It’s different this time?

We have all heard the phrase “History repeats itself!” Yet very few people seriously apply long-term history to the art and science of investing.

There is no better example of this than how the majority of modern investors, the most knowledgeable and technologically advanced in history, mishandled the dot.com bull market and the prolonged bear market that followed. Throughout the 1990s, the phrase “It’s different this time!” was repeated by Wall Street’s elite analysts, and investors blindly kept buying stocks and mutual funds throughout 1999 and 2000, ignorant of the fact that they were playing long Las Vegas odds of success and not even taking a Cliff Notes glance at the behavior of past bull markets.

Does this sound familiar? “The Federal Reserve is much blamed because it made money easy, and that easy money help to start the current investment boom. The real fault is that too many people are eager to grab something for nothing.”

No, it wasn’t written in 1999 about technology stocks. It came out of a business publication in January 1929.

In the lunacy of this easy-money era, if the investing public had realized that the stock market’s performance over the past 10 years had far exceeded the return of the great bull market of the Roaring 20s, would they have been so eager to buy another Internet stock IPO, with no earnings, and run by a whiz kid with limited business experience?

At the other end of the spectrum, the terrorist attacks of 2001 were publicly compared to the 1941 surprise assault on Pearl Harbor. Many panicked investors didn’t even consider that the market would act in a similar “wartime” way as they dumped their stocks with no plans to reinvest.

The time-tested knowledge that stocks usually go up in war, not down, cost them dearly as the stocks posted a 25% rally over the next 3½ months.

This historical ignorance isn’t limited to stock investors.

Today’s real estate speculators recently bought overpriced investment properties with “nothing down” by using adjustable rate mortgages based on the myth that real estate never loses value. It might have been wise for them to study how rising interest rates and overdevelopment sent housing into a nosedive in the late 1960s and early 1980s.

Clearly, the constant barrage of news, earnings projections, economic reports, and advice from respected professionals streaming over media outlets 24 hours a day hasn’t helped investors separate the forest from the trees and tackle the age-old problems of successful investing.

History is an important key to profitability!

Though personal experience is an important teacher, learning to correctly interpret and apply history’s lessons is a more important factor in successful investing. Remember, the names and faces are different, but the basic investment game hasn’t changed in the past 150 years!

This reference book has been designed to help an investor build and maintain a strong foundation based on financial facts—a sort of investment history playbook—that an investor can refer to during a future calamity or to find out the performance record of a certain type of investment over the past 200 years.

This book is divided into five sections.

1. There’s Gold in Them Financial Hills! examines the amazing growth of the U.S. economy and key developments of investing in America.
2. Time-Tested Investments studies the basic characteristics of six different types of investments since 1800. Unlike many investment books that view only one type of investment in a vacuum, this section includes stocks, real estate, bonds, commodities, collectibles, and cash in combined studies. The reader will realize that each type of investment has a different personality, and just like dealing with people, investors either learn to deal with the different types or avoid the ones they can’t get along with. Though investors don’t have to invest in every type of investment studied in this book, it is important that they follow the historical trends and know the advantages and disadvantages of these investments to determine which are the best investments for them.
3. Market Cycles—From Easy Money to Crash Landings examines the major bull and bear markets in stocks, and real estate since 1800, and demonstrates how some of the tools outlined in Section 2 can provide the reader with clues as to the market’s overall health.
4. Historical Events—Does Wall Street Care? studies the reactions of stocks, housing, and interest rates to various factors and scenarios that have continuously confronted investors throughout history, such as wars, disasters (natural and man-made), and the never-ending government actions (i.e., interest rates, taxes, and regulations) in reaction to these situations.
5. Investing the Historic Way demonstrates ways to practically use historical information in establishing a disciplined investment strategy, which involves setting reasonable goals, dealing with taxes, and proper ways to monitor an investment portfolio’s progress. This section demonstrates that a successful investor doesn’t need to be a genius or well educated but needs to study major issues and events that have affected investments through the ages, and the discipline to stay the historical course and not emotionally follow the herd to the financial slaughterhouse during future bear markets in stocks, bonds, and real estate.

The knowledge in this book also serves as a good BS detector in screening investment professionals, and should help you find the elite investment advisors, financial planners, and brokers who are worth hiring. In other words, if they don’t know the information in this book, don’t waste your time and money working with them!

