Curious About The Stock Exchange’s Future? Look To The Past!

NEW HAVEN (AP) — Jittery investors watching US stock markets may learn about the future by looking backward.

William Goetzmann, a Yale University professor of finance, is preparing a database of another premier stock market at its peak, the London Stock Exchange between 1871 and 1930.

At first glance, the project is purely academic. But like other history lessons, collecting 60 million pieces of corporate information is intended to dig up artifacts pointing the way to the future.

“What turns you on are the hidden patterns in the numbers, the clues to how markets work and even to forecast markets,” said Goetzmann, director of Yale’s International Center for Finance.

Goetzmann’s database begins with the advent of printed sources of stock data, continues through the Victorian era of peace and prosperity, punctuated by the Boer War in South Africa, and ends with World War I, the General Strike of 1926, and the Depression.

Such a historical sweep is vastly different from the United States at the start of the 21st Century. Still, similarities merit a comparison between the two countries and two eras.

As a world power with an unsurpassed military and economic reach, Britain tapped its empire for raw materials manufactured into finished products for export to Europe and North America. The ability to organize international markets may provide clues to how this era’s global powerhouse manages its overseas business.

“It’s a chance for us to understand how much benefit you’re getting from investing internationally,” Goetzmann said. “Can you really diversify your portfolio?”

In addition, broader public involvement in stock markets – a “democratization of capital” in Britain in the 19th Century – mirrors modern America’s significant middle-class investment in mutual funds.

Goetzmann’s interest in finance is tangible. Walls on his office near the Yale campus are covered by framed stock and bond certificates he has purchased at auctions over the years.

Included are an 1888 bond certificate for the Congo signed by Belgian King Leopold, a five-year Texas government bond paying 8 percent interest and signed in 1836 by Stephen Austin, and a bond backed by financier Nathan Rothschild raising, capital for Russia’s czarist government in 1822.

“You see what the price is, what its story is,” said Goetzmann, 45, a former TV producer and historian’s son. “It’s an important bit of scholarship that’s often overlooked.”

The database project, financed by an anonymous gift of $750,000 in addition to $250,000 for a history book and $250,000 to match a grant of equal value, is expected to be completed in a year.

Primarily available to researchers, the database also could guide mutual fund managers who steer billions of dollars for small investors.

“There are some quantitative researchers or academics trying to make sense out of things,” said Ken Kraus, director of programming at the Center for Research in Security Prices at the University of Chicago.

The university’s Business School maintains a database of monthly US stock information dating to 1925 and daily data beginning in 1962. Information is available on 9,000 companies traded on the New York Stock Exchange, American Stock Exchange, and Nasdaq, in addition to US Treasury bonds and mutual funds.

Work on the Yale project will be daunting. Data will include a company’s name, a stock’s purchase and sale prices, dividends, earnings, and the company’s capitalization. Twelve such data items will be collected for each record and each page will have 100 records.

The completed project will total 50,000 pages providing 60 million pieces of information.

The numbers are expected to yield a broad picture of detailed changes in major industries such as railroads and banks and companies that sold a range of products such as beer, clothing, and land.

The subject of all this effort, however, is unimpressed.

“For our purposes it’s too academic,” said Jamin Smith, a spokesman for the London Stock Exchange. “People are more concerned about what’s going to happen at stock exchanges in the next couple of years rather than look at companies so long ago.”

Not so, Goetzmann said.

“We intend to see how useful history can be to see the future,” he said. “Most of the 20th Century was a surprise.”