to look at all 7,600 high school basketball players for each one who makes it to the NBA.

The strong form of survivorship bias is much more fundamental. It asks us to consider not just stock markets in other countries, but also other possible global histories. This sort of question is most often investigated in movies, particularly those that involve time travel. In Back to the Future, Marty McFly (played by Michael J. Fox) travels back to the time when his parents were in high school.

In his effort to get back to the future, Marty changes the outcome and jeopardizes his family. As Marty looks at a family snapshot that he carries in his wallet, he sees the image of his siblings-and then of himself- begin to dissolve as his actions in the past change the future. By the end of the movie, of course, the happy outcome includes a different, improved outcome for the modern McFlys.

With regard to U.S. stock returns, the strong form of survivorship bias suggests that not only has the United States been the luckiest of all countries, but also that the whole world has been extremely lucky. Just as small actions by the time-traveling Marty McFly had big effects on the future, small events that did not happen in the history of this world could have destroyed the value of stocks.

Among the most obvious bad thing that didnt happen is nuclear war between the United States and the Soviet Union. This avoidance of war seems to have happened with a large dose of luck. Recently released documents from both sides during the Cuban Missile Crisis reveal just how close we came to global nuclear war. During one confrontation between U.S. and Soviet ships, two soviet commanders gave orders to launch nuclear weapons.

This near nuclear miss is described by Noam Chomsky as follows:

We learned that the world was saved from nuclear devastation by one Russian submarine captain, Vasily Arkhipov, who blocked an order to fire nuclear missiles when Russian submarines were attacked by US destroyers near Kennedys quarantine line. Had

Arkhipov agreed, the nuclear launch would have almost certainly set off an interchange that could have destroyed the Northern hemisphere, as Eisenhower had warned.8

How much have U.S. stocks benefited by global luck? This is extremely difficult to ascertain because it requires assigning probabilities to events that didnt happen. Furthermore, such analysis should include all possible alternative scenarios including those that would have exceeded the actual outcome.

Presumably humans could have had an even better outcome than we realized. For example, we could live in a world without holes in the ozone layer, where Princess Diana is still alive and married to Prince Charles, and where there are no nuclear weapons that can be hijacked and used to hold the world hostage.

How can we quantify these alternate possible histories? The mathematical tool of Monte Carlo simulations allows one to run the calculation, but still depends on the assumptions. Some of the best efforts to generalize this stronger form of survivorship bias have been done by Nassim Nicholas Taleb and are contained in academic papers, his first book Fooled by Randomness, and his forthcoming book The Black Swan.9

Taleb concludes it is likely that all of the excess return of U.S. stocks is due to luck, not skill. While we cant know the answer for sure, I lean toward believing that things have turned out better than we could have expected.

Putting both weak and strong forms of survivorship bias into the analysis of U.S. stocks requires adding some lines to Professor Siegels table. The amended data might look something like what we see in Table 8.2.

So where do we stand on assessing the elements of luck and skill in historical U.S. stock market performance? U.S. stocks have done better than stocks in other countries. Furthermore, it seems likely that the world has been lucky in avoiding any global wars, nuclear or otherwise, since 1945. Both of these suggest that luck played a significant, and perhaps dominant, role in the fantastic performance of U.S. stocks.

TABLE 8.2 U.S. Stocks Have Benefited from Good Luck

Investment of $1000 in 1802 1997 value

U.S. Consumer Price Index $13,370

Gold $11,370

U.S. Government Bonds $10,750,000

U.S. Stocks $7,470,000,000

East German Stocks $0

U.S. Stocks had there been a nuclear war $0

Source: Stocks for the Long Run, Second edition

U.S. Stocks Have Survived. Are They Expensive Today?

The historical survivorship analysis suggests that the amazing performance of U.S. stocks is unlikely to be repeated. Buying stocks today is not the easy choice that it would be if we had a time machine and could go back into U.S. history.

My father is a physician of the old school. He likes to mock modern-day physicians and their reliance on technology. He jokes, If all else fails, lets look at the patient. His meaning is, of course, that we ought to start by looking at the patient. Similarly we are several pages into a discussion of stocks without actually looking at any stocks. Lets look at the financial patient and analyze some stocks.

We begin with Microsoft and then move to the entire S&P 500. Microsoft is one of the most profitable companies in the world and consequently one with among the highest stock market value. It is also part of all the major financial indices including the Dow Jones Industrial Average, the S&P 500, and the NASDAQ 100. Beyond financial strength, Microsoft generates strong emotions in many people, ranging from frustration with Windows glitches to the joys of a beautiful Excel spreadsheet.

When it comes to investing, we put aside our feelings and look at the numbers. Perhaps the most common analysis uses the so-called Fed