This book’s emphasis is not to pick market tops and bottoms with a secret indicator, but rather to identify investment scenarios that have been historically good times to make money in, and warning signs to help preserve those hard-won profits as the investment climate becomes turbulent. In other words, this book helps you determine when you should be a “bull” or a “bear” for the right time-proven reasons. Simply put, only investors knowledgeable of history’s trends can successfully navigate the investment world over time.

What is needed to study investment history?

Three items are required to conduct the proper historical analysis of investments:

Reliable Investment Indexes

Invention of the Dow Jones Industrial Average (DJIA) marked an important milestone in the history of investing, because it provided a common reference point of current stock market activity as well as a means to track its past performance. The index has been so successful that it has spawned the development of other investment indexes and products such as index funds and market derivatives, just to name a few.

But not all areas of investing are as well indexed, and many investors have had to develop their own indexes. Take preferred stocks, one of the oldest and most reliable exchange-listed income investments in existence. Until the Winans International Preferred Stock Index™ (WIPSI™) was introduced in 2005, there hadn’t been a reliable index tracking this investment medium since the early 1900s.

Financial Archaeology

One of the greatest problems in conducting long-term investment analysis is getting reliable data. Because of this, most investors and Wall Street professionals don’t take their studies far enough back in time to be useful for long-term historical comparisons.

A great amount of time and effort went into amassing and compiling data needed to construct studies for this book. In fact, many of the data are from hard-to-find sources or required physically going into the library stacks to find the information.

Furthermore, to have continuous, usable charts and tables over a long time frame, many different indexes’ percentage movements had to be combined. In other words, the focus in constructing charts used in this book is on percentage change of various indexes, not the indexes’ values. For example, U.S. common stock studies in this book came from many sources, such as S&P 500 Stock Index™ (1928-present), Dow Jones Industrial Average™ (1927-1887), Cowles Commission Studies (1871-1886), and Smith and Cole Studies (1800-1870), with volume figures from the New York Stock Exchange (1871-present).

Charts—The “Maps” of Investment History

We have all heard the phrase “A picture tells a thousand words.”

The  “pictures”  in this book are primarily charts of past investment activity. As you will see, these are an effective way to identify historical investment trends. Just as a traveler uses a road atlas to determine time and distance for a trip, charts of past market conditions help determine the overall direction and make historical comparisons with other types of investments. As the examples show, it is much faster and easier to determine the overall direction of the market with a chart than with a table of numbers.

I started writing this book on a beach in Puerto Vallarta, Mexico. I was struck by how much the study of investment history resembles the movement of ocean waves. It was easy to see that the size and shape of no two waves were identical, yet the forces and factors that created them are the same.

Look at the front cover of this book. Isn’t it amazing how much the stock market trends of the three great bull markets shown resemble one another? In other words, when charts of an investment, from the same scenario in two different time frames, are compared, the patterns are not usually identical and yet the direction of the trend is. This is because the economic forces that move the investment in a certain direction are the same in the long term.

Ultimately, people’s emotions (i.e., greed and fear) about money and investing haven’t changed much over time, and their actions typically resemble those of previous investors. The critics of this type of analysis will tell you that investment prices don’t trend and instead move randomly through time. Their unrealistic answer to investing is to “buy all the time.” As you study the following pages, it will soon become obvious that investment prices do trend over long periods of time.

This information, coupled with the tools outlined in the “Time-Proven Investments” section, can help investors make important investment decisions. As stated before, this book is not about attempting to pick market tops and bottoms with a magic formula, rather it uses history to keep you on the right side of the tracks in major bull or bear markets.

The Winans Collection

Throughout my education and career, I have read many useful yet incredibly dull and boring books on economics, finance, and investing, whose important messages are lost on less-than-enthusiastic readers. To ensure this book does not fall into that infamous category, the best parts of investment, history, and art books are combined. Useful yet beautiful!

As a serious collector of antique financial documents, photographs and publications (many on display in the Museum of American Finance), I have used many pieces of this collection, some dating back to the 1600s, to decorate this book and help bring historical events back to life.

As a final note, I am a 12th-generation American whose Dutch family first arrived and established colonies in New York and New Jersey. They became some of this nation’s first multimillionaires. My mother’s Swedish family emigrated to California in the 1850s and soon became leaders in science, architecture, agriculture, and business.

An epiphany hit me as I began working on this book: “My ancestors experienced everything I’m writing about—the wars, depressions, natural disasters—all of it!” To honor their achievements, I also have accented their investment experiences throughout this text.

Enjoy the Journey!

Kenneth G. Winans