The Deep History of Stock & Bond Returns

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SimpleGift
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The Deep History of Stock & Bond Returns

Post by SimpleGift » Tue Jun 12, 2018 9:09 am

In recent years, there's been an impressive amount of research into the "deep history" of real stock and bond returns going back over six centuries. Several papers and articles (a few discussed on the Forum) report returns from the nascent Italian bond markets of the 1300s and the early Dutch & U.K. stock trading of the 1600s, down to the present day. This post summarizes the real return data from all of this research, with possible implications for 21st century investors.

First, a summary table of real returns reported for each century, plus a chart of the average returns since 1400:
  • Image

What might this deep history suggest for investors in the 21st century? Two observations:
  • 1) Stocks have had remarkably consistent 5%-6% real returns over four centuries. In major economies that survived, investing in corporate enterprise was rewarded — and there's no reason to expect this won't continue.

    2) Bond returns have fallen steadily from 9%-10% in the late Middle Ages to 1%-2% today. At root, real interest rates reflect perceived risk and uncertainty, be it societal chaos, war, high inflation, etc. Today's low rates reflect today's relative global stability and peace — which is also likely to persist (absent a pandemic or other catastrophe).
Thoughts on this?
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Tue Jun 12, 2018 9:12 am

Just to add more flavor to the deep history of stocks and bonds, beyond the tables and charts:

Early Bond Trading Era — 14th century bankers in an Italian counting house.
Early Stock Trading Era — Courtyard of the Amsterdam Stock Exchange, circa 1670.
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by midareff » Tue Jun 12, 2018 9:14 am

It certainly merits a thoughtful re-evaluation of how much safe money is really needed.

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Re: The Deep History of Stock & Bond Returns

Post by ResearchMed » Tue Jun 12, 2018 9:15 am

SimpleGift wrote:
Tue Jun 12, 2018 9:12 am
Just to add more flavor to the deep history of stocks and bonds, beyond the tables and charts:

Early Bond Trading Era — 14th century bankers in an Italian counting house.
Early Stock Trading Era — Courtyard of the Amsterdam Stock Exchange, circa 1670.
Nice touch. :happy
Thanks!

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Re: The Deep History of Stock & Bond Returns

Post by Blueskies123 » Tue Jun 12, 2018 9:15 am

If I were not touch my portfolio for hundreds of years this might be useful but I am going to start tapping it in the next few years so the next few decades is what is important to me. Also, I suspect there is some survivor-ship bias in here. If your portfolio was in German, Russian, Chinese, and Japanese stocks in the last 30's you would have had zero left.

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Tue Jun 12, 2018 9:37 am

Blueskies123 wrote:
Tue Jun 12, 2018 9:15 am
Also, I suspect there is some survivor-ship bias in here. If your portfolio was in German, Russian, Chinese, and Japanese stocks in the last 30's you would have had zero left.
Absolutely there is survivorship bias — we only have data from those major markets that endured over the centuries.

But the question for a 21st century investor is: What are the chances that a major stock exchange is going to disappear in the modern world? In this sense, the data that has survived over the centuries should have some relevance for our future.
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by golfCaddy » Tue Jun 12, 2018 10:58 am

It would be interesting if stock market data did go back 400 years, but I'm suspicious this is the financial equivalent of archeology. There appear to be substantial quality issues with US market data from the 1800s. If we can't trust the US data from the 1800s, can we trust the UK and Dutch data from the 1600s and 1700s? Read this from the WSJ: https://www.wsj.com/articles/SB124725925791924871.

This post from nisiprius is worth repeating.
And, now, the punch line, which I've underlined:

In the years 1929-1933 the New York Stock Exchange accounted for about 67 percent of the total volume of stock transactions on the 24 most important exchanges in the country.

Got that? The data commonly cited for "the U.S. stock market" represents 90% of the NYSE, which in turn is 67% of the total market. That is to say LESS THAN 2/3 of the total U.S. stock market.

Do you think there might be systematic differences in the characteristics of NYSE-listed stocks and those on the other exchanges?

Do you think some stocks might start being listed only on a regional exchange, then thrive and get listed on the NYSE, then decay and get unlisted, raising survivorship issues within the universe of "NYSE-listed stocks?"

It gets even more interesting.

The Cowles report, after saying the NYSE is 67% of the total, "More than half of the remaining volume was on the New York Curb Exchange" (ancestor of the Amex). That is to say, 15%, or 1/6 of all stocks were traded on the "Curb." Why didn't Cowles include them?

The reason... is indicated by the following statement regularly carried by the Commercial and Financial Chronicle at the head of the Curb quotations prior to December 1920: "It should be understood that no such reliability attaches to transactions on the "Curb" as to those on the regularly organized stock exchanges... it is out of the question for anyone to vouch for the absolute trustworthiness of the record of "Curb" transactions, and we give it for what it may be worth." Frauds practiced on the New York Curb were so severely criticized in the report of the Hughes Commission in 1909 that organization was begun for the purpose of reform.

