Following Mr. Draghi’s speach on Thursday, the German Stock Index DAX hit the 10.000 mark for the first time in history soon thereafter. Many major publications directly came out with headlines along the line “DAX 10000 – what’s next” and speculated where the DAX might go.
In contrast to that and only for reasons of personal entertainment, I want to take a look back into the DAX history. The DAX was introduced 26 years ago in July 1988 by the German Stock Exchange in order to introduce a modern, performance based stock index. The linked Wikipedia site gives a great overview on the history of the DAX and the change in constituents. Mathematically, the DAX times series was based on 31.12.1987 with a starting value of 1.000 although there exist some “Virtual” time series going back much further.
Just a few interesting facts about the DAX:
– only 15 of the original constituents are still in the DAX
– 3 (or 10% of the original 30) actually went bankrupt
– the best years since 1987 have been 1993 with +46,71% and 1997 with +47,11%
– the worst year were 2002 with -43,94% and 2008 with -40,37%
– the biggest cummulative loss was the 2001-2003 period with a cumulative loss -58,9%
– the Dax rarely ends up pruducing single digit returns over a full calender year. Only 5 out of the last 26 years produced “single digit” returns. So yes, long term stock returns might be single digits but short term single digit returns are an exception
Neverthess, the 10.000 level represents an annual return of ~9,02% over 26,5 years (from December 1987 until May 2014). This compares with around 10,1% for the S&P 500 (in EUR).
For me personally, the implementation of the Dax coincidently equals almost exactly when I bought my first stock. The first Stock I bought was a company called Hoesch in September 1987. I remember this so well because just a few weeks later, the “Black october of 1987” hit me with full force. I had used half of my earnings from a vacation job. As I wanted to increase my position after the crash, the people at the bank refused to take my order because they said that stocks are only for gamblers. As I was not yet of legal age back then, I had to come again with written permission of my parents to buy stocks.
This leads to another question:
Was this huge 26 year rally predictable or not ?
3 years ago I had reviewed the original “Market Wizards” from Jack Schwager which contains interviews with many then famous traders and hedge fund managers. Overall, one year after th 1987 crash, the sentiment was very very negative.
As I did not find historical P/Es for the Dax in 1987/1988, let’s look at this table of historic P/Es for the S&P 500:
|
P/E |
| 31.12.1973 |
12,3 |
| 31.12.1974 |
7,3 |
| 31.12.1975 |
11,7 |
| 31.12.1976 |
11,0 |
| 30.12.1977 |
8,8 |
| 29.12.1978 |
8,3 |
| 31.12.1979 |
7,4 |
| 31.12.1980 |
9,1 |
| 31.12.1981 |
8,1 |
| 31.12.1982 |
10,2 |
| 30.12.1983 |
12,4 |
| 31.12.1984 |
9,9 |
| 31.12.1985 |
13,5 |
| 31.12.1986 |
16,3 |
| 31.12.1987 |
15,6 |
| avg |
10,8 |
Someone like John Hussmann might have said that stocks have nowhere to go as the P/E even after the 1987 crash was ~50% higher than the preceeding 15 year average. At the and of 1987, 10 30 year US Treasuries were yielding around 9%, another argument why stocks didn’t look that “apetizing” at that point in time. Why bother with stocks if you can earn double digits with corporate bonds any time ?
What followed
Looking back, it is easy to point out some of the events which led to this remarkable run especially for the DAX over the last 26 years:
– Communism broke down (“Peace dividend”)
– the Eurozone was created, stimulating cross border trading, increasing competition
– technology change (PC, Internet, Mobile)
– Corporate taxes in Germany went down form >50% to ~30%
– interest rates declined for now 25 years in a row
– old crossholding structure (“Deutschland AG”) dissolved, more professional management, foreign investors
– the BRIC story unfolded, further possibilities to export “core competency” goods like machinery and cars
In 1987/1988, few market pundits did even predict a single one of those factors. That’s why I think that just looking into the rearview (valuation) mirror should not be the only tool in the investing toolbox. Past P/Es will not predict future seismic shifts. On the other hand, one should not rely on such evcents happening over and over again and boosting share prices further. Clearly, interest rates and taxes will not fall that much lower and the effect of the end of Communism will not repeat itself.
For me the major conclusion is the following: Do not rely on any one system which tries to predict the future and/or future returns. Keep an open eye on everything, from valuations to macro economic factors and political shifts. Be prepared for surprises. Inthe long term, many surprises turned out to be positive for the economy and stock return.
Some musings on the Dax constituents
Just for fun, I created a table with the long term performance of the 15 “surviving” Dax constituents. Unfortunately I only got performance numbers back to 1992, but the p.a. Performance of the DAX was quite similar. lets look at those 15:
| 1987 |
Still in DAX |
Comment |
LT Perf (08/1992) |
p.a. |
| DAX |
|
|
545,14% |
8,95% |
| Allianz * |
1 |
|
177,55% |
4,80% |
| BASF * |
1 |
|
3650,23% |
18,12% |
| Bayer * |
1 |
|
1598,15% |
13,90% |
| BMW * |
1 |
|
1723,82% |
14,28% |
| Commerzbank * |
1 |
|
-70,14% |
-5,40% |
| Continental |
1 |
|
1962,28% |
14,92% |
| Daimler-Benz (*) |
1 |
|
90,50% |
4,22% |
| Deutsche Bank * |
1 |
|
89,57% |
2,98% |
| Deutsche Lufthansa * |
1 |
|
615,84% |
9,47% |
| Henkel * |
1 |
|
1200,08% |
12,51% |
| Linde * |
1 |
|
699,66% |
10,03% |
| RWE * |
1 |
|
308,71% |
6,68% |
| Siemens * |
1 |
|
742,92% |
10,29% |
| Thyssen (*) |
1 |
|
89,98% |
4,32% |
| Volkswagen * |
1 |
|
1690,10% |
14,18% |
Not surprisingly, financial stocks do not look good here. Overall, companies which are considered “well managed” did quite well such as Henkel, Bayer, BMW, Linde. Surprising for me is the fact that Lufthansa actually outperformed the DAX as well as Siemens.
