Unit 2 · Level 4 · Market history
The graveyard you can't see
Of the 12 companies in the original 1896 Dow index, none remain; General Electric, the last, was removed in 2018. A large share of the mutual funds that existed 20 years ago have been closed or merged away, vanishing from the performance averages. Even whole markets have died: investors in St. Petersburg in 1917 or Shanghai in 1949 lost everything. History looks smoother than it was, because the corpses are buried off-screen.
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What you get asked
A brochure says: 'The average fund in our family returned 9%/yr over 20 years.' What's the survivorship-bias catch?
The losers were quietly merged or liquidated, so only survivors get averaged. The real investor experience, including the dead funds, was worse than 9%.
Match each graveyard to what it hides
Every 'long-term average' you'll ever see was computed on the things that lived. Ask what died to make the number look that good.
One reason 'the index always recovers': it constantly swaps its ___ for rising companies.
An index is a self-pruning garden: failing firms shrink and drop out, growers take their place. Kodak leaves, Apple grows. Your single stock has no such gardener.
'Stocks always come back, so I'll hold my one favourite share through anything.' What's wrong here?
Enron, Wirecard, Lehman and thousands of quieter deaths never came back. The comforting statistic belongs to the haystack, not to any single needle.
How does an index investor actually USE survivorship bias?
You can't reliably pick survivors in advance, but the index replaces the fallen automatically. It's the one place the bias works FOR you. 🐜
The rest of this unit
A century of crashes, recoveries and expensive lessons. Read before repeating.