caution, eventually found themselves far behind investors who had pa-
tiently accumulated equity.^4
The story of John Raskob’s infamous prediction illustrates an im-
portant theme in the history of Wall Street. This theme is not the preva-
lence of foolish optimism at market peaks; rather, it is that over the last
century, accumulations in stocks have always outperformed other finan-
cial assets for the patient investor. Even such calamitous events as the
Great 1929 Stock Crash did not negate the superiority of stocks as long-
term investments.FINANCIAL MARKET RETURNS FROM 1802
This chapter analyzes the returns on stocks and bonds over long periods of
time in both the United States and other countries. This two-century his-
tory is divided into three subperiods. In the first subperiod, from 1802
through 1870, the United States made a transition from an agrarian to an
industrialized economy, comparable to the transition that the “emerging
markets” of Latin America and Asia are making today.^5 In the second sub-
period, from 1871 through 1925, the United States became the foremost po-
litical and economic power in the world.^6 The third subperiod, from 1926
to the present, contains the 1929 to 1932 stock collapse, the Great Depres-
sion, and the postwar expansion. The data from this period have been an-
alyzed extensively by academics and professional money managers and
have served as benchmarks for historical returns.^7 The story is told in Fig-
ure 1-1. It depicts the total return indexes for stocks, long- and short-term
bonds, gold, and commodities from 1802 through 2006. Total returnmeans
that all returns, such as interest and dividends and capital gains, are auto-
matically reinvested in the asset and allowed to accumulate over time.CHAPTER 1 Stock and Bond Returns Since 1802 5
(^4) Raskob succumbed to investors in the 1920s who wanted to get rich quickly by devising a scheme
by which investors borrowed $300, adding $200 of personal capital, to invest $500 in stocks. Al-
though in 1929 this was certainly not as good as putting money gradually in the market, even this
plan beat investment in Treasury bills after 20 years.
(^5) A brief description of the early stock market is found in Appendix 1 at the end of this chapter. The
stock price data during this period are taken from Schwert (1990), and I have added my own divi-
dend series. G. William Schwert, “Indexes of United States Stock Prices from 1802 to 1987,” Journal
of Business, vol. 63 (July 1990), pp. 399–426.
(^6) The stock series used in this period are taken from the Cowles indexes as reprinted in Robert
Shiller, Market Volatility, Cambridge: MIT Press, 1989. The Cowles indexes are capitalization-
weighted indexes of all New York Stock Exchange stocks, and they include dividends.
(^7) The data from the third period are taken from the Center for Research in Security Prices (CRSP)
capitalization-weighted indexes of all New York stocks, and starting in 1962, they include American
and Nasdaq stocks.