So, ONE SIXTH of the stock market was omitted from the Cowles report because

ONE SIXTH of the market was plagued by fraud and
even then, the numbers in the newspaper came with a warning label.

I'll guess that the regional exchanges were just as bad.

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Re: The Deep History of Stock & Bond Returns

Post by Call_Me_Op » Tue Jun 12, 2018 11:07 am

The obvious take away is not to assume more than 2% real for bonds - which you should not be assuming anyway.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Tue Jun 12, 2018 11:33 am

golfCaddy wrote:
Tue Jun 12, 2018 10:58 am
It would be interesting if stock market data did go back 400 years, but I'm suspicious this is the financial equivalent of archeology. There appear to be substantial quality issues with US market data from the 1800s. If we can't trust the US data from the 1800s, can we trust the UK and Dutch data from the 1600s and 1700s?
It's a fair point that stock return data from the 1600s and 1700s is financial archaeology. According to the research, there were at most nine securities with recoverable trading histories for this period — two of which were Dutch (Dutch East India Co. and Dutch West India Co.) and seven of which were English (Bank of England, English East India Co., London Assurance Co., Million Bank, Royal African Co., Royal Exchange Assurance Co., and the South Sea Company).

Even with this very limited data set, though, it's interesting that real returns were in line with modern stock returns.

For bond returns, the deep history was pieced together from the best data available over the centuries (chart below), starting with northern Italy city markets in the 1300s, to Spain in the 1500s, then to Amsterdam in the 1600s, before moving to the U.K. and U.S. markets after 1700. If anything, these returns reflect a decline in the "societal risk premium" over time.
  • Image
    Note: Chart shows nominal bond returns, as opposed to real returns in the OP.
    Source: Schmelzing
Certainly this deep history return data cannot compare in accuracy or completeness with modern data, but it's the best that's survived over the centuries — and it's not entirely without a few relevant lessons for modern times, in my view.
Last edited by SimpleGift on Tue Jun 12, 2018 11:45 am, edited 1 time in total.
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by rudeboy » Tue Jun 12, 2018 11:45 am

The 5-6% 'deep historical' return of equities is surprisingly (or, unsurprisingly?) close to Elroy Dimson and co's findings of a 5.5% average return for international equities in the 20th Century, as documented in Triumph of the Optimists.

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Tue Jun 12, 2018 12:15 pm

Call_Me_Op wrote:
Tue Jun 12, 2018 11:07 am
The obvious take away is not to assume more than 2% real for bonds - which you should not be assuming anyway.
Yes, my sense of the lessons for the 21st century from the deep history data is that 1) it seems unlikely that global stocks would massively underperform 5%-6% real over the next 100 years, and 2) it seems very unlikely that global bond returns would rise back to, say, 4% real in this century, barring a world catastrophe.
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by whodidntante » Tue Jun 12, 2018 12:17 pm

SimpleGift wrote:
Tue Jun 12, 2018 9:37 am
Blueskies123 wrote:
Tue Jun 12, 2018 9:15 am
Also, I suspect there is some survivor-ship bias in here. If your portfolio was in German, Russian, Chinese, and Japanese stocks in the last 30's you would have had zero left.
Absolutely there is survivorship bias — we only have data from those major markets that endured over the centuries.

But the question for a 21st century investor is: What are the chances that a major stock exchange is going to disappear in the modern world? In this sense, the data that has survived over the centuries should have some relevance for our future.
I would estimate the chance of a major market going to zero at approximately 100%. It often seems far fetched until it happens.

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Re: The Deep History of Stock & Bond Returns

Post by dbr » Tue Jun 12, 2018 12:24 pm

The bond returns extrapolate to about zero real in the 2000's. Maybe Buffett is right.

But the point is that keeping ahold of your assets at low risk is still a necessary part of wealth management. Fortunately people get to make a choice anywhere along that continuum they want to go.

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Re: The Deep History of Stock & Bond Returns

Post by NoRegret » Tue Jun 12, 2018 1:03 pm

SimpleGift wrote:
Tue Jun 12, 2018 9:37 am
Blueskies123 wrote:
Tue Jun 12, 2018 9:15 am
Also, I suspect there is some survivor-ship bias in here. If your portfolio was in German, Russian, Chinese, and Japanese stocks in the last 30's you would have had zero left.
Absolutely there is survivorship bias — we only have data from those major markets that endured over the centuries.

But the question for a 21st century investor is: What are the chances that a major stock exchange is going to disappear in the modern world? In this sense, the data that has survived over the centuries should have some relevance for our future.
If the major markets that disappeared belonged to the category of "losers" in whatever struggle, then the surviving markets must belonged to the category of "winners" of that same struggle. One could argue that the returns of the winners' markets were boosted in so far as whatever spoils accrued to them. Following this line of reasoning, if all current major markets survive, their returns would be lower than if some of them fail.

