Credit Suisse 2015 Yearbook: How Tobacco Dominated Investment Returns over the Past Century (and other interesting tid bits)

tobacco was the best investment over the previous 100 years 2I felt like a sleep deprived kid on Christmas morning. I was recently perusing the Credit Suisse Global Investment Returns Yearbook 2015 and I was irrationally giddy. Pouring over the research, I couldn’t contain my excitement at the amount of data and graphs that were available. For example, does it surprise you that the “sin” industries of tobacco and alcohol were the best performing industries of the previous century in the US and UK? Did you know their was a high tech shakeup in the 1800s where the scrappy, newborn rail industry turned the old canal industry upside-down on its head? I’ll give you a rundown of the most interest aspects of the report.


1. The Great Tech Transformation of… 1900

Little do most of us remember (outside those strangely interested in history):

“In 1900… virtually no one had driven a car, made a phone call, used electric lighting, seen a movie or heard recorded music; no one had flown in an aircraft, listened to the radio, watched TV, used a computer, sent an email or used a smartphone. There were no x-rays, body scans, DNA tests or transplants, and no one had taken an antibiotic. Many would die young because of this.”

This seemingly low tech world was actually in quite the high tech transformation, just as we are experiencing today. The first true wave of globalization was taking place as technological innovation started shrinking the world.

Want to see what tech disruption looked like 200 years ago? Here is what the advent of the “high tech” rail industry did to the old guard industry of canals and dikes:

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Not too dissimilar to Facebook coming along and uprooting MySpace or Apple’s emergence and Blackberry’s tailspin.

This is what the industry weightings of the US and UK looked like in 1900 compared to today:

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Markets in the US and UK were dominated by rail in 1900. High tech industries such as telegraphy (the equivalent of smartphones today) and shipping lanes, trams, and docks (the modern equivalents of airlines, buses, and trucking) were revolutionizing the market.

It’s very interesting to see the evolution of industries over 115 years.

2. Sin Industries Dominated the Previous Century

If one had invested a dollar into the US stock market at the beginning of 1900, with dividends reinvested, it would have grown to $35,255 by the end of 2014, representing an annualized return of 9.6%. Compounding your money for 115 years at 9.6% is nothing to sneeze at.

A dollar invested into the worst performing industry, shipbuilding and shipping, would have grown to $1,225 and represented an annualized return of 6.4%. Perfectly mediocre.

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However, a dollar invested into tobacco saw you average a 14.6% return over 115 years, turning your one dollar into $6.2 million. Yes, you read that right. $6.2 million. Yes, that is what time and compounding does to money. This is an example of why costs matter when it comes to the average person paying high MER fees on mutual funds. Notice how a 5% difference over a 115 years creates a +$6 million difference in outcome. Costs matter.

Because of the period of prohibition, there is no long-run US index on alcohol (for other reasons, none on banks and insurance either). The UK, does have a long run index on alcohol:

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Any surprise alcohol was the best performing industry over a century in the UK?

The report suggests that the reasons sin industries, such as tobacco and alcohol, outperform the market are because:

a) there is a steady demand for these good and services regardless of economic conditions.

b) They operate globally and is a species wide phenomenon.

c) They tend to be high margin businesses.

d) They are in industries with high entry barriers.

e) Other investors may have moral and ethical objections to these companies, and by shunning the stocks of these companies, it causes the share prices to be depressed, allowing others who have no objections to pick up ownership shares for lower prices (which will increase their returns, as we’ve talk about how the price you pay will determine the returns you receive).

So the conclusion seems to be that these sin industries operate in an environment of global, species wide appeal, they are typically addictive, there is demand no matter boom or bust, they are high margin, they operate with economic moats, and the price of ownership is typically depressed because a segment of investors want no part for moral or ethical reasons. Hmm…

3. Sector Weightings in Key Countries 2015

Take a peruse through sector weightings for key countries and emerging markets. What trends do you see?

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The US market is actually pretty well diversified comparatively speaking. The heaviest weighting in the US are in Financials, Technology, Consumer Services, Health Care, and Oil and Gas.

4. Relative Sizes of World Stock Markets

A snapshot of the evolution of sizes of stock markets around the world at the beginning of 1900 and 2015:

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5. Other Interesting Graphs

Here is a look at corruption scores by country in 2014:

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Here is a look at how crazy the Dot Com Bubble was at the beginning of the millennium:

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And here is a look at changes in the US discount rate (as calculated by Credit Suisse) from 1976 to present:

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Credit Suisse writes in the report that “today’s discount rate is 4.2%, which indicates the US stock market is relatively expensive (nearly at the 10th percentile of historical observations… as a general rule of thumb, a discount rate below 5% indicates that investors might be too euphoric and above 7% that investors might be too pessimistic… using this rate today in a discounted cash flow model would show that most US stocks are expensive.”


