 Good day, fellow investors. Today we'll discuss a bit of stock market history. The usual charts go back to 1926 and then show us what happened. However, if we go back to 1851, the story is completely different. And then if we take bits and pieces of past charts, the story about the stock market is completely different than the story you hear if you read Jeremy Siegel's book Stocks for the Long Run. Stocks don't go always up. However, we have to prepare ourselves to that and see how to take advantage of whatever will happen in the stock market so that our returns are satisfying for us. From 1952 to 1982 the stock market went nowhere. However, Warren Buffett achieved huge returns. So we have to really be smart about our investments and don't just follow the trend. Let's first discuss a bit of history and then discuss five smart things to do in order to achieve great returns no matter what happens in the stock market. I have taken the data from Professor Emeritus Edward McQuarrie from the Levy School of Business from Santa Clara University that just published a paper discussing the charts nobody is showing you about the stock market. So let's start with the first chart. This is the normal chart everybody is showing everybody. Stocks long-term return stocks can go only up right from 1925 in this case till 2006-07 and if you add the last 10 years then stocks can go only higher. However, if you look at the previous 80 years not just at the last 80 years you can see that stock market returns were a zero from 1851 till 1931. So if somebody is telling you that stocks go only up the idea is not that correct. To continue on the charts you never saw from 1919 till 1949 40 years the stock market went nowhere. And why is such a 30 year period very important for us because that's the usual investment horizon everybody has. If you're a bit older your horizons are a bit shorter also but nobody invests for the next 100 years. You invest for a certain period in your life. My investment horizons are even shorter than 30 years. I don't want to retire at 65. I want to enjoy my life as soon as possible. So therefore betting on the stock market that the stock market goes always up is a wrong thing to do especially now and we'll see later about that. The next thing the professor does he deflates the returns in relation to inflation and dividends. If you invested 10 000 dollars in 1929 the return would now be around 27 million so huge returns 3 000 times what you invested. However if you omit the dividends and you take out inflation the return would be around 100 000. So 99.7% of stock market's returns are thanks to inflation and dividends. That's something very important to take into consideration when investing. And we'll discuss again later in the five things to do how to take advantage of this. 99% remember dividends and inflation. So again similarly to previous charts from 1952 to 1982 the stock market didn't go anywhere. From 1964 to 1994 the stock market didn't go anywhere. So 30 years of zero returns. Going back to Jeremy Siegel's book Stocks for the Long Run you can see that this is the chart he uses and this is logical. You say okay in the last 200 years almost stocks have gone only up and the average is 6.6 returns. But if you take this chart and you slice it up in a few pieces the picture is completely different. From 1840 to 1861 the stock market was lagging the expected 6.6 return. From 1861 to 1906 was above the 6.6 return. 906, 1949 below the 6.6 return and then from 1949 to 1999 is above the 6.6 return. From 1999 till now is again below the 6.6 return. Stocks haven't returned more than 6.6 in the last 70 years. Be aware of that. This means that stocks aren't always the best investment and there is another piece of research that I found from Zakamulin from the University of Adger in Norway that shows how good performance in the past is usually indicator of bad performance in the future. So in this chart we have past 15 year returns compared to future 15 year returns and the results are pretty opposite. So when the stock market does good for a period of free time you can expect it to even out. So in the last 45 years the stock market has done really well we can expect the stock market to even out in the future. Before going into discussion about what to do in relation to the above data I would like to quote professor McQuarrie's conclusion. When investment advisors counsel that stocks are the best bet for a long-term horizon they should append the acknowledgement. If my market timing is good. When advisors argue for stocks over bonds they should append the caveat. As long as you are not French or Italian or Japanese or Swiss and provided that the 20th century is a better guide to the future than the 19th century. For real investors with their limited time horizons who may reside anywhere in the world there have been times where both stock recommendations were bad. Okay so now what to do we know that just blindly investing in the stock market isn't the smartest idea and we can expect terrible returns in the future. However we also know that Buffett and others outperformed every market and every market condition. Let's see five points that will allow us to outperform anytime. One as I said dividends by dividends I mean also earnings especially in the past a lot of the earnings were paid out however now earnings are less paid out so we have to look at earnings dividends because that's the essence of investing. If you buy with high valuations you will get burned. The second point is inflation is really important for stock market returns so we have to buy stocks that will protect us if there is higher inflation or will protect us also to the current inflation. 2% inflation might be low but it accumulates over time so stocks that have good revenues and stock that have tangible assets to protect us from inflation. Number two again related to inflation if you buy a stock that has a price to book value of one and with tangible assets those assets protect you against inflation because those are tangible assets. If you buy a stock whatever that has a price to book value of three like the average SAP 500 you are not protected against the downside and have no margin of safety and you're again not protected against inflation so very important to think where do you position yourself. There are so many stocks in the world so I think it's possible to find the same growth same returns with lower risk by focusing on book value. Number three dividends come from earnings earnings come from valuations if we look from 1881 at the returns of the stock market the higher was the CAPE ratio the lower were the returns so the CAPE ratio below 10 returns in history were always above 5% per year over the subsequent 10-15 years. CAPE ratio above 30-40 the returns are really lower and also often below zero so the average is tell us that the lower the valuation the higher the return so again we have to look now at low valuations in order to prepare ourselves for the future. Number four know the business extremely well if you know the business you know the sector you understand how it will perform in good economic times in bad economic times over the long term is it focused on growth will it continue to create value if it does buybacks like we discussed yesterday and not creating value just pushing the stock price up temporarily it will destroy your value in the long term so really know the business where you're invested it and feel good about the business you're invested not about the stock price that goes up and down. Number five don't apply an unlimited time horizon to your investments you have to know exactly okay when do I want to get my money back what do I want to do with your money I think 99% of viewers are not buffet and you don't want to die rich so we have to really be careful to out with what we do with our investments and what's the investment horizon stocks have returned 6.6% over the last 200 years however those 6.6% can be zero for 30 years how does that affect my returns and would my life quality be the same if I get a 0% return from stocks so really separate stocks the SAP 500 is one thing and smart investments fundamentals valuations in relation to your investing goals do yourself a favor and take responsibility for your financial life. That's it for today we'll discuss more and more and more about how to find stocks picks interesting data from the past that will help us increase our returns in the future thank you for watching and I'll see you in the next video