Alternatively, one could argue for the "peace dividend". This is the same old size of the pie versus number of pieces argument. I certainly don't have answers.

I do find it interesting that bond returns dropped precipitously after the 1600's -- presumably due to the advent of the "joint stock company". I have always wondered whether there is a natural return on capital in a closed system -- more invested capital means lower rate of return and vice versa. We'll need to know the respective market capitalizations.

Thanks to the OP for sharing. It's fascinating data.

Cheers,
NR
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Re: The Deep History of Stock & Bond Returns

Post by GAAP » Tue Jun 12, 2018 1:37 pm

SimpleGift wrote:
Tue Jun 12, 2018 9:09 am
2) Bond returns have fallen steadily from 9%-10% in the late Middle Ages to 1%-2% today. At root, real interest rates reflect perceived risk and uncertainty, be it societal chaos, war, high inflation, etc. Today's low rates reflect today's relative global stability and peace — which is also likely to persist (absent a pandemic or other catastrophe).
I have far less faith in that stability and peace. Even if there is "peace", I have much more difficulty seeing continued global financial stability. The January 2017 CSRI report Getting Over Globalization https://www.credit-suisse.com/media/ass ... zation.pdf provides three potential scenarios. Only one of those seems to match recent news -- and that scenario is anything but stable.
Then there is a third darker and more negative path that recalls the collapse of globalization in 1913 (see page 6) and the subsequent onset of World War I. Although the world has been stressed by the global financial crisis and terrorist attacks in recent years, these developments have arguably led to more rather than less cooperation between nations. An “end of globalization” scenario is driven by slowdown in economic growth and trade with the added possibility of a macro shock (from indebtedness, inequality, immigration), a rise in protectionism, a geopolitical/military clash between the “great powers,” currency wars, a climate event(s), the rise of broad-based “anti-globalization” political movements and a backlash against global corporations, or a reversal in transitions to democracy. The fact that Brexit and the Trump presidency have occurred against the views of the commentariat makes the above scenario less implausible.

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Tue Jun 12, 2018 2:02 pm

GAAP wrote:
Tue Jun 12, 2018 1:37 pm
I have far less faith in that stability and peace. Even if there is "peace", I have much more difficulty seeing continued global financial stability.
Very instructive report on the future of globalization, thank you for the link. I would just point out, though, that you've highlighted the "least likely and desirable" option identified by the authors (quote below, my bold). Obviously, no one knows the future, but the "end to globalization" does seem like a rather dark and extreme outlook in my view.
Credit Suisse wrote:At this point, we believe that there are three potential paths that globalization can take going forward. It could continue more or less unchanged, which we consider increasingly unlikely. Alternatively, the rise of Asia and a stabilization of the Eurozone point toward a more multi-polar arrangement. The third scenario an “end to globalization” is the least likely and least desirable and would consist of a major slowdown in economic growth and trade with a rise in protectionism, geopolitical conflicts between the “great powers” and a backlash against global corporations, among other developments.
In any case, it's hard to imagine the level of overall societal risk returning to the 1700s, when bonds yielded over 4% real. In fact, investors today are pricing 30-year bonds at real yields of less than 1% — meaning there doesn't appear to be a great deal of worry about the near-term future at least.
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by GAAP » Tue Jun 12, 2018 2:58 pm

SimpleGift wrote:
Tue Jun 12, 2018 2:02 pm
I would just point out, though, that you've highlighted the "least likely and desirable" option identified by the authors (quote below, my bold). Obviously, no one knows the future, but the "end to globalization" does seem like a rather dark and extreme outlook in my view.
Very dark and extreme -- but the no-change option is also rapidly becoming even more "increasingly unlikely". I'm hoping for the multi-polar outcome -- which increases my belief in the value of diversification across economies.
SimpleGift wrote:
Tue Jun 12, 2018 2:02 pm
In any case, it's hard to imagine the level of overall societal risk returning to the 1700s, when bonds yielded over 4% real. In fact, investors today are pricing 30-year bonds at real yields of less than 1% — meaning there doesn't appear to be a great deal of worry about the near-term future at least.
The CSRI Global Investment Returns Yearbook would seem to disagree, with real world bond returns increasing from 1.8% since 1900 to 4.2% since 1967 and 4.8% since 2000 -- for a United States investor. Those results are probably completely different for someone in another country. Direct comparison may be difficult since the definition and scope of bond trading is likely to vary across data sources.

This in turn makes me wonder how much we can use or apply data that predate the Bretton-Woods agreement -- unless we limit it to the economy that provided the data. The 1971 end of the gold standard is what I would probably consider to be the real start of the current monetary system -- or perhaps when the value of the dollar was completely decoupled from gold in 1976. I use a weighted average of the last 50 years and post-2000 CSRI results for my planning purposes.

