Will Goetzmann’s Learning Curves

Welcome to Will Goetzmann's Learning Curves! This section is a showcase for graphs, images, models and other additions to the electronic textbook. Below, you will find items of interest with brief descriptions. You may wish to print out, save and study the things that are included below. Stop by here often as we are adding items on an almost daily basis. Also, please feel free to submit anything that you think might be a good addition to this site....

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The Great Stock Market Crash of 1720 (GIF)

This allegorical cartoon ridicules the greatest investment banker of all time, John Law. After nearly taking France's foreign trade, monetary and fiscal systems private through a series of bank creations and corporate mergers, Law's visionary dreams of a modern financial market economy suddenly burst with a collapse of confidence in paper securities. The cartoon is among the many satirical allegories compiled in the anonymous volume Het Groot Tefereel published in Amsterdam in 1720. It sold well to Dutch investors who were burned by the promise of Law's Mississippi Company scheme to use the French colony of Louisiana as collateral against which to issue stocks, bonds and paper money. John Law's scheme almost succeeded, but its failure set monetary policy in Europe back 100 years. Instead, Law is blamed for the first great international stock market crash of 1720 that occurred in France, Holland and England as a direct consequence of the bursting of Law's Mississippi Company Bubble. Law is the culprit in this scene drawn by an anonymous but obviously bitter contemporary. The banker floats on cloud, and above his head is a windmill. Both are allusions to the term "Winde negotie" as the trade in inflated stock shares was called after the crash. Another manifestation of Law is keeping a balooned cat aloft through the pumping of bellows, and a list of suddenly defunct stock market jargon offered for the vewier's entertainment. The ape in the tree above Law is a metaphor for foolish speculators. The ape immitates the actions of man without comprehension of the meaning or intent. The ape peers into the distance, but sees no end in sight to the increase in share prices. In the French poem below, written under the psuedonym S. Civilien, the ape is judged unable to understand the risk that is inevitably associated with investment gain: "Le singe imite l'homme aussi, mais sans seprit a l'hazard de perir L'sppoire de gain s'atache." Much of the humor of the puns, jokes and allusions in the cartoon are lost to the modern viewer. However, it is evident that "Het Groot Tafereel" represents the need to interpret the shock of the first market failure in terms and stories that were familiar. It obviously served put this new phenomenon -- the stock market crash - into some existing cultural context. However, by stereotyping Law and other stock market participants, these and other sarcastic commentaries on the Law -- the most famous of which is 19th century classic "The Extraordinary Pupular Delusions and the Madness of Crowds" -- impeded the future development of paper money and Europe's banking system.

An Early Market Timer (288K, GIF)

The Dow index was created to help analysists forecast long-term patterns in the stock market. Here is one forecast, published in a Wall Street magazine called The Ticker, in 1907. It is important, because it makes a TESTABLE forecast. The analyst identified in solid lines, a 40 month intervals between market peaks. Using this pattern, he (or she, since the analyst is unidentified) predicted the future trajectory of the U.S. stocks. The dotted lines after 1907 show the forecasted pattern of the market. The RED line shows what actually happened to the DOW. The analyst called the next peak pretty well -- only about three months too soon. However, the dire prediction of a depression of prices in 1912 did not materialize. The chart is a response to the great panic of 1907 -- at that time the worst crash in U.S. market history. Market analysts have been trying to forecast future crashes in the same way since then -- with equally ambiguous results. Interestingly, recent research has suggested marginal evidence of a four-year pattern in market returns -- a validation of the famous Dow theory?

Whistling Dixie (86K, JPG)

A link to the Museum of Financial History exhibit on financing the Civil War. According the museum curator this 19th century note was published in English and French -- both legal languages in Lousiana at that time. These ten dollar bil ls circulated up and down the Mississippi beforethe Civil War, and their source in the deep south came to be known as the "Land of Dixies."

Emerging Markets in the 1920's and 1930's (276K, GIF)

Emerging markets are a hot topic these days -- as they were in the 1920's and 30's. The League of Nations collected information on international stock market indices between the wars, and just like today, some of the hot markets at that time were Hungary, Poland and Mexico. This risk of international stock investing is not always captured by statistical measures like standard deviation. An investor is wise to consider the political and legal risks as well. Many of these markets suffered complete or partial expropriation during the second world war. Notice the discontinuity in the 1940's for Czechoslovakia and Poland. They are only now re-emerging markets. Are emerging markets any safer today?

Global Stock Market History (14K, GIF)

The worlds' equity markets can be viewed as an evolving system that reacts to global political events and forces. These four figures show annual, dollar-denominated capital appreciation indices for 37 of the world's stock markets during the 20th century. They are indexed to 1953, and are arranged alphabetically.
Argentina to Columbia
Denmark to Israel
Italy to Peru
Portugal to Venezuela

The New York Stock Exchange as an Emerging Market (28K, GIF)

Three different statistical procedures for measuring average share price appreciation tell about the same story. NYSE shares rose little in price for forty years. This is because most stocks paid out profits in dividends, rather than retaining earnings. Share prices got a big lift from the Civil War, and the market was about as volatile as in the 1900s. The more things change, the more they stay the same.

