The stock market is an incredibly resilient thing. A wonderful example can be seen through some astounding facts I found out earlier this year about Germany’s stock market, courtesy of a blog post from investor Anthony Isola.
Germany lost World War I, which lasted from 1914 to 1918, and signed the infamous Treaty of Versailles. The peace agreement placed usurious repayment demands on Germany, which resulted in hyperinflation in the country and the ruin of her economy in the 1920s. This paved the way for Adolf Hitler’s rise to power in Germany in the early 1930s. After Hitler’s ascension, he dragged the globe into World War II, starting with his invasion of Poland in 1939. During the war, Germany suffered decimating air raids on its cities conducted by the Allied nations and by 1945 she had lost the war. Here’s how Germany’s stock market did from 1930 to 1950:
Unsurprisingly, German stocks were smashed shortly after World War II ended. But what happened next was remarkable. Germany managed to rebuild, as the victors decided to support the country’s rehabilitation rather than punitively punishing her as they had done in the aftermath of World War I. Germany’s stock market rebounded, and then some. Isola wrote:
“Amazingly despite losing not one but two World Wars, suffering a vicious bout of wealth destruction due to Hyperinflation, experiencing a Great Depression, and living under the rule of a fanatically evil dictatorship, long-term German investors realized positive returns by 1960. The German market’s real return compounded at an annual rate of 2.4% from 1900-1960. From 1950 to 2000, German stocks posted an annual real return of 9.1%.”
So even after accounting for inflation – and bear in mind that Germany endured hyperinflation in the 1920s because of theTreaty of Versailles – German stocks still generated a return of 2.4% per year from 1900 to 1960. Here’s a chart from Isola’s blog post that shows the performance of Germany stock’s market from 1870 to 1994:
In his blog post, Isola also wrote that “stock markets can be way more resilient than you can imagine. Provided you have the luxury of time to work in your favor.” This is why Jeremy and I are long-term investors. We want time to be on our side.
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Yup, read this every few years. The other example is Japan. Both were beneficiaries of post-WW2 Marshall plan. The listed companies that survived the war continued to be traded, albeit some were forced to be broken up into smaller companies by the Allies (particularly the large industrial companies which had contributed to the German & Japanese war efforts).
Stock markets rise over the long term. But to paraphrase Keynes, long before the long term, we’re all dead. 🙂
There are also 2 famous cases where the stocks went to zero and never recovered. Pre-1949 Shanghai stock market and pre-1917 Moscow stock market. The listed companies were nationalised by the communists and owners & shareholders struck off.
Even if some of these old Russian & Chinese companies survived to be privatised & listed again in the post-1990s, the original shareholders are not recognised or compensated. The listed companies are treated as completely new entities.
Investors in all these cases may have benefited financially from geographical diversification, if it was feasible then (like a global etf now). But still, it would have been a challenge to just physically survive those eras.
It’s the main reason why Buffett always repeatedly says he’s so lucky to be born in the US.
Hi Sinkie! Thanks for sharing the data. I never knew about the Shanghai and Moscow experiences but I wasn’t surprised. A major shift in political systems will likely wipe out existing equity owners. William Bernstein once defined “deep risk” in the market as the risk of permanent loss of capital and one of his sources of deep risk is political confiscation, which is what happened in Shanghai and Moscow. And you’re absolutely right that geographical diversification for investors in Shanghai and Moscow back then would have been helpful, but in those olden times, geographical diversification was likely not achievable. I personally do not like to invest in companies that are based in countries with highly unstable political regimes, or with governments that have scant respect for the rule of low. But if the political risk is cleared, then time can be a wonderful ally for us in the stock market.
Ser Jing