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Re: The Deep History of Stock & Bond Returns

Post by Pajamas » Tue Jun 12, 2018 3:03 pm

That illustration of the counting house points out that money used to be precious metals so there was a scarcity that had an effect on interest rates on loans and bonds. It's not surprising that interest rates on bonds and loans are so low today (given good likelihood of repayment) since the world is now awash in money that is so easily created.

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Re: The Deep History of Stock & Bond Returns

Post by golfCaddy » Tue Jun 12, 2018 3:43 pm

It's a fair point that stock return data from the 1600s and 1700s is financial archaeology. According to the research, there were at most nine securities with recoverable trading histories for this period — two of which were Dutch (Dutch East India Co. and Dutch West India Co.) and seven of which were English (Bank of England, English East India Co., London Assurance Co., Million Bank, Royal African Co., Royal Exchange Assurance Co., and the South Sea Company).

Even with this very limited data set, though, it's interesting that real returns were in line with modern stock returns.
Even if we could pretend UK and Dutch stock returns were representative of global returns, there were only nine securities total! Those nine securities were likely the luckiest of the lucky surviving companies. I don't know why anyone would take that data seriously.

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Tue Jun 12, 2018 3:46 pm

GAAP wrote:
Tue Jun 12, 2018 2:58 pm
The CSRI Global Investment Returns Yearbook would seem to disagree, with real world bond returns increasing from 1.8% since 1900 to 4.2% since 1967 and 4.8% since 2000 -- for a United States investor. Those results are probably completely different for someone in another country.
Dimson, Marsh and Staunton's global bond return data for the 1900s is skewed somewhat by the high, post-war inflation experienced by Germany, Japan, Italy and France, leading to negative real bond returns for these four countries over the century (in gray, chart below).
As a result, the DMS century-average global bond return (0.6% real above) is lower than the real returns for those more fortunate countries not so heavily-impacted by high inflation and the war (in the 1.5%-2.5% range above).
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by rudeboy » Tue Jun 12, 2018 5:25 pm

golfCaddy wrote:
Tue Jun 12, 2018 3:43 pm
It's a fair point that stock return data from the 1600s and 1700s is financial archaeology. According to the research, there were at most nine securities with recoverable trading histories for this period — two of which were Dutch (Dutch East India Co. and Dutch West India Co.) and seven of which were English (Bank of England, English East India Co., London Assurance Co., Million Bank, Royal African Co., Royal Exchange Assurance Co., and the South Sea Company).

Even with this very limited data set, though, it's interesting that real returns were in line with modern stock returns.
Even if we could pretend UK and Dutch stock returns were representative of global returns, there were only nine securities total! Those nine securities were likely the luckiest of the lucky surviving companies. I don't know why anyone would take that data seriously.
As you said above, this is the financial equivalent of archeology, and archeologists are able to deduce quite a lot with quite a little. I'm not sure how you couldn't take note of the returns of nine ancient securities that almost perfectly align with the global average returns of the past 100 years.

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Re: The Deep History of Stock & Bond Returns

Post by Lynette » Tue Jun 12, 2018 6:33 pm

Thanks for posting this. It shows how global power changes. These companies were actually far more than merchants. They were the rulers of their territories with armies. For example:

https://en.wikipedia.org/wiki/Dutch_East_India_Company

"The Dutch East India Company became the world's first formally listed public company. In other words, it was the first corporation to be ever actually listed on an official stock Exchange. The Dutch East India Company was influential in the rise of corporation-led globalization in the early modern period. With its pioneering institutional innovations and powerful roles in world history, the company is considered by many to be the first major modern global corporation, and at its height was the most valuable corporation ever."

https://en.wikipedia.org/wiki/East_India_Comp

"By 1803, at the height of its rule in India, the British East India company had a private army of about 260,000—twice the size of the British Army with Indian revenues of £13,464,561, and expenses of £14,017,473."

I was trained as a history teacher in South Africa and taught history briefly in public schools. In 1652, the Dutch East India established an outpost in the Cape (South Africa) to establish a refreshment station for ships on their way to the East as the sailors were getting scurvy. Then they had to deal with settlers who wanted to move away from the Cape and the control of the company. Then they got into trouble in wars with the local inhabitants ....

After Britain lost the war with the thirteen colonies in America, a lot of their energy was focused on India. They also got involved in wars and finally the British crown took over the company. Queen Victoria had the title of the Empress of India.

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Re: The Deep History of Stock & Bond Returns

Post by Pajamas » Tue Jun 12, 2018 6:45 pm

golfCaddy wrote:
Tue Jun 12, 2018 3:43 pm
Even if we could pretend UK and Dutch stock returns were representative of global returns, there were only nine securities total! Those nine securities were likely the luckiest of the lucky surviving companies. I don't know why anyone would take that data seriously.
At least some of those companies were granted monopolies, too.

