Holding a mirror to 1918:
As I stood in silence by our village’s war memorial yesterday, I gave thanks that I was born in 1963 and not a century before. My boys are 22 and 18 and my daughter 25. How different our family history could have been. In this parallel universe, I am a 55-year old late-Victorian whose world has just been shattered. I am looking this morning through the prism of personal tragedy at the first day of peace, surveying a world in ruins, in the grip of the worst plague since the Middle Ages, rocked by revolution.
Were time to slip back a hundred years in this way, the prospects for the stock market would probably not be my principal concern. But let’s assume I was fortunate enough to be checking the prices in my newspaper this Monday morning in November 1918, what would I see? Perhaps unsurprisingly, it would not be pretty. The First World War was one of the six worst periods for stock market investors since 1900.1
Returns in the 1914-1918 period were not uniformly bad. From the perspective of a Taisho period investor in Tokyo, the war years had been a time of opportunity. Real, inflation-adjusted returns had been 66%. Everywhere else, however, the war had been catastrophic financially as much as in every other respect. Real share prices in Germany had fallen by 66%, had halved in France and fallen by 36% for British investors. Even in the US, enjoying the early stages of the American century and a late entrant to the war, shares had fallen by a fifth in inflation-adjusted terms.
So, things looked pretty bleak in November 1918 for anyone with capital to put to work. As so often when this is the case, the best time to invest was when it felt least comfortable. Again, there were huge variations in performance around the world, but the period of recovery after the First World War was one of the four best episodes for investors in the 20th century.
Again unsurprisingly, given the injustice of post-war reparations and the ravages of hyper-inflation, Germany was a poor place to invest. Even here, however, real returns were positive between 1919 and 1928, up 18% over the period. The military build-up in Japan during these years kept returns positive after inflation too, at 30%. But it was in France (171%), Britain (234%) and the US (376%) where the 1920s were truly roaring.
It is a sad fact that the technological advances enabled by war-time military investment and the post-war reconstruction effort are a galvanizing combination for stock market investors. This was even more dramatically evident in the ten years following the Second World War when the performance of stock markets in some countries dwarfed the returns in the great peace-time bull markets during the 1980s and 1990s.
The outstanding performances, thanks in large part to the lessons learned from the self-defeating vengeance of Versailles, were in Germany and Japan, where self-interested investment by the victors led to extraordinary economic miracles in both countries. Japan’s stock market returns between 1949 and 1959 were an inflation-adjusted 1,565%, equivalent to 29.1% a year. In Germany, returns amounted to 4,373%, a breath-taking 41.3% a year.
Britain’s experience during these years was rather different. A Pyrrhic victory in economic terms meant the 1950s provided relatively lean pickings as austerity bit. The UK market’s 212% total return, adjusted for price rises, was significantly less than the 337% achieved in the 1980s when a different sort of revolution transformed Britain.
In America, the post-war years were truly a golden age. Even without the need to rebuild, the US stock market returned 430% during the 1950s as the baby-boom, industrial and financial dominance and the rapid rise of consumerism fuelled growth.
So, what can we learn from this blizzard of figures?
The first lesson is that overall the scale of value creation in the best periods of growth massively outweighs the damage wreaked during the worst episodes. This is unsurprising when you consider the transformation that the world has undergone in the past 100 years. Many of the great innovations that fuelled growth in the years since the First World War were already in place but the widespread adoption of electricity, telephony and the internal combustion engine still lay in the future.
Entire industries were still nascent or yet to be thought of: cars, airlines, oil and gas, telecoms, pharmaceuticals, chemicals, information technology, media, entertainment, fashion. Stock markets were still dominated by rail, iron and steel and other industrials, mining and textiles.
The second lesson is that, as one of today’s most successful investors, Nick Train, said at a recent event we hosted, ‘you have to be in it to win it’. Missing out on the performance that accompanies the Phoenix rising from the ashes is devastating to the long-term returns attributed to the stock market. If you only invest when it feels like the sensible thing to do, your experience will be massively worse than the long-run data suggests.
A third lesson I take from these numbers, however, is a warning. Beneath the global averages, there lurk big variations in performance that only diversification can mitigate. Invest for at least 17 years in America and you have been guaranteed a positive return since 1900. But in France, Germany or Japan you could have gone as long as 55 years and remained underwater. As I reflected yesterday, you can’t choose where and when you are born. But with your investments, at least, you can always stack the odds in your favour.
So, things looked pretty bleak in November 1918 for anyone with capital to put to work. As so often when this is the case, the best time to invest was when it felt least comfortable.
1 Credit Suisse Global Investment Returns Yearbook 2018 (Dimson, Staunton and Marsh) is the source for statistics quoted in this article.
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