The American Anomaly: Stocks Don’t Always go up in The Long Run

Posted on December 11, 2007
Filed Under Business & Entrepreneurship, Finance & Economics |

Occasionally I will mark up really great articles I have read and make a note to go back and read them again.  Usually these articles totally disrupt my worldview and will make me rethink old ideas.  Today I went back into an old publication of the Economist and found a real gem.

It is conventional wisdom in America to put some money in the stock market and then forget about it.  Certainly, as the professionals are known to say, stocks will appreciate in the long-run.  And this wisdom seems to be supported by solid evidence too.  If you take any 20-year period in the US, you will find that Wall Street has delivered positive real returns.

However, what is interesting is that the wisdom doesn’t hold up in other countries around the world.  Consider the following:

• Japan’s most popular stock market average, the Nikkei 225, peaked at 38,915 on the last trading day of the 1980’s.
• Today, nearly 20 years later, the Nikkei 225 is trading at around 16,044, less than half its peak.
• If you followed the conventional American wisdom of buying on the dips, you would have lost money every time in the long-run.
• Japan is the world’s second largest economy.
• The same is true for Russia, China and Germany during the first 50 years of the 20^th century.
• Japanese, German, French and Spanish investors had instances where they had to wait 50-60 years for positive real returns.
• In Italy and Belgium, the waiting period stretched to 70 years.

The American stock market is truly an anomaly and it is incredible to think that this wisdom has consistently held up.  Is it because our citizens have access to freer markets and have more liberty, which allow innovation to thrive?  Perhaps part of the explanation in Japan has to do with the relatively low level of entrepreneurship in that country.

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