Rate of Return on Common Stocks

Abstract

Listen

Translate article

today, what rate of return can he reasonably expect to receive? No one can give an unqualified answer. But as long as the future continues to resemble the past, the Financial Security Analyst can develop some clues to the answer. For he can ask and answer a related querry: What rate of return did people receive during the great bull market of the past decade? The top panel in Figure I shows the Dow Jones composite average of 65 stocks from June 1947 through March 1960.' From a low of 59 in mid 1949, the average climbed to a peak of 226 in mid 1959. Some components of the average reached relatively higher levels; others did not attain this peak ( See Table I). For our purposes however, the rate of change in the D-J composite average is more important than its absolute rise. For during the great bull market, the rate of change fluctuated widely, and as a consequence, the rate of return moved through wide ranges. Panel 2 of Figure I shows the change in the D-J composite average from same month one year ago. This figure should be interpreted as follows: if an investor bought the entire D-J average in January, 1947, and sold his holdings one year later-ignoring commissions and taxes-he would have realized neither a gain nor a loss. For the D-J average was 65 in both months. If he had purchased the average in May 1947, and sold in May 1948, however, his securities would have appreciated by almost 16%. During the great bull market, the rate of return on investment measured by price changes in the D-J average from year ago levels2 moved through three distinct cycles. Dating the cycles from trough, to trough, the first run from June 1949 through September 1953. The peak return, reached approximately one year after the cycle began, was about 28%. The lowest return, marking the end of the cycle, was a negative 5%. The second cycle lasted from September 1953 to December 1957. The peak return, over 34% came approximately one year after the cycle began. The lowest return was a negative 15%. The third cycle began in January 1958. It has not as yet ended. The peak, which again came approximately one year after the cycle began, was passed in March 1959. The terminal trough however has not been defined.