Here are two new charts illustrating the growth of earnings over time. The underlying concept was suggested by Arto Nissinen, an investment advisor at Osuuspankki, one of the major banks in Finland.

The charts illustrate the relationship between the stock market, adjusted for inflation, and the real wealth created by companies in the form of earnings. Over the past year I've featured a monthly update of market valuation with a focus on the P/E ratio itself. These charts essentially use the average trailing-year and trailing 10-year P/E ratios to provide a greater focus on the growth of earnings with the more volatile market price hovering around those earnings.

First Chart. The blue bars in this chart show the real (inflation-adjusted) annualized earnings of the S&P Composite for the past 138 years. I've multiplied the values by 15.5, the average P/E ratio over the 138-year history, to align the two data series for a more useful overlay. The red line (inflation-adjusted price) shows how the market fluctuates around this real value. We can also see the occasional volatility of earnings at major economic inflection points: the earnings declines in 1894, the multi-year dips that started in 1916 and 1929, and the more recent bad years in 1991, 2001, and the earnings cliff dive in 2008, which included the only quarter of negative returns in this 138 year series.

Second Chart. Here the blue bars are the rolling averages of 10-year trailing returns multiplied by 16.3, the average P/E10 over this extended time frame. Now the long-term earnings growth becomes clearer against the more volatile annual price of the stock market.

Thanks, Arto, for the suggestion!

Incidentally, Arto classifies people according to three psychological investment profiles: Wealth Growers, Wealth Preservers, and Money-Amount Preservers. See below for his fascinating profile of the three types. Arto endeavors to educate Wealth Preservers who misguidedly think that Money-Amount Preserving is the best way to preserve wealth.

1. Wealth Growers
   Want: To grow wealth in the long term
   Accept: Strong fluctuations OR spend a lot of time with their investments
   Motto: "Fortune favors the bold (even statistically)"
   Example Solutions: 100% buy and hold global stock weight OR trading
   
   
2. Wealth Preservers
   Want: Primarily to preserve the wealth in the long term
   Accept: Moderate fluctuations
   Motto: "The golden middle way always works"
   Example Solutions: 50/50 wealth management OR Portfolio of 40% global stocks, 40% Euro fixed-income, 20% EMD local currency, no market timing at all, no activity requirement.
   
   
3. Money-Amount Preservers
   Want: The feeling of security that comes from seeing the Euros in the account
   Accept: Greatest risk of long-term decline in wealth
   Motto: "I get a feeling of security from the solution that I am used to"
   Example Solution: Renewing bank-deposits (they are government-backed in Finland)
   
   Note: EMD = emerging market debt