• The chart shows the rolling 10-year period returns since 1800
  • Where available we show the Shiller PE peak and trough valuations
  • The chart shows a reasonably consistent pattern of 10-year runs followed by dismal decades
  • Over centuries markets oscillate between low multiples after sustained periods of low returns
  • …which are then followed by decades of rising returns ending in higher multiples

Despite the consensus that novel new technologies are going to alter the return structure for some firms, the KCR research team has and will remain committed to the lessons so freely given by history. With stock speculation at historical extremes, we believe the chart below is yet another sign of overextended markets setting investors up for difficult days ahead.

10 Year Rolling Stock Market Returns

10 Year Rolling Stock Market Returns

Source: Kailash Capital LLC, Robert Shiller Data, Yale University, American Economic Development in Historical Perspective[1]

For a more brutal variant of this post, please visit our RANT discussing Richard Sylla’s update on this work he presented in 1999 at a Columbia University Conference on Venture Capital and New Media.

Current Expected Market Returns: The Buy & Hold Headache

We certainly make no claims to market timing. But what we do believe is that what you pay matters. As we frequently note, valuation is a useless tool when trying to assess future returns over any one- or two-year period. Yet for those willing to move their time frame out, valuation has historically offered a healthy estimate of the market’s average annual return over 10-year time periods.

In fact, we know that the Buffett metric, currently at an all-time record of 234% of GDP, has had more predictive value than the Shiller PE metric we used in the above chart. This indicates a dismal decade may lay ahead for impatient investors. For a brief review, see KCR’s posts about Buffett’s indicator or for a detailed analysis see our piece The Buffett Valuation Metric & the Notion of “Cheap at the Peak.” KCR posted follow up comments on this thread incorporating how data from Private Equity might be understating how expensive markets are today.

We have written a lot of material recently discussing the enormously popular and empirically impossible claims of “exponential returns” presented by the market’s most popular investors & influencers. Nerds to the core, the KCR team believes the chart above is a simple and instructive reminder for investors that this time is NOT different.

A Nod of Thanks to Some Academic Greats:

The idea for the chart above came from work by legendary economist Richard Sylla and co-authors Jack W. Wilson, and Charles P. Jones. The original piece can be found in American Economic Development in Historical Perspective. Published in 1994, the authors’ piece is titled “U.S. Financial Markets and Long-Term Economic Growth, 1790 – 1989.” The work discusses, among other things, the complex interactions between realized rates of return and the behavior of savers.

One of the innovations in their work was that investment decisions were driven by actual realized real returns. The authors were making what was, at the time, a relatively novel observation around what behavioral finance refers to as the “extrapolation bias” or the tendency to take a recent experience and project it will continue into the future.

Sylla and his co-authors note that “Interest rates, whether nominal or real, are rather imperfect measures of the returns by savers, a point inadequately appreciated in the literature of economic history.”[2] Their point being that declining interest rates actually increase realized returns for savers resulting in “Saving rates [that] will increase along the savings function in response to higher returns.”[3]

This observation leads the authors to a thoughtful discussion about the rise of the robber barons. There is a stunning quote discussing how a 40-year decline in nominal and real-yields enabled the outsized accumulation of wealth due to lengthy and outsized returns to stocks and bonds from 1860-1900.

“If the financial returns we calculated for this era [1860-1900] are accurate, it might be said that the robber barons did not have to steal. They could then amass more wealth than in any other eras of U.S. history merely by saving and investing in stocks and bonds. Although nominal and real interest rates declined in this era, nominal and real returns to bond investments remained high….”[4]

One could suggest that the perverse incentives that have risen from the 40-year collapse in real rates culminating in the negative real-rates of today and the associated speculative euphoria, like cleantech shares, has put the wealth of the robber barons to shame.

With shills using the uncommon power of social media to suck investors into the most overpriced and financially fragile stocks in history, we have created a speculative peak of epic proportions. Wealth inequality and how to fix it have become as topical as any time in modern history. Charts about the most recent 40 year stretch of collapsing interest rates, like the one below, have become a mainstream part of economic and political discourse.

We do not weigh-in on social issues here at KCR as it is outside our domain knowledge. But we do believe, like many around us, that the relentless decline in the cost of money has led to epic financial distortions.

Productivity Growth and Hourly Compensation Growth 1948 2020

The unusual persistence of these financial distortions has led to the complete collapse of common sense. We posted some of what we learned from Seth Klarman’s legendary A Margin of Safety in the hope that it might salvage the savings of even one speculator. As we watch various story stocks implode we wonder what the Federal Reserve will do next…

For anyone who believes that there are lessons to be had from history, we cannot recommend American Economic Development in Historical Perspective strongly enough. In our view it has rarely been as timely as it is today. Written in 1994, the authors note how the real returns to stocks and bonds were much closer between 1790 and 1900 than in the period after 1900.

From 1900 – 1989 they observe that the real returns to bonds and commercial paper came in at less than 2% while the average stock market return was 6% a year. That is a massive difference in real average returns over centuries! .

They go on to observe that:

…across the whole of the nineteenth century there was no inflation. In [the 20th century], by contrast, inflation exceeded 3 percent per year. … the stock market in the twentieth century appeared to make a much better adjustment to the fundamental difference in inflation rates between the two centuries than did the bond and commercial paper markets, in which the decline of real returns was precipitous. … The ravages of inflation not entirely anticipated or the accumulation of capital leading to lower marginal productivity are among the considerations that could lead to such a result.[5] -emphasis ours

With nominal rates on 10-year Treasuries below 1.5%, inflation over 6% and vast amounts of capital invested in enterprises that have never made money we can only wonder what the future holds.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
[1] Yes! We put a footnote on citation.  The original idea for this graph and the data came from a book we own called “American Economic Development in Historical Perspective. Chapter Two, US Financial Markets and Long-Term Economic Growth, 1790-1989” – by Richard Sylla, Jack W. Wilson, and Charles P. Jones, page 35.  The data table in the book was partial, prevented replication and we are left in the awkward position of using a snippet from a scan to fill the back part of the chart in.  Published by Stanford University Press in 1994, we have our hand up and will remove that component of the image if the publisher finds it objectionable due to Copyright.  If you represent the publisher please do not hesitate to reach out to KCR’s research team at research@nullkailashconcepts.com.  Please know this post is free and was not in any way designed to harm the publisher or brilliant researchers who authored the piece for the journal.

[2]  American Economic Development in Historical Perspective, Edited by Thomas Weiss and Donald Schaefer, page 42

[3] IBID, page 39

[4] IBID, page 48

[5] IBID, pages 46-47


The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

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