“California has been devastated by wildfires for a decade. So everyone was ecstatic when 2017 brought one of the wettest winters California had seen in recent memory. Parts of Lake Tahoe received more than 65 feet of snow in a few months. The six-year drought was declared over.
That seemed great, but it had a hidden risk: A dry 2018 summer turned that record vegetation into a record amount of dry kindling to fuel new fires. Record rain led to record fire.
The point is that extreme events in one direction increase the odds of extreme events in the other. And isn’t it the same in the stock market? And in business?
The Japanese stock market is the most-cited example of when long-term investing doesn’t work. The Nikkei index traded lower today than it was in 1990. In 2012 it traded 70% lower than it was at 22 years before. Just a disaster.
There can be a lot of explanations for what happened, not least of which is Japan’s demographics. But the biggest cause is simple: Returns were so extreme from 1950 to 1990 that there was nothing left over for subsequent decades.
The Nikkei increased 400-fold from 1950 to 1990, an average annual return of more than 16%. I don’t think any other country, in any era, has a stock market that performed so well.
What’s happened over the last 30 years is the flip side of an extreme event in one direction leading to an extreme event in the other. Today, we marvel at how terribly the Japanese stock market has performed, but the real shocker is how well it performed prior. Half a century of extraordinary performance in one direction lead to half a century of flat in the other.”