The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 18

Growth-Stock Gyrations

This chart teaches several lessons. First, looks can be deceiving. It looks like the Hambrecht & Quist Growth Index did phenomenally and left the Standard & Poor's 400 in the dust. Then, too, it looks like the Technology Index matched the market (as represented by the S&P 400). None of these conclusions is true. For example, on the seeming standoff of the S&P 400 and the Technology Index, the chart doesn't include the S&P 400's dividend yields of more than 5 percent annually—the Technology Index paid virtually nothing. The best lesson from these charts is to get a financial calculator that allows you to figure compound rates of return. Then use it to look behind the numbers to the real, and often hidden, meaning.

The Growth Index was about 195 in 1971. It flopped steadily to 80 in 1978. Then it rose irregularly to a peak of about 1,020 in 1983 before ending up at about 680. The upshot? The 1971–1978 period turned in returns of −12 percent per year. Ouch! But during 1978–1983, the compound return was a spectacular 66 percent per year. After 1983, the return was again a −12 percent per year. So much for the value of a big upward move surrounded by poor results—the overall 15-year return for 1971–1986 was a paltry 8.7 percent. By contrast, the dowdy-looking S&P 400 grew almost as fast (from a lower beginning level) at 7.6 percent per year over those 15 years. But, don't forget that the S&P gave you another 5 percent each year in dividends, which don't ...