Documente Academic
Documente Profesional
Documente Cultură
16 0 0 600
14 0 0
50 0
12 0 0
400
10 0 0
8 00 300
6 00
200
4 00
10 0
Price
2 00
Earning s
0 0
18 6 0 18 8 0 19 0 0 19 2 0 19 4 0 19 6 0 19 8 0 2000 20 20
Year
S&P 500 Price/(10-Year Earnings)
Jan 1881-Feb 2004
50
2000
45
40
35 19 2 9
30
19 0 1
25 19 6 6
20
15
10
0
18 6 0 18 8 0 19 0 0 19 2 0 19 4 0 19 6 0 19 8 0 2000 2020
Ye ar
Nikkei Index, Jan 1984-Feb 2004
45000
40000
35000
30000
Nikkei Index
25000
20000
15000
10000
5000
0
1980 1985 1990 1995 2000 2005 2010
Year
Germany Dax
Nov. 1990 – Nov. 2003
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
1990 1992 1994 1996 1998 2000 2002 2004 2006
UK FTSE 100
April 1984-Nov. 2003
8000
7000
6000
5000
4000
3000
2000
1000
0
1980 1985 1990 1995 2000 2005
France CAC 40
March 1990- Nov. 2003
7000
6000
5000
4000
3000
2000
1000
0
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
P/E Predicts 10-Year Returns
Price Earnings Ratio Predicting Subsequent Ten-Year Real Returns
Annual January Data, 1881-1990 (1891-2000 returns)
20
1919
S&P Ten-Year Subsequent Real
15 1990
1982
10
Return
1935
1899
5
1914
1929
0
1911 1965
-5
0 5 10 15 20 25 30 35 40 45 50
S&P Real Price / 10-Year Average Real Earnings
One-Year Confidence, USA
Valuation Confidence, USA
Faith in the Stock Market
“The stock market is the best investment for long-term holders, who can just buy
and hold through the ups and downs of the market.”
1996 1999 2000 2001-2 2002 2003
1. Strongly agree 69% 76% 63% 60% 46% 39%
2. Agree somewhat 25% 20% 34% 31% 40% 44%
3. Neutral 2% 2% 2% 3% 5% 8%
4. Disagree somewhat 2% 1% 1% 5% 8% 5%
5. Strongly disagree 1% 1% 0% 1% 2% 5%
(Individual investors)
Historical Intervals between
Normal Years
(Excluding War, Recession)
• 1. 1871-1891 • 6. 1964-1972
• 2. 1891-1913 • 7. 1972-1979
• 3. 1913-1928 • 8. 1979-1988
• 4. 1928-1950 • 9. 1988-1996
• 5. 1950-1964
Earnings, Productivity & Value
Grow th over Historical Intervals
15
10
Grow th Rate (Annual %)
-5
-10
Interval Number
Part 1: Structural Factors
• Precipitating Factors: the Internet, the Baby
Boom, and other events
• Amplification Mechanisms: Naturally
Occurring Ponzi Schemes
Precipitating Factors
• The World Wide Web • Optimistic Analysts
• Triumphalism • 401(k) Plans
• Culture Favoring • Rise of Mutual Funds
Business Success • Decline of Inflation
• Republican Congress • Expanding Volume of
& Capital Gains Taxes Trade
• Baby Boom • Rise of Gambling
• Media Expansion Opportunities
Variations in Factors Since March 2000
• WWW: Dot-com bust weakened faith. Productivity numbers for 1990s
revised down, strong productivity growth since then
• Triumphalism: China 9% growth in 2003
• Republican Congress: Republican James Jeffords defection to
Independent May 2001, Democratic Senate 51-49, back to Republican
senate 51-48 Nov. 2002
• Optimistic Analysts: All major Wall Street firms have announced new
guidelines, HSBC abolishes “hold” recommendation, “equal” buy and
sell. Post-Enron reforms may reduce incentives for optimistic bias.
• Mutual funds: net new flow into stock mutual funds was $32 billion in
2001, compared to $309 billion in 2000, then back up to $69 billion in
year ending February 2004 (all in first two months of 2004).
Amplification Mechanisms
• Price-to-price
• Price-to-gdp-to-price
• Price-to-earnings-to-price
• Naturally Occurring Ponzi Scheme
Amplification Through
Expectations
• PaineWebber/Gallup Poll: Expect 15.0%
return on stock market over next 12 months
in 1999.
• My polls of individual investors: Expect
4.6% increase in Dow over next twelve
months in 1999.
Part 2: Cultural Factors
• The News Media
• New Era Economic Thinking
• New Eras and Bubbles around the World
Largest Recent One-Year Real
Stock Price Changes
• Philippines 683.4% Dec. 1985-Dec. 1986
• Taiwan 400.1% Oct. 1986-Oct. 1987
• Venezuela 384.6% Jan. 1990-Jan.1991
• Peru 360.9% Aug. 1992-Aug. 1993
• Colombia 271.3% Jan 1991-Jan. 1992
• Jamaica 224.5% Apr. 1992-Apr. 1993
• Chile 199.8% Jan. 1979-Jan. 1980
• Italy 166.4% May 1985-May 1986
Part 3: Psychological Factors
• Psychological Anchors for the Market
• Herd Behavior and Epidemics
Prominent Psychological Theories
1400
Real S&P Composite Index
1200
1000
800
600
400
1
dividend growth
0.5
-0.5
0 0.1 0.2 0.3 0.4 0.5
D/P ratio
Part 5: Tension Between Efficient
Markets Theory and Behavioral
Finance
• Aggregate markets are not very efficient
• Investors make many systematic mistakes
• And yet, financial markets matter very
much for economic success
• All successful economies have sophisticated
financial institutions
Concluding Thoughts
The Next Few Decades
• The most exciting prospect: the developing
world catches up
• Financial Markets will be everywhere,
dominating people’s lives
• Financial booms and crashes will be even
bigger than before
• Worse things have happened in history!
Dramatic Change in Finance, our
Economy
• Experience of last century suggests
dramatic changes in the next
• Information technology unleashes a cascade
of other changes in the economy
• Other technology transforms the world
economy, creating opportunities and
challenges
Risk and Chance over Careers
• Century-long personal outlook
• Reflections on upheavals in last century
• Stock market risk is compounded by
individual career risk
• Illusion of invulnerability
Ecclesiastes IX 11
“I returned and saw under the sun that the
race is not to the swift, nor the battle to the
strong, neither yet bread to the wise, nor yet
riches to men of understanding, nor yet
favour to men of skill; but time and chance
happeneth to them all.”
Career Risks
• Joshua Angrist, Analysis of draft lottery,
1969. Low RSN lowered income decade
later by 15%
• Over half of the cross-individual variance in
incomes cannot be explained either by age,
schooling, experience, parents income,
parents occupation, or transitory component
[Bowles et al. JEL Dec. 2001]
A Risky World
• Media focus on success
• Longer-run perspective: people in positions
come and go by chance
• Careers and economic success “come
together” by the strangest coincidences
Human Capital, Positioning, and
Meaning
• Maintain an orientation towards history in
the making, rather than to one’s own point
in the life cycle
• Maintain human capital, strategically
oriented
• Maintain humanity in an unforgiving
business world
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