For those of you who are my age (69) or older, this little essay will be as much a refresher as a history lesson. But, if you’re younger than I am (most of you), read very carefully and pay really close attention; you are about to receive an investing lesson for the ages. (My thanks to Nick Murray for the data and the idea.)
1975
The war in Vietnam had been won militarily, and a peace accord had been signed. The communists had withdrawn to the prewar border. But, Congress pulled America’s financial support of the democratically elected government of South Vietnam, and the North Vietnamese army returned to fight again. To our everlasting shame, Saigon fell and millions were enslaved, driven from their homeland, or murdered. That was the bad news.
More positively, Andrei Sakharov, the great hero of anti-communist resistance in the Soviet Union, was awarded the Nobel Peace Prize. Margaret Thatcher became the first female leader of the Conservative Party in Britain; and in 1978, her historical and spiritual collaborator, Cardinal Karol Jozef Wojtyla, became Pope John Paul II.
Global population in 1975 was 4.1 billion, fully half of whom lived in extreme poverty. U.S. inflation-adjusted GDP for the year was $5.49 trillion. An Apollo/Soyuz first class postage stamp set you back a dime.
Earnings on the S&P 500 were $7.71, and dividends were $3.73. The S&P 500 index closed the year at 90.19.
1985
Mikhail Gorbachev came to power in the Soviet Union and scheduled a historic meeting with President Reagan. The Internet domain name system was created. Microsoft published Windows 1.0.
The song of the year “We Are the World” was produced by Quincy Jones. Written by Michael Jackson and Lionel Ritchie, the album sold more than twenty million copies.
Coca Cola introduced, and then killed, “New Coke” in the greatest corporate marketing debacle since Ford introduced the Edsel in 1958. A first class postage stamp cost twenty-two cents.
Global population reached 4.85 billion, with U.S. population accounting for 238 million. U.S. inflation-adjusted GDP in 1985 was $7.71 trillion.
S&P 500 earnings were $15.68, dividends were $8.20, and the S&P 500 Index closed the year at 211.28, an annualized gain for the decade of 8.88%, excluding dividends.
1995
This was my first full year in Winfield. On April 19, we watched on television the most horrific domestic terrorist attack in American history—the bombing of the Alfred P. Murrah Federal Building in Oklahoma City by Timothy McVey and Terry Nichols.
- J. Simpson was tried and acquitted for the 1994 murders of Nicole Brown Simpson and Ron Goldman. Israeli Prime Minister Yitzhak Rabin was assassinated. Jerry Garcia of The Grateful Dead died. The Rock and Roll Hall of Fame Museum opened in Cleveland.
Global population reached 5.7 billion people. America was home to 266 million. A first-class postage stamp was now 32 cents, more than triple what it had been in 1975.
S&P 500 earnings had grown to $37.70 and dividends to $14.17. The S&P 500 Index closed the year at 615.93, an annualized gain for the decade of 11.29%, again excluding dividends.
At this point, you will have noticed that in the twenty years from 1975 through 1995, the S&P 500 Index was multiplied nearly seven times, dividends nearly four times, and earnings nearly five times. The cost of living, as evidenced by the price of a postage stamp had tripled. At the risk of redundancy, please read on.
2005
Hurricane Katrina swept into Louisiana, devastating a land area larger than Great Britain. Saddam Hussein went on trial in an Iraqi courtroom. Islamic terrorists attacked the London bus and subway system, killing fifty-two innocent people.
His Holiness John Paul II—one of the truly great men of the twentieth century—passed away in Vatican City, one month shy of his 85th birthday. A first-class American postage stamp cost thirty-seven cents.
Global population was 6.5 billion. The U.S. population was 296 million. Inflation-adjusted U.S. GDP was $14.37 trillion.
S&P 500 earnings were $76.45. Dividends were $22.38, and the S&P 500 Index closed the year at 1,248.29, an annualized gain for the decade of 7.32%, excluding dividends.
