These 8 Charts Will Change Your Mind On Buy & Hold Investing

October 27, 2017

These 8 Charts Will Change Your Mind On Buy & Hold Investing

  • If you take a different perspective on the stock market, things aren’t all that rosy.
  • If the stock market has done well in the last 15 years, it probably won’t do that well in the future.
  • I’ll share 5 things that will enable you to reach satisfying returns in the long term, no matter what happens in the stock market.


Today, I’ll discuss two academic research papers that look into slightly longer stock market periods to analyze returns in order to stress the importance of DIY investing and taking responsibility for our financial lives.

I’ll conclude today’s article with some insight on what to look for in stocks to outperform the market in the next 15 years.

The Stock Market Charts You Haven’t Seen

I’ll start with Professor Emeritus, Edward F. McQuarrie, from the Leavey School of Business at Santa Clara University who just published a paper discussing long term stock market returns and averages. In it, he shows charts from the stock market that go back to 1851 as there is enough data to trace stock market returns this far back in history. (Note: This is almost 80 years more data than what is typically used in stock market charts.)

Let’s start with the most popular stock market chart, which describes how since 1926, stock markets have only gone up and will probably continue to do so in the future which is the conventional wisdom on the stock market.

Figure 1: The main culprit of the buy and hold strategy. Source: McQuarrie.

Now, on to a chart that many of you probably have never seen, stock market returns from 1851 to 1932.

The picture of the stock market looks completely different than the previous figure.

Figure 2: Who says the stock market only goes up in the long term? Source: McQuarrie.

If Wall Street was flashing this figure, the buildings in New York would be much, much smaller. Nevertheless, it’s of extreme importance to understand that the stock market doesn’t just go up, often it is volatile, exuberant, sometimes panicky, and it happens that over 80 years, returns don’t amount to much.

This would completely change the perspective investors who only look at figure 1 have, and would lead to different conclusions about the stock market which I’ll sum up at the end of this article.

To continue on the charts you’ve never seen, this 1919-1949 chart is also very interesting.

Figure 3: The stock market was flat between 1919 and 1949. Source: McQuarrie.

Further, most analysts totally omit inflation from stock market returns which isn’t a wise thing to do given that inflation has contributed to a large part of stock market nominal returns over the past 90 years.

Figure 4: Inflation adjusted stock market returns. Source: McQuarrie.

Now, something else stock market enthusiasts market is that $10,000 invested in 1929 would have been around $9 million in 2009, and thus almost $27 million now. But if you omit dividends and inflation, the real return would be around $33,000 in 2009. Thus 99.7% of stock market returns are thanks to inflation and dividends, which is something very important to take into consideration when investing.

So as the market is at its peak now, similarly to 1929, it’s wrong to assume that even if there is a crash, stocks would quickly regain the lost territory. Only in 1985 did the stock market return to the previous level when adjusted for inflation.

Similarly to what I’ve discussed above, the stock market didn’t go anywhere from 1952 to 1982, nor from 1964 to 1994.

Figure 5: 30-year periods of zero returns are common. Source: McQuarrie.

Despite the weak performance of the stock market in the two periods shown above, Warren Buffett’s best returns came from those periods. His returns since 1994 are more in line with market performance. Therefore, we have to position ourselves so that we too can achieve amazing returns in the next 30 years, no matter where the stock market actually goes.

Back to Siegel’s chart that discusses more than 200 years of stock market returns, making you believe the stock market can only go up and that stocks yield a 6.6% average return.

Figure 6: Jeremy Siegel’s stock chart from Stocks For The Long Run. Source: McQuarrie.

The fact is that the visual is misleading. The point is that our investing horizons are at most 30 years, 40 for some lucky investors that are starting out young. Thus, the above chart can really mislead you.

The split of the 180 year period into 4 charts shows that you really have to be lucky to achieve returns of 6.6% over a period of 30 years.

Figure 7: Stock market returns vary in time. Sometimes they surge, sometimes they lag. Source: McQuarrie.

Another interesting piece of research that I found is from Valeriy Zakamulin from the School of Business and Law at the University of Adger in Norway.

His findings are very interesting and show how stock returns in the following 15 years are opposite to what they were in the preceding 15 years, something to really think about when investing blindly into stocks now.

Figure 8: 15 good years usually mean 15 bad years ahead. Source: Zakamulin.

Before going into a discussion about what to do about to the above data, I’d like to quote the conclusion of Professor McQuarrie’s paper:

“When investment advisors counsel that stocks are the best bet for a long investment horizon, they should append the acknowledgement: “if my market timing is good.” When advisors argue for stocks over bonds, they should append the caveat “as long as you are not French, or Italian, or Japanese, or Swiss, and provided that the 20th century is a better guide to the future than the 19th century.” For real investors with their limited time horizons, who may reside anywhere in the world, there have been times when both stock recommendations were bad.”

Conclusion & Investing Approach

So we’ve seen that stock returns are extremely volatile and no one can guarantee you a return of 6.6% over the long term. Additionally, after periods of extreme performance like the stock market has had in the last 35 years, future returns are usually below the mean but it’s possible to achieve investment returns in all kinds of markets.

The only thing is, you have to be smart about it. I’ve outlined a few steps you can make to be just that.


  • 99.7% of stock market returns over the last 90 years come from dividends and inflation. Thus, we really have to focus on companies that are going to protect us against inflation, and that can raise prices accordingly. Looking at dividends also isn’t a bad idea if the dividend shows how healthy the business is.
  • Continuing on inflation, price to book values play a huge role here because the higher the book value is, especially the tangible book value, the higher the appreciation is that will be achieved in relation to inflation. Something to really think about as the average S&P 500 price to book value is above 3.
  • Valuations matter! Using data from 1881, we can see that when valuations are high, subsequent returns are low. Thus, try to set up a portfolio that has good price to book values and low valuations.

Figure 9: The higher the CAPE ratio is, the lower long term returns are. Source: StarCapital.

  • Know the business! Even if most people say you can’t outperform the market, you have to look at the market from a different perspective because the consensus is built into the price. By taking longer time horizons, you can really find value at a cheap price which will lead to satisfying returns over the long term.
  • Don’t apply an infinite horizon to your investment goals because unfortunately, our lives are not infinite. If you’ve reached your financial goals, you might want to sell your index funds.

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