This article is an excerpt from the Shortform book guide to "The Intelligent Investor" by Benjamin Graham. Shortform has the world's best summaries and analyses of books you should be reading.
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What is stock market history? What can stock market history tell us about stock trends and investment opportunities?
Stock market history can help explain some past stock market trends. You can evaluate the past to see how stocks have changed and fluctuated over time.
Read more about stock market history and why it matters.
Stock Market History: 75 Years of Lessons
In hindsight, over the past 75 years, stocks have trended consistently upwards. Here’s a chart showing the S&P 500 on a log scale:
(Shortform note: Long-term stock charts are often shown in log scale since they better reflect percentage changes and compounded growth, as opposed to changes in absolute values.)
Over the long term, stocks have tended to rise—in the stock market history of the S&P 500, the annual return is roughly 10%, without adjusting for inflation. Graham suggests this consistent long-term performance supports his advice that all portfolios should have a portion in stocks.
However, he heavily cautions against simplistically extrapolating from the past, and against the delusion that stocks will always increase and so are worth investing in at any time, at any price. These conditions tend to breed wanton overpricing, which tends to invite a steep correction downward.
While the general trend is up and to the right, in the short-term, stocks fluctuate. Look more closely at the chart, and you’ll see more detail:
- A major collapse in 1929, followed by fluctuations up until 1950. The S&P 500 would not reach the heights of 1929 until 25 years later.
- A strong growth period from 1950 to 1965.
- A period of relative flatness from 1965 to 1975.
- Generally strong growth from 1975 to the 2000 dotcom crash, with periodic recessions in between.
As we think about investments today, we don’t have the benefit of future information, and so it becomes important to assess whether the stock market is expensive or cheap.
Shortform Exclusive: Inflation-Adjusted Returns
The book doesn’t address inflation in this chapter, but the inflation-adjusted stock returns have a significantly different shape:
Notably, during the highly inflationary 1970s and early 1980s, the stock market halved in real value, even though the absolute price stayed relatively flat. After adjusting for inflation, the annual return of the S&P 500 decreases from 10% to 7%.
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