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Principles of Finance 2e

Why It Matters

Principles of Finance 2eWhy It Matters
Figure 12.1 Stock markets are affected by many factors, such as interest rates, inflation, and politics. (credit: modification of "That was supposed to be going up, wasn't it? by Rafael Matsunaga/flickr, CC BY 2.0)

Chapter Outline

Why It Matters

Author Mark Twain spoke for many when he wrote, “October—this is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” Twain’s comment, though humorous, reflects the serious risks associated with investing in the stock market. So why should we study the history of the US financial markets? Financial experts regularly remind us that past performance is no guarantee of future results. However, past performance can provide targets or benchmarks around which to build expectations. We can learn about the past to prepare for future possibilities, or we can suffer what Winston Churchill warned, “Those that fail to learn from history are doomed to repeat it.”

Carlos Slim Helu, a Mexican businessman and the richest person in the world from 2010 to 2013, once said, “With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future.”1 In this chapter, we examine current and historical performance in money, bond, and stock markets. Studying past market risk and return also allows investors to understand what is reasonable and what is not.

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