Three centuries of confusion

Last Monday I was reading an article in FT by Tony Jackson: “Is China an investment sweet spot or a sour lesson?”.

Not that I am thinking about investing there, but in this article I started reading sentences which rang bells… “the long-run correlation between real growth in gross domestic product and real equity returns is in fact slightly negative”, “reminder of the futility of long-range forecasting”, “how to explain the underwhelming performance of emerging equities, besides a simple propensity to overpay for growth?”…

Nevertheless, the best I got from this articles it wasn’t those reflections but that it referred me to the Credit Suisse annual study from the academics Dimson, Marsh and Staunton. 

This annual study contains wonderful data and graphics. Let me share some of them.

Later on the report very well summarises what we have read and heard so many times from Graham and/or Buffet:

“Value stocks sell for relatively low multiples of earnings, book value or dividends. They may be mature businesses with an unexciting future, or they may have a depressed share price that anticipates setbacks. Growth stocks sell for relatively high valuation ratios, reflecting favorable prospects for the business, and their stock price anticipates cash flows that are expected to get larger in the future.

For larger US companies, over the longest available period (end-1926 to end-2008), the difference between the annualized returns on the Fama-French value and growth indexes is 2.5%. In other words, the premium for US value stocks, relative to large companies as a whole, is approximately +1.2%, while the «premium» for growth stocks is of the same magnitude but negative.”

Finally the report reviews the case for different countries and regions. Among them The Netherlands, where the stock exchange originated with Dutch East India Company. Here we find a reference to the book “Confusión de confusiones” by Jose de la Vega (1688), an Spaniard who wrote the first book ever on the stock exchange business. 

I will end this post with one quotation from the book: “What really matters is an awareness of how greed and fear can drive rational people to behave in strange ways when they gather in the marketplace.” (We have heard this lately from someone else as well).