FOOL ON THE HILL
An Investment Opinion
The End of History? Bring it on. Bill Barker (TMF Max)
December 30, 1999
As Millennium fever goes into hyperdrive, with some television networks promising to inflict over 24 hours of "event" coverage onto their dazed viewers, it is worth pausing to consider whether we should be pausing to consider the end of the century or the end of the millennium at all. Perhaps the stakes need to be raised. What about the End of History? Are we, as some overwrought apocalyptic visionaries predict, right now staring at the end of history? Actually, from a certain perspective, it may already have arrived -- and investors pretty must need to hope that such is the case.
By the "End of History," I'm not talking about the world ending in either bangs or whimpers, but instead I'm thinking about a 1992 book by Francis Fukuyama. The book is entitled The End of History and the Last Man, but the first half of the title is the one that has always caught most of the attention.
To vastly oversimplify the theme of the Fukuyama's work, the author argues that the history of mankind is a struggle toward establishing capitalist liberal democracies as the end state of the historical process. We are, here at the end of the 20th century, essentially at a time when "History" -- in the sense of the "eternal" battle between competing political doctrines -- has fully played out. The threats of communism, dictatorships, fascism, etc., are for all intents and purposes over -- liberal democratic capitalism has won the day, and will continue to be the choice of virtually all societies. In the sense that History is about the struggle toward an end-state society, we may truly have reached an end.
While the paint-strokes du jour on television and print are often summarizing this century and millennium as ones of vast technological and economic development, they are also, and almost certainly more importantly, ones of political and sociological development, and a development which may be largely completed and is hopefully irreversible. I'm convoluting Fukuyama's work to an outrageous extent here (hey, what do you expect -- I've only got about a thousand words or so to play with), but forgive me. Suffice it to say that though our work as a society isn't nearly finished, the framework for including everyone in a liberal capitalist democracy (women and minorities included) has by now largely been established. To the extent that work still has to be done, and it most certainly does, well, it's a heckuva lot less work than needed to be done at the beginning of the century, or, really, even 20 years ago.
You think the Internet is a big deal? Ha. Developing a stable society that includes all of its citizenry into the political, economic and sociologic process and progress is a heckuva bigger accomplishment than the Internet will ever be; it involved a lot more work than developing faster Internet access, fully employable "B2B" capabilities, or open source operating systems. The best and the brightest's efforts throughout most of this century were devoted not to pretty small things like the economy but to the struggles for equality and liberty.
Okay. Fine. Maybe. Whatever. A little political philosophy ramblings here on a slow news day, you say. But this stuff is important for investors, for history is so often taken as the touchstone for what one can expect about the future returns of the market. The arguments, wrapped up in a nutshell, are that history is always repeating itself -- that good cycles follow bad ones and investors have to be cognizant of what the historical returns of the market are, because they aren't likely to radically change over time. If the markets have been going up at 20+% a year for the last five years, and they have, those returns are coming at the expense of future returns, because, unless "history" in some sense has "ended," a reversion to the mean has to be assumed, and assumed soon.
Consider this statement from John Bogle, delivered nearly two years ago:
"The fact is that for more than two centuries the U.S. stock market has demonstrated a profound tendency to provide real (after-inflation) returns that surround a norm of about 6.7%. [T]he swings around this norm over moving 25-year periods are reasonably narrow, with returns much above 10 percent in only 7 of the 172 periods and returns much below 4 percent in another 5 periods. In short, real returns have ranged between roughly 4% and 10% in 93% of the 25-year periods, a remarkable record of consistency."
-- Bogle on Investment Performance and the Law of Gravity: Reversion to the Mean --Sir Isaac Newton Comes to Wall Street
That's kind of sobering stuff for those who expect positive returns at all over the next 20 years, which certainly should qualify as a long-term horizon. The last five years have provided results that would swallow up most or all of a 25-year period's expected returns according to Bogle's numbers.
Echoing these concerns, Warren Buffett also caused a little bit of a stir earlier this year when Fortune magazine published an article quoting his prediction that the returns of the market over the next 17 years or so in real terms would be about 4%. Buffett's arguments and numbers justifying this conclusion are based on a lot more than just a reiteration of what history indicates, but history does play a role in his computations.
All of which leads back to the question of what investors really should be expecting over the next 20 years -- or roughly the next generation. Now John Bogle and Warren Buffett have forgotten more about the stock market and valuations than I'm likely to ever learn, but there is at least the argument that an emphasis on history is misapplied here. Can near-term future gains in the market, in any way, approximate the returns of either the recent past or even the general long-term stock market averages?
If you think so, you pretty much have to subscribe to some theory or another that posits we've arrived at the end of history -- that the historical law of gravity over 25-year market periods, applicable almost without exception over the last two centuries, no longer operates at the same level that it has in the past. Fukuyama, as distorted herein, provides one possible avenue. You can believe that severe events, such as Civil Wars, World Wars, and civil rights movements, things which profoundly disrupt the economy, are not cyclical, but directional, have guided us in the right direction, and that society's resources no longer need to be devoted to those types of battles.
Of course, you can hang your hat on many other theories as well. Choose your own theory for whether there is some meaningful reason why things in the market over the next 25 years will be profoundly different from other 25 year periods, or accept what history offers as a better guide. Either way, have a Happy New Year, and visit Foolanthropy before you sign off tonight. There's only one day left to give.