Keen historians would invest now

by | Jul 21, 2012 | Business, Economy & Markets

If history is any guide – and let’s face it, history is the only guide – it is a good time to buy shares.

Not that we are recommending it – we don’t boast a financial services licence for one – but merely pointing out that it is statistically logical.

Research from Mark Hancock’s Precept Investment Actuaries puts the return from Australian shares for the 20 years to June 30, 2012, at 8.9 per cent. That’s if you bought, sat there, raked in the fully franked dividends and didn’t trade.

As the endangered species of the self-funded retiree can attest, the average market return over the past five years has been minus 4 per cent. That is minus 13.4 per cent, minus 20.1 per cent, +13.1, +11.7 and minus 6.7 per cent respectively, which suggests the worm of probability should have turned.

”Based on the last 20 years and even the 10 years prior to that, in our opinion it would be statistically unlikely to have another negative five-year period going forward from 2012 to 2017.”

That’s on a five-year view. As Hancock points out, negative years tend to correlate, so it might be a smidgeon more likely that this year will be negative too.

This marries with our own highly illogical and unmathematical view – call it a vibe – that the bottom is yet to arrive; and that recovery, when it comes, will be tedious and faltering as the world slowly deleverages from its debt binge.

Besides, markets tend to turn when there is universal pessimism and there are still one or two bulls still forlornly moping about the market paddock.

Over the 20-year period, Hancock calculates the average capital gain on shares at 4.6 per cent and the average dividend return at 4.1 per cent. In other words, virtually half the sharemarket’s returns came from dividends and associated franking credits.

Yet, of those 20 years, only five produced a negative return, and three of these five have been in the last five years.

As an aside, the average return from a share fund or balanced fund during this time may amount to only half of Hancock’s average annual 8.9 per cent, or thereabouts, once the bevvy of middle-people had all taken their cut.

The Precept report doesn’t go there though. It just calculates compound returns from the S&P/ASX200 Accumulation Index, which excludes small and illiquid stocks.

On the numbers, this financial crisis is surely a “black swan”, a once in a lifetime event already similar in scale to the 1929 crash and its aftermath. And it’s not over yet.

The question is, is it something grander and more sinister; a slow end to the present economic system? A purple, polka-dot swan perhaps?

Even radical central bank intervention, rabid money printing, interest rates pinned near zero and bonds at record low yields, have not been enough.

Playing devil’s advocate to the logic of Precept’s equity market statistics, the boom of the early ’90s to November 2007 was accompanied by an explosion in leverage. Average household gearing rose from roughly 60 per cent to 160 per cent.

At the same time, Australia’s economic growth was fuelled by unprecedented Asian industrialisation and the computer and internet revolutions. These won’t come again, although their effects persist.

Countervailing these dramatic ”one-offs”, the 30-year return from the All Ordinaries Index, from June 1982 to June 2012 that is, (excluding franking credits) is 11.9 per cent. Over time, equities tend to deliver 10 per cent growth, on average, annually.

Say gross domestic product growth runs 2 per cent to 3 per cent and inflation runs the same, company earnings should be at least 4 per cent to 6 per cent, before dividends. Even accounting for a ”Japanese lost decade” scenario, and structurally lower equity returns, they are still likely to surpass bonds and other asset classes.

If the statistical assumptions are off the mark, watch out, the unassailable logic of hindsight may one day tell us we should have bought gold and headed for the hills.


Having been away for two weeks, we are deeply saddened to have missed the opportunity to pass comment on the David Jones imbroglio. Such gift horses are too rare.

It was hardly a surprise however to come back and find another banking scandal, offshore naturally. The Aussie banking cartel is as pure as the driven snow, apart from the standard bastardry.

There is none of this money laundering for drug traffickers and terrorists, Mafia-style bid rigging against local governments, insider trading, front-running, mortgage fraud, or committing all manner of other frauds with impunity – while being mollycoddled by government. Nothing that springs to mind.

Now there’s the Libor scandal where the likes of Barclays, HSBC, Deutsche, UBS, JPMorgan and Citigroup and a couple of French banks are under scrutiny for manipulating interbank lending rates – basically robbing the world. Quelle surprise!

Banks have been batting off bad press since servicing the Nazis during World War II. They’ve always been big on servicing dictators.

The difference now, indeed the great danger, is that they are too big to fail. They are the system.

So, if anyone has another massive yarn about cheating, thieving, collusion, bribery or whatever, pop it in the anonymous tips box.

A real scoop would be preferable, maybe a banker serial killer or a banker goes to jail … or, heaven forbid, a banker has to pay back bonuses.

Michael West established to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences.

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