The country profiles were also very interesting too look through; there were too many country profiles so you’ll need to go look at the report yourself.

I found it interesting to note that country like Canada and the US have not experienced the wars (on home soil), invasions, hyperinflation of countries such as Austria and Belgium over the previous century and you can see a HUGE difference in annualized real returns on equities, bonds, and bills over +100 years.

The data shows that it is immensely important that a country is stable and relatively peaceful for investments to make the gains they have in the US and Canada over the previous century. People like to throw around the figure that “stocks have historically returned ~10% over the long run based on the available data”. This is based on data mainly from the US.

Go through the country profiles in this Credit Suisse report and look at other “1st world countries” like Austria, Belgium, Denmark, Finland, France, and Germany and see the trend you notice in those asset classes over 100 years. To me, it’s not surprising at all that all the figures for these countries are far below what the US achieved as the European continent witnessed two of the largest wars in human history in the 20th century.

Stability and peace are integral to growth and prosperity. That was a big takeaway from this report. The other was that tobacco was the best investment over the previous 100 years.

8 thoughts on “Credit Suisse 2015 Yearbook: How Tobacco Dominated Investment Returns over the Past Century (and other interesting tid bits)

  1. Thanks for the overview, very interesting!

    It annoys me a bit when people bleat on about getting 10% per year as if it’s a sure thing.

    1. I am not from the US and I don’t think it’s a very good idea for me to invest solely in US stocks

    2. Past performance is no prediction of… etc….

    I’m all for being optimistic but there is a fine line between that and foolish assumptions, IMO.

    I’m not sure if I’d be comfortable investing in tobacco stocks directly, as an ex-smoker I’d be happier if the damn stuff was made illegal (not that that will ever happen! Well not in my lifetime anyway)

    1. While all we have is history to go on, I think one needs to come to their own conclusion on whether a 100 years worth of stock market data is sufficient to make forward “average” predictions like that 10% or not. One might be severely disappointed if they become fixated on attaining 10% and it does not work out that way for them. The market can go for long stretches with little gain.

  2. Steve, as always, live the post. Thankfully, I can understand everything in this one! I was too embarrassed to take you up on the offer of an explanation of your previous post with all the scary maths in it, but hopefully my pride is less battered now after being able to comprehend my ass off in this post.

    I find it interesting that the UK has so much in oil, gas, and mining, but sad that our tech sector is so low. Thankfully, the latter is something which is being addressed at present. Also, despite having lost more than ⅔ of our relative stock market size, we are still double Germany. Ha!

    1. Glad you enjoyed it M. I think Britain’s advantage, whether militarily or economically, has always been the fact that it is an isolated island. Isolated in the sense that it is militarily difficult to conquer and economically not as integrated as on mainland Europe.

      It probably didn’t hurt that it was the super power in the 1800s, followed by a close friendship with the next superpower, America in the 1900s.

  3. Steve,

    Love this kind of info, thank you for sharing!

    I just took a quick look at the country profile for Belgium, whoa! Pretty amazing that we’re one of the most prosperous and wealthy countries worldwide with our awful investment returns the past century.

    Then again, our economy is pretty solid and many people own their own home. Both world wars and the 1970’s inflation will probably be the largest causes of the 2.7% annualised return between 1900 and 2014.

    What’s worrisome, though, is the fact that AB InBev makes up such a large percentage of our BEL20 index. I knew their relative weight is massive, but not that it was over 50% of the entire index’s weighted capital.

    Again, thanks for sharing,


    1. It was interesting to see that Belgium hasn’t experienced the “10%” average return that the US market saw during the 1900s. Not too surprising given it being caught between continental superpowers flexing their muscle in 2 big ways in the 20th century. That doesn’t leave much for the stretch of home soil peace that the US, and to some extent Britain, enjoyed in the 20th century.

      I’m really interested in AB InBev based on what 3G has been able to do with RBI, Heinz, and now Kraft for the Kraft-Heinz merger with Berkshire.

      I hold some Diageo, I think AB InBev might be next in terms of alcohol.

  4. So you mean, past performance is really not indicative of future returns 😉

    When this went out, I checked the performance of each country listed. There were quite a few European countries where the first 40 – 50 years of the 20th century resulted in flat real returns. I guess two wars and a depression can be tough for returns.. I like to look at worst case scenarios, just in case in order to further stress test my retirement model.

    I am actually surprised that Argentina is not listed in that workbook. Argentina was one of the most advanced countries in the early 20th century. Unfortunately, I think they did as much as they can wrong. I would be interested to see their stock returns…

    Either way, I wanted to stop by and say hi. I hope you are ok, and did not get lost in that big pile of reading materials you have built up.

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