2015
The Islamic terrorist group ISIS committed atrocities on a scale rarely seen since America abandoned its allies in Southeast Asia in the mid 1970’s. Reminiscent of the so-called “boat people” of that era, refugees poured into Europe from the Middle East. Apparently, some among those refugees have carried out atrocities of their own after they arrived.
The world’s leading nations reached a nuclear accord with Iran.
Lawrence Peter “Yogi” Berra died at the age of ninety. A first-class postage stamp cost forty-nine cents.
Global population is now 7.29 billion, and fewer than 10% live in extreme poverty. The U.S. population has reached 322 million. Real, inflation-adjusted U.S. GDP for 2015 is estimated to approach $18 trillion.
Earnings on the S&P 500 for 2015 are currently estimated to be $117. Dividends for 2015 are estimated to be $43. The S&P 500 Index closed 2015 at 2043.94, an annualized gain—in spite of the 2008-2009 financial crisis, and again excluding dividends, of 5.05%.
Summary: World population is up 80% since 1975, but extreme poverty has been slashed from one person in two to one person in ten. There are 3 billion new middle class consumers and entrepreneurs, with more on the way.
The U.S. population is fifty percent higher, having gained a new person through net births and immigration every fourteen seconds for forty years. Still, America is blessed with unimaginable room to grow. Population density is a mere 85 humans per square mile; it’s 300 in France, 590 in Germany, 680 in the U.K., and 870 in Japan; all this before the recent influx of refugees into Europe from the Middle East. We have more than a hundred years’ worth of dormant hydrocarbon energy under out feet, and the rights thereto are vested predominately in the land owners. Ditto, the industrial technology which brings that dormant energy to the surface and converts it into warmer, well-lit homes, businesses, and hospitals; and a million conveniences of modern life. Many of you will remember when President Carter told us that we would run out of oil and gas before the end of the last century. Like so many others, he underestimated the American businessman and the creative power of his free and incentivized mind.
Since 1975, real GDP in the U.S. has more than tripled, while the population is up only 50%. Bringing the meaning of that closer to Main Street, inflation-adjusted GDP per person has risen from $25,000 per person to nearly $56,000. I don’t know if that really accounts for the omnipresence of high definition televisions, smartphones, and global positioning systems, but I doubt it.
The S&P 500 index rose by more than twenty times in the past forty years. Earnings increased more than fifteen times. The difference between those two multipliers can be accounted for, I believe, by the fact that interest rates back then, though far from the highs they would attain in the early 1980’s, were still well above today’s levels. Dividends are almost twelve times greater and—when measured against the increase in consumer prices—are more than four and a half times what they were in 1975. I’ll say it again: Over the past forty years, dividends on the S&P 500 index increased at more than four and a half times the rate of consumer prices.
Conclusion: If you’re forty years old or older, you have just lived through the greatest accretion of wealth by the greatest number of people in the history of the world. There are two trends in place that are responsible for this spectacular economic progress. First, there is the Global Capitalist Revolution, as free market principles have all but vanquished unalloyed socialism and pure communism. Even China is adopting free market policies, and as its top down, crony command structure fades into history—and despite its current problems—it will become a true economic superpower.
The other catalytic trend is the exponential progress in information technology. This could hardly be otherwise, given a free market in ideas and the vesting of ownership rights in inventions. Biotechnology will soon be performing miracles beyond our ability to imagine or predict, and the work is well advanced. Ditto, a return to space—in commercial, passenger-carrying vehicles. With these things, and many others, consumers will benefit, our economy will grow, and investors will find new opportunities. There will be temporary setbacks, but the trend of discovery is accelerating.
History is a window into the future, but the real lesson here is the same one you see at the close of our Editor’s Note in every edition: The best investors, regardless of their age, are those who can ignore the noise. They have learned that Patience, Discipline, and Confidence in the Future are virtues practiced by truly happy and successful people. mh
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