such as real estate, for which daily quotations are not available. Others
believe that not knowing the current price somehow makes an invest-
ment less risky. As Keynes stated nearly 60 years ago about the investing
attitudes of the endowment committee at Cambridge University:
Some Bursars will buy without a tremor unquoted and unmarketable in-
vestments in real estate which, if they had a selling quotation for immedi-
ate cash available at each audit, would turn their hair grey. The fact that
you do not know how much its ready money quotation fluctuates does
not, as is commonly supposed, make an investment a safe one.^9HISTORICAL TRENDS OF STOCK VOLATILITY
The annual variability, measured by the standard deviation of the
monthly returns, from 1834 to 2006 is plotted in Figure 16-2. It is striking
that there is so little overall trend of any sort in the volatility of the mar-
ket. The period of greatest volatility was during the Great Depression,
and the year of highest volatility was 1932. The annualized volatility of
1932 was over 65 percent, 17 times higher than 1964, which is the least
volatile year on record. The volatility of 1987 was the highest since the
Great Depression, but the volatility in the mid-1990s and 2006 fell to near
record lows. Excluding the 1929 to 1939 period, when the volatility was
34 percent, the volatility of the market has remained remarkably stable
at about 13 to 14 percent over the past 170 years.
These trends are confirmed by examining Figure 16-3a, which dis-
plays the average daily percentage change on the Dow Jones Industrial
Average during each year since 1896. The downward trend in the Dow
volatility in the early twentieth century is partially due to the increase in
the number of stocks in the Dow Industrials from 12 to 20, and then to 30
in 1928. The average daily change in the Dow Industrials over the past
100 years is 0.73 percent, slightly less than three-quarters of 1 percent.
Since the 1930s, there have been only three years—1974, 1987, and
2000—when the average daily change has exceeded 1 percent.^10
The percentage of trading days when the Dow Industrials changed
by more than 1 percent is shown in Figure 16-3b. It has averaged 23 per-
cent over the period, or about once per week. But it has ranged from
as low as 1.2 percent in 1964 to a high of 67.6 percent in 1932, when
278 PART 4 Stock Fluctuations in the Short Run
(^9) Charles D. Ellis, ed., “Memo for the Estates Committee, King’s College, Cambridge, May 8, 1938,”
Classics, Homewood, Ill.: Dow Jones-Irwin, 1989, p. 79.
(^10) The average percentage change in the Dow Industrials in 2001 was 0.9934 percent.