Three Days After Black Monday: The Crash of 1987 (216K, GIF)

Three days after the stock market crash on October 19th, 1987, The NYSE published this chart of the plunge of the New York Stock Exchange Average. It fell from 159 to 128 IN ONE DAY! The more widely watched Dow Index dropped by 508 points - - nearly a 23% loss -- making it the worst crash in U.S. financial market history. If you believed that stock market returns behaved "log-normally" i.e. conformed to the bell-curve, this event should not have happened in a million years!

Why did the market drop so suddenly? No-one really knows. Some look to announcements of failed exchange rate policies, others blame newly automated computer trading programs, which put machines at the control of sell orders, rather than people.

This picture tells an interesting story. Look at the days before October 19th. The market looks like a cresting rollercoaster. It drops a little, then a little more, then a lot, then finally cascades. As it is dropping, notice that the market keeps o pening lower than the previous day's close, suggesting that, on the days before the crash, the market failed to find it's bottom. This suggests we should consider keeping markets open when they are crisis, rather than shutting them down. If people fear a market shut-down, and in this case their fears were possibly well-founded, everyone will try and execute trades before the market closes. Those who sold at the closing price were sorry the next day. The market recovered almost a third of the previous day 's loss.

Strangely enough, the legacy of the crash of 1987 was mild in comparison to the crash of 1929. The market boomed throughout the rest of the 1980's, as the U.S. economy remained strong. One enduring lesson from that day for investors -- returns to the s tock market are not log-normally distributed! By the way, When you view this picture, just keep scrolling down.

The Art Market Since 1850 (24K, GIF)

For anyone considering art as an investment, this is an instructive picture. This graphic is constructed from the repeated-sales of thousands of paintings over the period since 1850. It shows that art has been a high-risk, high-return asset. The volatility of the art index is greater than the volatility of say, an index of high-terchnology stocks. On the other hand, art had an average annual arithmetic rate of return of more than 17% per year since the beginning of this century -- even neglecting the boom of the late 1980s. Not bad, considering you get to look at it! Art is not a good diversification tool. It has been correlated to the stock market for long periods of time, and financial market moves tend to be followed by art market moves.

The Perils of Wall Street Speculation (155K, GIF)

This cartoon from the William Worthington Fowler's 1870 autobiography, Ten Years in Wall Street is accompanied by a reformed speculator's admonition:

"Drive the plow and reap the grain, sail over the sea, sweep the streets even, choose any honest calling, no matter how arduous, anything but speculation. Even if endowed by nature with gifts and favored by fortune, you rise to be one of the money kings, your name will then only go down among the gigantic but disreputable shadows which flit through the traditionary landscape of Wall Street."

Don't take the threat seriously. Our culture has always had a love-hate relationship with finance. The same people who depend upon professional investors for their future well-being at the same time decry money-managers for not doing "real work." If you go into finance, you will have to live with this cultural duality.

A Russian Government Bond from 1890 (524K, GIF)

Russia was one of the worlds great economic powers before the Communist revolution. This bond, issued by the Russian Imperial Government in 1890, helped finance the construction of Russia's rail system. Just like America's westward expansion in the 19th century, Russia's eastward expansion was financed by foreign investment. Russia had a well-developed and relatively sophisticated capital market at the turn of the century. For an all-too-brief moment in global financial history, Russian mining operations and railway companies were the darlings of international investors in London and Paris. This bond, fo r instance was underwritten in France by the Rothschild Bank, one of the world's greatest banking empires. Investors were promised repayment of their principal in gold. Alas, they never received it. The Russian Bolshevik government defaulted on virtua lly all of the Imperial financial obligations. Three years the Russian Revolution, Russia's dynamic stock market was shut down and equity claims held by foreigners and Russian nationals alike were expropriated by the state. Holders of these bonds are sti ll trying to force Russia to make good their turn-of-the-century obligations. More likely they will remain interesting collector's items (Coming soon: then and now, a picture of the trading floor of the Moscow Securities Exchange from 1993).

Book: Bluff your Way in Finance (87K, GIF)

An alternative textbook for an alternative course. We teach Finance as a set of quantitative tools that allow you, or the organization you work for, to make informed investment decisions. These basic tools are ultimately more important than all of the specialized language, and all of the detailed institutional knowledge that the field engenders. Don't rely upon superficial knowledge to "Bluff your way in Finance." Learn the fundamental skills and intuition behind them, and they will stand you in good stead through an enourmous range of different problems.

Zip Code Clusters of Cities and Suburbs in California

(1,000, multiple GIFs)
How do you define a city? One way is to allow housing price changes to define the city for you. In this huge, composite map of California zip codes, Susan Wachter, Matthew Spiegel and I have used a clustering program on the last decade of return indices for most of California's zip codes. We specify 20 clusters for California -- effectively requiring the program to create at most 20 groups of zip codes that are substitutes for each other. The results indicate that the Los Angeles area breaks up into three major cities: North Coastal LA, East Central LA, and Orange county. We interpret houses in these groups as relatively close substitutes for each other. We find broad North-South California relationships in suburban communities.

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