This year marks a significant milestone in financial history, celebrating a century of research-quality U.S. stock market returns. This centennial is not only a reminder of the progress made in investment understanding but also emphasizes the importance of data-driven decision-making. For context, the movie Moneyball illustrates this shift in perspective through the story of Oakland A’s General Manager Billy Beane, who relied on statistical analysis to build a competitive baseball team on a tight budget rather than conventional wisdom.
In the 1960s, the University of Chicago paved the way for financial data revolution by establishing the Center for Research in Security Prices (CRSP), which meticulously collected and standardized market data dating back to 1926. This groundbreaking work fundamentally shifted how investors perceive stock market returns, introducing precision where previously there was only speculation. Prior to this archive, there was no reliable measure of the stock market’s total return, leading to opinions that often proved misguided.
The findings that emerged were surprising: U.S. stocks had compounded at approximately 9% annually from 1926 to 1960, a statistic that greatly exceeded contemporary beliefs. This collection of data not only changed the landscape for investors but also birthed vital lessons.
One key takeaway is that insider knowledge does not guarantee superior performance. Amidst a sea of uncertainty, the common wisdom is that the collective intelligence of all investors is often more reliable than the strategies employed by experts. Historical analyses revealed that mutual funds seldom outperformed a simple “buy and hold” strategy. This trend persisted, with returns continuing to compound at about 10% annually over the past 100 years.
For everyday investors, this suggests that one does not need to possess insider information to experience success in the market. There are multiple market-like portfolios accessible to anyone willing to invest wisely.
Another crucial lesson revolves around human innovation. The structure of the market encourages fair pricing through enforceable agreements and strong investor protections while fostering a competitive environment. Companies continuously strive to innovate, which in turn propels market growth. Every individual within a business contributes to its success, reflecting a broader aspiration for improvement that fuels market returns over the long term.
Lastly, the importance of investor behavior cannot be overstated. A long-term perspective is essential to harness the benefits of a compounded return. Historical data reveals that if a hypothetical $1,000 were invested in a total market index a century ago, it would grow to $17.1 million by 2025. Consistency in staying invested over a decade yields favorable outcomes in real terms nearly 90% of the time, reinforcing the principle that steadfastness pays off.
However, maintaining discipline is challenging, especially amid various global events—be they wars, economic downturns, or market fluctuations. The key is to focus on the long-term signal amid the noise that short-term volatility creates.
Ultimately, while Billy Beane did not claim a World Series title, he transformed talent evaluation in baseball, paralleling how Lorie and Fisher revolutionized investment strategies through rigorous data analysis. Investing today is less about stock picking and more about recognizing the reliability of returns over a lifetime. This centennial not only highlights historical data’s relevance but also sets the stage for continued growth and learning in the investment landscape for the next hundred years.