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Tue Jun 12, 2018 6:49 pm

golfCaddy wrote:
Tue Jun 12, 2018 3:43 pm
Even if we could pretend UK and Dutch stock returns were representative of global returns, there were only nine securities total! Those nine securities were likely the luckiest of the lucky surviving companies. I don't know why anyone would take that data seriously.
Actually, according to the research, the nine stocks listed upthread from the 1600s and 1700s "represented the near universe of traded equities in Amsterdam and London." So survivorship bias was not a significant factor in the reported returns.

You might also appreciate a description of the Amsterdam stock exchange of that era (from one of the papers):
Golez et al wrote:Netherlands and U.K. data: 1629-1813
Amsterdam was arguably the most important financial center of the 17th and 18th century. It was closely integrated with the market in London and featured trade in the largest English securities (Neal 1990). Although technologically less advanced, the market functioned similarly to today. Harrison (1998) provides evidence that the time series properties of returns in these markets were similar to more recent periods. Koudijs (2016) shows that stock prices responded to the arrival of news in an efficient way. The paper’s calculations suggest that trading costs in the 1770s and 1780s were comparable to those on the NYSE between 1993 and 2005.

We take the perspective of an Amsterdam investor who held a value-weighted portfolio of Dutch and English securities. We convert prices and dividends of English securities from Pounds Sterling to Dutch Guilders. Since both countries were on metallic standards, exchange rate fluctuations were relatively small with an annual standard deviation of 3%.
No one is saying this return data is comparable to modern times, but it's also not something to be summarily discarded.
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by stlutz » Tue Jun 12, 2018 7:33 pm

It's perhaps interesting (and illustrative) to also look at the history of what a corporation is.

Easy link to scrounge up on the subject: https://en.wikipedia.org/wiki/Corporation

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Tue Jun 12, 2018 8:48 pm

Just for fun, a copy of the first stock certificate ever issued — a share in the Dutch East India Company in 1606 (known in Dutch as the Verenigde Oost-Indische Compagnie or VOC):
According to Wikipedia, the VOC was the world's first formally listed public corporation (on the Amsterdam Stock Exchange) and widely issued bonds and shares of stock to the general public during the 1600s, up until it became defunct in 1799.
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by siamond » Tue Jun 12, 2018 8:57 pm

SimpleGift wrote:
Tue Jun 12, 2018 8:48 pm
Just for fun, a copy of the first stock certificate ever issued — a share in the Dutch East India Company in 1606 (known in Dutch as the Verenigde Oost-Indische Compagnie or VOC)
That is very cool! Thank you for sharing!

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Re: The Deep History of Stock & Bond Returns

Post by ResearchMed » Tue Jun 12, 2018 9:00 pm

SimpleGift wrote:
Tue Jun 12, 2018 8:48 pm
Just for fun, a copy of the first stock certificate ever issued — a share in the Dutch East India Company in 1606 (known in Dutch as the Verenigde Oost-Indische Compagnie or VOC):
According to Wikipedia, the VOC was the world's first formally listed public corporation (on the Amsterdam Stock Exchange) and widely issued bonds and shares of stock to the general public during the 1600s, up until it became defunct in 1799.
These "oldies but goodies" that you are sharing are just terrific!

Thanks again! :happy

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Re: The Deep History of Stock & Bond Returns

Post by Reb Tevye » Tue Jun 12, 2018 10:54 pm

Fun and informative thread.

Boy, I’m sure hoping for 2% real on bonds this century.

Did anyone dig up volatility numbers for these historical returns? Returns follow risk. Did that drop too?
"So, what would have been so terrible if I had a small fortune?"

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Re: The Deep History of Stock & Bond Returns

Post by alpine_boglehead » Tue Jun 12, 2018 11:16 pm

Thanks for this information, it's a perfect companion to your more anecdotal, but very interesting One Company, Six Centuries of Stock Returns, 1372-1946 post about a french company that existed during all this time.

Which also concludes that long term returns on stocks are in the ballpark of 5% real return.

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Re: The Deep History of Stock & Bond Returns

Post by galeno » Tue Jun 12, 2018 11:37 pm

I'm happy if my investment grade bonds deliver a positive real after tax return.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: The Deep History of Stock & Bond Returns