Now let’s take a quick look at the new stocks. If I didn’t have returns from 1992, I made a comment:
|
|
|
Total |
p.a. |
Perf. Since |
| Adidas |
1 |
|
896,84% |
13,23% |
1995 |
| Beiersdorf |
1 |
|
1658,99% |
14,09% |
|
| Deutsche Börse |
1 |
|
335,79% |
11,74% |
2001 |
| Deutsche Post |
1 |
|
103,80% |
5,41% |
2000 |
| Deutsche Telekom |
1 |
|
62,22% |
2,80% |
1996 |
| EON |
1 |
|
485,63% |
8,46% |
|
| Fresenius |
1 |
|
4651,42% |
19,42% |
|
| Fresenius Medical Care |
1 |
|
174,05% |
5,90% |
1996 |
| HeidelCement |
1 |
|
242,80% |
5,83% |
|
| Infineon |
1 |
|
-80,66% |
-10,95% |
2000 |
| K&S |
1 |
|
3084,30% |
17,24% |
|
| Lanxess |
1 |
|
302,98% |
16,11% |
|
| Merck |
1 |
|
555,53% |
10,64% |
1995 |
| Munich Re |
1 |
|
300,42% |
7,24% |
1994 |
| SAP |
1 |
|
3502,32% |
19,98% |
|
Not surprisingly, the best “newcomers” also lead the total Dax performance. Smaller companies which grow big are always the best investments, although it is often hard to identify them before.
Finally one other table. Let’s look at some of the best performers and their historical P/Es:
|
FRE |
SAP |
HEN3 |
BEI |
BAS |
| 31.12.1992 |
28,6 |
24,4 |
19,6 |
18,9 |
11,4 |
| 31.12.1993 |
35,2 |
25,8 |
25,7 |
22,8 |
28,0 |
| 30.12.1994 |
19,4 |
36,7 |
15,0 |
20,6 |
14,6 |
| 29.12.1995 |
33,0 |
55,2 |
18,4 |
18,9 |
7,8 |
| 31.12.1996 |
64,4 |
52,1 |
25,9 |
28,7 |
14,4 |
| 30.12.1997 |
49,2 |
61,1 |
29,5 |
46,8 |
12,0 |
| 30.12.1998 |
30,8 |
71,5 |
32,8 |
30,4 |
11,8 |
| 30.12.1999 |
27,1 |
83,7 |
26,2 |
32,5 |
25,3 |
| 29.12.2000 |
37,7 |
60,0 |
21,7 |
41,9 |
23,6 |
| 28.12.2001 |
183,3 |
78,5 |
18,3 |
38,1 |
20,7 |
| 30.12.2002 |
10,8 |
46,3 |
20,0 |
31,3 |
13,9 |
| 30.12.2003 |
23,0 |
38,1 |
17,1 |
27,3 |
27,5 |
| 30.12.2004 |
18,2 |
30,9 |
5,3 |
21,9 |
14,5 |
| 30.12.2005 |
20,1 |
31,5 |
16,2 |
23,7 |
11,3 |
| 29.12.2006 |
23,5 |
26,2 |
18,9 |
16,7 |
11,6 |
| 28.12.2007 |
21,5 |
22,3 |
18,1 |
27,2 |
12,1 |
| 30.12.2008 |
21,2 |
15,5 |
54,7 |
16,8 |
8,9 |
| 30.12.2009 |
14,2 |
22,3 |
26,4 |
27,8 |
28,2 |
| 30.12.2010 |
16,3 |
24,9 |
18,1 |
29,7 |
12,0 |
| 30.12.2011 |
16,9 |
14,0 |
16,7 |
39,8 |
8,0 |
| 28.12.2012 |
16,3 |
25,8 |
18,3 |
31,6 |
13,6 |
| 30.12.2013 |
19,7 |
22,3 |
23,1 |
31,3 |
14,7 |
We can easily see that quality and growth NEVER is cheap. I am not sure if that Henkel 2004 P/E of 5 is incorrect data, but the solid “quality stocks” always traded “richly” and nevertheless delivered outstanding long term performance. Only BASF, as a “quality cyclical” company has been available at single digit P/Es at some years.
So after all, this is wat Warren B. likes to tell us: In the long term, quality does seem to beat anything else, especially if you factor in taxes, trading costs etc.
Summary:
So what does this all tell us ? I am afraid that I cannot come up with some “Magic Formula” to identify future winners. Nevertheless, I think the look back emphasizes three of Warren Buffet’s main points:
1) over the long term, stocks have been a unbeatable compounding machine. A return 10 times the original inevstment in 26 years despite several devasting crashes speaks for itself
2) over such a long time horizon, it seems that “quality buy and hold” seems to be at an advantage at least for large caps. Yes, introducing a backtested system (market timing, EV/anything) could generate fantastic returns as well, but just buying and holding well managed companies did produce spectacular returns
3) Just buying the index and sitting on one’s ass would have beaten almost all active strategies. To be fair although, the first DAX index funds were available mid/end 90ties…..
P.S.: To finish the story: What happend to my first stock, Hoesch AG ? Hoesch was taken over by steel company Krupp which itself merged with Thyssen. If I would held it all the time, it would have been a pretty weak investment……
