +14.17% pa
20-Year Annualised Return: +8.35% pa
Annualised return: +10.38% pa
Best 1-Year Return: +162.88% (1932-1933)
Worst 1-Year Return: -67.57% (1931-1932)
Best 3-Year Return: +43.35% pa (1933)
Worst 3-Year Return: -42.35% pa (1929)
Best 5-Year Return: +36.12% pa (1932)
Worst 5-Year Return: -17.36% pa (1929)
Best 10-Year Return: +21.43% pa (1949)
Worst 10-Year Return: -4.95% pa (1929)
The data during the Great Depression dominates the highlight reel, especially some of the long-term numbers such as the worst 10 year period - it really doesn't make it look good. The stock market has lost money in 3% of all 10 year holding periods and has failed to keep up with inflation only 12% of the time. In other words, historically, there is a 97% chance of making money in stocks over a 10+ year holding period, and an 88% chance your stocks will at least keep up with inflation. Who said stocks weren't a great inflation hedge?
You don't need to have a 125 year time horizon to make good returns in the stock market. I think it's pretty simple - most people over complicate it. You need to understand the rules to the game you're playing - I think this is totally underrated. You need a game plan, a strategy. You need to remain disciplined and patient. Most investors have the opportunity to participate in these returns. Yet most investors do worse than the market. In fact, from 1999 to 2020, the stock market (S&P 500) returned 6.1% pa. During this same time, the average stock investor returned 2.5% pa according to JP Morgan.
Most investors suck at investing. And it's not the market that should be blamed, it's the behaviour of the end investor that detracts from performance. Maybe investors need to spend less time on trying to beat the market, and more time on making sure the market doesn't beat them.