Roger Claessens No Comments

Whilst finishing writing the first version of my course on INVESTMENTS, “The Economist” in its May 15th 1999 issue, highlighted the unprecedented level of the stock exchanges in the United States and in Western Europe. The Dow Jones (the N.Y stock exchange index) was heading towards 10.000!

The article started as follows:


“Stock prices have reached what looks like a permanent high plateau”. So thought Irving Fisher, a great American economist, in 1929, shortly before the stock market fell into a ravine! (At that time the Dow Jones index indicated 381 and fell to 41 in three years). The explanation for current share prices is that investors are indeed being irrational. Economists who believe this point to evidence from psychology that, for instance, people give too much weight to recent experience – share prices have been going up, so investors expect them to go on doing so”.

“High share prices attract again the attention of academic economists. New theories abound, though old ones still had their defenders. But would any prove more prescient that Fisher’s ill-fated observation?

“Combined with demographic factors – such as the baby-boomer generation investing for retirement – this could send share prices soaring even further above “rational” levels. If so, the academics should not be surprised. John Maynard Keynes, another economist who knew about the stock market, once noted that “there is nothing as dangerous as the pursuit of a rational

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investment policy in an irrational world”.

Another thought crossed my mind whilst writing this course. Look at these two pictures hereafter. They are scanned from a remarkable book “The

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principles of corporate finance” by Brealey and Meyers, published at Mc Graw Hill, revised in 2013.

Which one represents the Standard and Poor’s Index for a 5-year period and which one represents a coin that is being tossed over and over again? Can you tell which is which? The SP index represents 75% of all shares quoted on the New York stock exchange.

Investment Strategies

Top chart shows the real Standard and Poor’s Index for the years 1980 through 1984. The bottom chart

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is a series of cumulated random numbers. The difference is matter of trend. The trend is related to inflation!

Another introductory observation: a sentence found in Brealy and Meyers book:
”The patron saint of the Bolsa (stock exchange) in Barcelona, Spain, is Nuestra Senora de la Esperenza – Our Lady of Hope. She is the perfect patron, for we all hope for superior returns when we invest in an “efficient and rational market”! THE question is: are they rational?

However, since than the index tumbled to 6.500 after the collapse of Lehman Brothers and stands over 16.000 in early 2014!

What should be our conclusion?

The message is: know your asset classes well, and stick to the proven principles of asset allocation and diversification, in order to weather likely significant fluctuations that few, maybe none, will forecast correctly. In all modesty, let us not forget that our investment- strategies are, whatever we do, always based on the assumption that the future will not be dramatically different from the past. All our theories and means are based on statistics, i.e. on the analysis of the past.

We are permanently extrapolating.

For sure, the better your grip on all the subjects covered in my course, the greater the probability that you will extrapolate in the right direction.

In addition, it needs to be stressed that most Principles covered in this course are valid in a mature economic environment with large markets and high liquidity. The reader should consider that it may or may not be applicable to his own environment dependent upon the fact his market is closely, or not, related to the US environment, which we consider as the best possible case study. The reason the US markets are the best case study is the wealth on statistics over a long period of time as well as the cheer size and volume of the market.