Chart of the week
Lived Experience
What does this chart show?
From 1965 to 1990, the Nikkei 225, Japan’s leading stock market index, trounced the S&P 500’s average annual return. Since 1990, the index has averaged ~0% per year.
Why does it matter?
The full period average annual returns from 1965 - 2022 for the Nikkei vs the S&P 500 are 6.3% and 6.8% respectively, but the paths each market traveled are wildly different and highlight a few important points:
The surest indicator of your long-term returns are the price you pay today for future cash-flows. The incredible Japanese recovery in the aftermath of WWII, spurred by financial deregulation, macroeconomic factors, and corporate innovation, led to possibly the greatest asset bubble of all time. By 1989, Japan, a nation representing <1% of global population, was 42% of global equity market capitalization (the U.S was only 33%) and was trading at a CAPE ratio of 100x.
Over the past decade(+) the S&P 500 has dominated all competitors, becoming 61% of global equity market capitalization, and trades at a CAPE ratio of 29. With the rise of American tech giants, any recent advocate for cheap foreign stocks has been laughed at, but so were those advocating for anything other than Japanese stocks in the 1980s. Investors continue to maintain an overwhelming home country bias in their portfolios, but unless you can predict which country will be the top performer, investing globally allows you to capture global innovation and returns at cheap valuations (for now).
Investors in Japanese stocks in the late 1980s undoubtedly expected that future returns would resemble past returns. There’s a similar consensus now around U.S. stocks as investors forget the period of 0% annual returns from 2000 - 2010 and only recall the recent past. Uncalibrated expectations are a dangerous thing.
The Bottom Line
Allocate to global assets using an unemotional, rules based process that considers valuation. Calibrate expectations carefully.
Data & Chart Credit - The great work of Morgan Housel and Ben Carlson