Post by golfCaddy » Tue Jun 12, 2018 11:47 pm

SimpleGift wrote:
Tue Jun 12, 2018 6:49 pm
Actually, according to the research, the nine stocks listed upthread from the 1600s and 1700s "represented the near universe of traded equities in Amsterdam and London." So survivorship bias was not a significant factor in the reported returns.
This doesn't seem consistent with other data, excluding the South Sea company.
We know that by the end of 1695, at least 150 joint-stock companies were in existence, with shares traded in the coffeehouses, especially Jonathan's and Garroway's, that lay in Exchange Alley. ...
Scott estimated a total of £4,250,083 of paid-up capital in all these, with three-fourths being concentrated in the chartered companies: the Bank of England, the Million Bank, the African
Company, the East India Company, Hudson's Bay Company, and the New River Company.
From this description of the South Sea Company, it sounds closer to a closed end bond fund than what we think of as stocks today.
The South Sea Company began its existence in May 1711 with a capital stock of £9,177,967 15s. It was created to buy up the existing short-term debt of the government, which had risen to enormous sums in the course of the War of the Spanish Succession. The stock was issued and trade begun in it
in September 1711. At the end of 1715 its capital was raised to an even £10,000,000. The primary motivation for the company from the beginning was to fund a major part of the total national debt, accepting a lower interest rate on its share of the national debt than had been paid by the
government previously. This interest received from the government, plus an annual management fee, provided the cash flow for dividend payments to shareholders, whose shares were more easily transferable than the short-term debt they had replaced.

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Re: The Deep History of Stock & Bond Returns

Post by Call_Me_Op » Wed Jun 13, 2018 7:35 am

dbr wrote:
Tue Jun 12, 2018 12:24 pm
The bond returns extrapolate to about zero real in the 2000's. Maybe Buffett is right.

But the point is that keeping ahold of your assets at low risk is still a necessary part of wealth management. Fortunately people get to make a choice anywhere along that continuum they want to go.
Indeed. I hold only two asset categories - "risky" (diversified stocks) and "safe" (treasuries, CD's, etc). This allows me to dial-in exactly where I want to be on the risk spectrum.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Wed Jun 13, 2018 11:13 am

Reb Tevye wrote:
Tue Jun 12, 2018 10:54 pm
Did anyone dig up volatility numbers for these historical returns? Returns follow risk.
Yes, it took me a while to find, but there is return, volatility (standard deviation) and Sharpe ratio data on the deep history of equity returns from 1629 through 1870 (table below):
  • Image
    Note: Returns are nominal, but inflation averaged 0.13%, 1629-1870.
    Source: Golez et al
What's interesting is that the return of modern-era world equity has been 5.2% real with a Sharpe ratio of 0.24 — using Dimson, Marsh and Staunton's numbers for the 1900-2017 period.

This suggest that, data quality issues aside, investing in the broad universe of available global equities has provided fairly consistent risk-adjusted returns for over four centuries.
Last edited by SimpleGift on Wed Jun 13, 2018 11:29 am, edited 1 time in total.
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by golfCaddy » Wed Jun 13, 2018 11:28 am

SimpleGift wrote:
Wed Jun 13, 2018 11:13 am
Reb Tevye wrote:
Tue Jun 12, 2018 10:54 pm
Did anyone dig up volatility numbers for these historical returns? Returns follow risk.
Yes, it took me a while to find, but there is return, volatility (standard deviation) and Sharpe ratio data on the deep history of equity returns from 1629 through 1870 (table below):
  • Image
    Note: Returns are nominal, but inflation averaged 0.13%, 1629-1870.
    Source: Golez et al
What's interesting is that the return of modern-era world equity was 5.2% real with a Sharpe ratio of 0.24 — using Dimson, Marsh and Staunton's numbers for the 1900-2017 period.

This suggest that, data quality issues aside, investing in the broad universe of available global equities has provided fairly consistent risk-adjusted returns for over four centuries.
Even ignoring the quality issues with the stock returns, this glosses over the assumptions in coming up with a risk-free rate of return. During wartime, England was forced to issue bonds at 8-10%, some of which had terms up to 99 years. Even during peacetime, England was issuing bonds at 5-6%. With inflation expectations near zero in the 17th and 18th centuries, if UK bonds are taken to be the risk-free rate of return, you could make the argument the realized ERP was negative.

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Wed Jun 13, 2018 11:37 am

golfCaddy wrote:
Wed Jun 13, 2018 11:28 am
Even ignoring the quality issues with the stock returns, this glosses over the assumptions in coming up with a risk-free rate of return.
Well, I have to take the professional researchers at their word for the risk-free rates that they've published in the table above (see RF% in the table). They show the risk-free rates in the 3%-4% range for the 1629-1870 period.

When deciding points of fact, and evaluating the difference between peer-reviewed professional research and anecdotal online comments, I'm usually persuaded by the former.
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by Reb Tevye » Wed Jun 13, 2018 11:49 am

SimpleGift wrote:
Wed Jun 13, 2018 11:13 am
Reb Tevye wrote:
Tue Jun 12, 2018 10:54 pm
Did anyone dig up volatility numbers for these historical returns? Returns follow risk.
Yes, it took me a while to find, but there is return, volatility (standard deviation) and Sharpe ratio data on the deep history of equity returns from 1629 through 1870 (table below):
  • Image
    Note: Returns are nominal, but inflation averaged 0.13%, 1629-1870.
    Source: Golez et al
What's interesting is that the return of modern-era world equity was 5.2% real with a Sharpe ratio of 0.24 — using Dimson, Marsh and Staunton's numbers for the 1900-2016 period.

