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

ERA I: THE AGE OF COMFORT
Consumers celebrated the end of World War II with a
spending spree. They had gone without cars, refrigerators,
and countless other goods during the war, and they forked
over their liquid savings with abandon, creating a mini-boom
with some inflation. It was hard, however, to forget the Great

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Depression of the 1930s. Economists (those dismal
scientists) were worried as demand began to slacken and
became convinced that a deep recession, or perhaps a
depression, was just around the corner. President Harry
Truman was responsible for a widely used definition of the
difference between the two: “A recession is when you’re out
of work. A depression is when I’m out of work.” Investors in
the stock market noted the economists’ gloom and were
clearly worried. Dividend yields at the start of 1947 were
unusually high at 5 percent, and P/E multiples, which hovered
around 12, were well below their long-term average.
It turned out that the economy did not sink into the
depression many had feared. Although there were periods of
mild recession, the economy grew at a quite reasonable rate
through the 1950s and 1960s. President Kennedy had
proposed a large tax cut in the early 1960s, which was
enacted in 1964, after his death. With the stimulus from the
tax cut and the increase in government spending for the
Vietnam War, the economy was robust, with high
employment levels. Inflation was generally not a problem
until the very end of the period. Investors became
progressively more confident; by 1968, P/Es were above 18,

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and the yield on the S&P 500-Stock Index had fallen to 3
percent. This created truly comfortable conditions for
common-stock investors: their initial dividends were high;
both earnings and dividends grew at reasonably robust rates
of 6½ to 7 percent; and valuations became richer, further
augmenting capital gains. The following table shows the
different components of the returns from stocks and bonds
over the 1947–68 period.