A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

THE DEVELOPMENT OF STOCK AND BOND
RETURNS (JANUARY 1947–DECEMBER 1968)
Unfortunately, bond investors did not fare nearly as well.
For starters, initial bond yields were low in 1947. Thus, bond
returns were destined to be low even for investors who held

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to maturity. During World War II, the United States pegged
long-term government-bond interest rates at no more than 2½
percent. The policy was implemented to permit the
government to finance the war cheaply with low-interest
borrowing, and it continued after the war until 1951, when
rates were allowed to rise. Therefore, bond investors suffered
a double whammy during the period. Not only were interest
rates artificially low at the start of the period, but
bondholders suffered capital losses when interest rates were
allowed to rise. As a result, bondholders received nominal
rates of return below 2 percent over the period and real
returns (after inflation) that were negative.
ERA II: THE AGE OF ANGST
From the late 1960s through the early 1980s, accelerating
inflation made an unexpected appearance and became the
major influence on securities markets. In the mid-1960s,
inflation was essentially unnoticeable—running at a rate of
just over 1 percent. When our involvement in Vietnam
increased in the late 1960s, however, we had classic, old-
fashioned “demand-pull” inflation—too much money chasing

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too few goods—and the rate of inflation spurted forward to
something like 4 or 4½ percent.
Then the economy was beset by the oil and food shocks of
1973–74. It was a classic case of Murphy’s Law at work—
whatever could go wrong did. The Organization of Petroleum
Exporting Countries (OPEC) contrived to produce an
artificial shortage of oil, and Mother Nature produced a real
shortage of foodstuffs through poor grain harvests in North
America and disastrous ones in the Soviet Union and sub-
Saharan Africa. When even the Peruvian anchovy crop
mysteriously disappeared (anchovies are a major source of
protein), it appears that O’Toole’s commentary had come
into play. (Remember, it was O’Toole who suggested that
“Murphy was an optimist.”) Again, the inflation rate rose to
6½ percent. Then, in 1978 and 1979, a combination of policy
mistakes—leading to considerable excess demand in certain
sectors—and another 125 percent increase in the price of oil
kicked the inflation rate up again, taking with it wage costs.
By the early 1980s, the inflation rate went above 10 percent
and there was considerable fear that the economy was out of
control.
Finally, the Federal Reserve, under the leadership of its

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chairman at the time, Paul Volcker, took decisive action. The
Fed initiated an extremely tight monetary policy designed to
rein in the economy and kill the inflationary virus. Inflation
did begin to subside in time, but the economy almost died as
well. We suffered the sharpest economic decline since the
1930s, and unemployment soared. By the end of 1981, the
U.S. economy suffered not only from double-digit inflation
but from double-digit unemployment as well.
The table below shows the fallout in financial markets
from the inflation and instability in the economy. Although
nominal returns for both stockholders and bondholders were
meager, the real returns, after factoring out the 7.8 percent
inflation rate, were actually negative. On the other hand, hard
assets such as gold, collectibles, and real estate provided
generous double-digit returns.