This suggest that, data quality issues aside, investing in the broad universe of available global equities has provided fairly consistent risk-adjusted returns over four centuries.
Thanks for the sleuthing, that’s good to see for consistency on stocks.

For bonds, I accept the narrative that risks of a committed bond payment are lower now than in times of old, pushing bond yields down. I think in a Bill Bernstein book he says something like, “A goat herder would lend two goats one season and demand three in return, because he often wouldn’t see any goats paid back the next season.” I figure in the case of proper paper bonds, more risk (systematic sources of default being primary?) really did show up more in olden days... wars, death, etc... it would be a nice confirmation of the narrative to see both bond return and risk numerically decrease over the centuries. In my scan of your links (thanks!) I didn’t see it in numbers, though the charts look pretty wild!

If low real bond yields are a price of keeping the Four Horsemen away, I’m ok with that.
"So, what would have been so terrible if I had a small fortune?"

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Re: The Deep History of Stock & Bond Returns

Post by Chan_va » Wed Jun 13, 2018 11:58 am

Thanks for sharing the data. Any similar long term data on real returns of real estate and commodities? I have seen a few studies (The Amsterdam house price index over 400 years for e.g), but I haven't seen any comprehensive data on the topic.

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Wed Jun 13, 2018 12:10 pm

Reb Tevye wrote:
Wed Jun 13, 2018 11:49 am
it would be a nice confirmation of the narrative to see both bond return and risk numerically decrease over the centuries. In my scan of your links (thanks!) I didn’t see it in numbers, though the charts look pretty wild!

If low real bond yields are a price of keeping the Four Horsemen away, I’m ok with that.
The best paper we have on the deep history of bond returns (Eight Centuries of the Risk Free Rate) unfortunately doesn't provide any volatility or Sharpe ratio data, such as we have for equities. But over periods as long as a century, as you suggest, the real interest rate itself is probably the best gauge of overall risk.

You've may have seen it, but William Bernstein discusses this issue in more detail in one of his Efficient Frontier blog posts from 2001, The Societal Risk Premium.
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Wed Jun 13, 2018 12:35 pm

Chan_va wrote:
Wed Jun 13, 2018 11:58 am
Any similar long term data on real returns of real estate and commodities?
Not sure if it qualifies as "deep history" by the standards of this thread, but a recent paper did report the returns of commercial residential real estate (as a rental investment, not an abode) for 16 advanced countries over the 150-year period from 1870-2015 — along with stocks, bonds and bills. We had a Forum discussion on it last year, found here.

Others may have better suggestions?
Last edited by SimpleGift on Wed Jun 13, 2018 12:54 pm, edited 1 time in total.
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Re: The Deep History of Stock & Bond Returns

Post by Reb Tevye » Wed Jun 13, 2018 12:40 pm

SimpleGift wrote:
Wed Jun 13, 2018 12:10 pm
You've may have seen it, but William Bernstein discusses this issue in more detail in one of his Efficient Frontier blog posts from 2001, The Societal Risk Premium.
Good stuff. I say, as I eat a delicious 19-cent banana.
"So, what would have been so terrible if I had a small fortune?"

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Re: The Deep History of Stock & Bond Returns

Post by siamond » Wed Jun 13, 2018 1:41 pm

SimpleGift wrote:
Tue Jun 12, 2018 9:09 am
Image

[...] Thoughts on this?
This chart got really struck in my mind. It is compelling. It captures something that became clear to me after doing quite some backtesting. In the past, there was no such thing as return to the mean for the bonds market. It just went through various stages for decades in a row, but there was just no consistency whatsoever between such long periods of time. While the stock market did display (coarse) long-term consistency and some form of return-to-the-mean is just undeniable. My backtesting focus was mostly about the 1900+ returns, but seeing this 'deep history' chart just reinforces the point.

One could say that bonds displayed a form of short-term consistency (low volatility, at least in nominal value), and no long-term consistency. While stocks were the reverse way around. Will this continue? I would tend to believe it, but we shall see.

PS. this observation should make people reflect about the true nature of 'risk' for accumulators and retirees. Personally, I much prefer to bet on a vehicle that displayed long-term consistency. But that's just me.

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Re: The Deep History of Stock & Bond Returns

Post by GAAP » Wed Jun 13, 2018 1:47 pm

siamond wrote:
Wed Jun 13, 2018 1:41 pm
One could say that bonds displayed a form of short-term consistency (low volatility, at least in nominal value), and no long-term consistency.
I dunno, seems like bond returns do have a fairly consistent long term pattern to me -- downward... Unfortunately, the trend is slow enough that I don't think I could really take advantage of it even if it does continue.

