Real Returns, Real Differences

Why have US stocks done so well?

NY City by Night. Photo: Paul Barcellos, Jr. Source: Wikimedia

Since 1900, US stocks have grown 6.4% per year, on average, after inflation. 2% of that has been capital gain, and over 4% has been dividends and reinvested dividends. A dollar invested in 1900 would have grown to be more than $1,400 today. By comparison, a dollar invested in the UK in 1900 would have only grown to about $500 today – a 5 1/2 % real return. And they’re better than the world average. This raises a question: how did the United States get to be so lucky? Among global markets, only South Africa and Australia have had better long-term real returns.

Source: Credit Suisse

One reason has to do with the way we deal with failure. The US has a very liberal bankruptcy regime. When companies can’t pay their debts, we allow them to stop paying their creditors and reorganize. Sometimes that means that the company continues, like General Growth Properties. That mall operator filed for bankruptcy in the middle of the recession of 2009, and came back out stronger than ever a year and a half later. By contrast, when Blockbuster Video went bankrupt in 2010, its assets were sold and the company was liquidated.

Former Blockbuster store in Nice, Florida. Public Domain. Source: Wikimedia

In both cases, managers were fired and unproductive assets were freed to be used more productively. This includes buildings and equipment, but it especially means people. When people are stuck working for “zombie companies” that have been propped up through subsidized loans, they can’t fulfill their fullest potential. Japan’s business sector is famous for having “company men” who draw a salary for doing nothing. What a waste of human capital! It’s like a generous version of debtor’s prison.

Failure isn’t really failure if we learn from it and put our time and efforts to more productive use. That’s why the startup culture in Silicon Valley rewards folks who are on their third or fourth attempt. In business, as in life, there’s no final defeat, just as there’s no final victory. Our bankruptcy laws and our market structure encourage people to keep trying, and toughen up.

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2018-05-15T06:29:25+00:00May 15th, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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