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Re: The Deep History of Stock & Bond Returns

Post by dcabler » Wed Jun 13, 2018 1:51 pm

siamond wrote:
Wed Jun 13, 2018 1:41 pm
SimpleGift wrote:
Tue Jun 12, 2018 9:09 am
Image

[...] Thoughts on this?
This chart got really struck in my mind. It is compelling. It captures something that became clear to me after doing quite some backtesting. In the past, there was no such thing as return to the mean for the bonds market. It just went through various stages for decades in a row, but there was just no consistency whatsoever between such long periods of time. While the stock market did display (coarse) long-term consistency and some form of return-to-the-mean is just undeniable. My backtesting focus was mostly about the 1900+ returns, but seeing this 'deep history' chart just reinforces the point.

One could say that bonds displayed a form of short-term consistency (low volatility, at least in nominal value), and no long-term consistency. While stocks were the reverse way around. Will this continue? I would tend to believe it, but we shall see.

PS. this observation should make people reflect about the true nature of 'risk' for accumulators and retirees. Personally, I much prefer to bet on a vehicle that displayed long-term consistency. But that's just me.
Are you planning on living for at least 4 centuries so that you can see the effect of truly long term stock return consistency? :D

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Re: The Deep History of Stock & Bond Returns

Post by JoMoney » Wed Jun 13, 2018 1:57 pm

I'm suspicious of even the 1.8% real return on bonds in the 1900's
Half the period had 0 real return
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Re: The Deep History of Stock & Bond Returns

Post by jj45 » Wed Jun 13, 2018 2:00 pm

SimpleGift wrote:
Wed Jun 13, 2018 11:13 am
  • Image
    Note: Returns are nominal, but inflation averaged 0.13%, 1629-1870.
    Source: Golez et al
It's interesting that inflation is so low. When and why did modern-era inflation set in?

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Re: The Deep History of Stock & Bond Returns

Post by JoMoney » Wed Jun 13, 2018 2:08 pm

jj45 wrote:
Wed Jun 13, 2018 2:00 pm
...
It's interesting that inflation is so low. When and why did modern-era inflation set in?
When money/bonds stopped being backed by a fixed physical commodity gold/silver standard.

I'll add, that I'm not a proponent of a gold standard (or any other physical commodity). I think there's something to the idea that it's not beneficial to society that someone can earn money by just having money (renting it out). I don't have the same issue with someone owning products for sale, or an equity stake in a business that may or may not earn a profit.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: The Deep History of Stock & Bond Returns

Post by siamond » Wed Jun 13, 2018 2:14 pm

GAAP wrote:
Wed Jun 13, 2018 1:47 pm
siamond wrote:
Wed Jun 13, 2018 1:41 pm
One could say that bonds displayed a form of short-term consistency (low volatility, at least in nominal value), and no long-term consistency.
I dunno, seems like bond returns do have a fairly consistent long term pattern to me -- downward... Unfortunately, the trend is slow enough that I don't think I could really take advantage of it even if it does continue.
When I made this statement, I had in mind the finer-grain trajectory of what happened in the past, in term of decades, not centuries. Where bonds had flat periods of time, upward periods of time, downwards period of time, with little rhyme or reason. And I defined consistency as return-to-the-mean, and clearly this didn't happen over decades, nor centuries.
dcabler wrote:
Wed Jun 13, 2018 1:51 pm
Are you planning on living for at least 4 centuries so that you can see the effect of truly long term stock return consistency? :D
I have to love when people extract quotes out of context. As I just stated (and made clear in my original post), I defined 'long-term' in terms of decades (while speaking of 'deep history' for century-long observations, like the OP did). And yes I do plan to live for a few more decades, thank you very much. (ok, ok, I know, you were just teasing).

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Re: The Deep History of Stock & Bond Returns

Post by SimpleGift » Wed Jun 13, 2018 2:36 pm

JoMoney wrote:
Wed Jun 13, 2018 2:08 pm
jj45 wrote:
Wed Jun 13, 2018 2:00 pm
...
It's interesting that inflation is so low. When and why did modern-era inflation set in?
When money/bonds stopped being backed by a fixed physical commodity gold/silver standard.
To support JoMoney's point, an historical chart showing the deep history of inflation going back to the 1200s (at left below). Modern Inflation as we know it started in the first half of the 20th century, as countries around the world abandoned commodity-based money (e.g., gold and silver).
Last edited by SimpleGift on Wed Jun 13, 2018 2:43 pm, edited 1 time in total.
Cordially, Todd

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Re: The Deep History of Stock & Bond Returns

Post by bhsince87 » Wed Jun 13, 2018 2:41 pm

A 60/40 portfolio yielding 5.5% and 1.8% respectively would give a net yield of 4.02%.

Gee, where have we seen that number before? :happy
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