Based on some quick math from the the S&P index prices from 40 years ago to today, the nominal geometric average return over the past 40 years is between 6.5-7%
What do you guys think we can realistically expect from the US equity markets as far as returns go over the next 40 years? Do you think we can expect less, more, or about about the same and why exactly do you think so?
I can’t help but think, the US had some major booms in development in the past 40 years - I wonder if there’s a lot more growth to give. What are your guys’s thoughts? If I had to venture to guess, I would say we should expect slightly less growth from the equity markets as compared to the historical average.
Coca cola sells coke everywhere. Disney movies are watched all over the world. Their earnings will grow with the world’s. As for americans, they are flecked. But some companies on the S&P? Like I said, they wont be relying on us, but they’ll still earn.
1982-2000 was the biggest equity rally in history. It was obvious the next decade would produce almost no returns. I was so convinced, that as soon as I started my career in the mid 2000s I didn’t invest a penny (outside of work) in equities until early 2010 (I missed the bottom of March 9, 2009 but I don’t care, catching the bottom is almost impossible).
Bonds have given me great returns during those years. Speaking of bonds, the last 3 decades have been the best in history, and taking the 1979-2009 period, it beat the equity index. This tells me stay away from bonds for a very, very long time. I don’t know where the top is (maybe when the 10 year hit 1.45% months ago) but it will not be less risky than stocks going forward.
I posted this earlier, but equity markets usually follow an 18 year trend:
Also, you mention nominal returns. Given we are in a disinflation period, the nominal return will no doubt be lower. Real returns would be a better gauge.
I believe Warren Buffett more than I believe former trader, so if WEB says it’s a great time to invest in American stocks, he must be right. Personally, I think S&P is at a short-term high but longer term, America will shrug off the bullshit financial crisis and show strong growth in real terms. I don’t know what the catalyst would be, maybe a war with China or Iran, maybe another invention like the Internet. 40 years is a long time.
Keep in mind that the Shiller PE for the S&P 500 right now is 23.6 and that profit margins ( which are mean reverting) are near historical highs.
Putting those two things together, it’s not a great time to invest in US stocks I think. Better value internationally.
As a general rule, I would expect stock prices to increase at a similar rate to nominal GDP growth over time. Global real GDP growth is currently about 4% driven by emerging economies although that is probably not sustainable in the long term. What is global inflation now? 2%-3% I’d guess. So 6%-7% return before dividends seems about right. Once China and the other BRICs have caught up with western levels of wealth, the nominal growth rate might decline. Also long term demographic trends are not good.
WB doesn’t invest in stocks anymore. He buys companies. I think that’s a little different ball game in terms of the influence you have on your investment’s future.
The equity risk premium(ERP) is one of the most debabted subjects in academic finance. If you look at the Ibbotson data series from 1926 I believe the standard error of the ERP is about 2%. So, you know its noisy before you even try to pin a number on it.
If you look at the return of the market as RF + ERP you have to start lower just because RF is lower. Some of the empirical return has come in the form of an increase in price multiples as stated above, that would have to repeat inorder to repeat history, which is unlikely.
You can have zero growth and as long as the discount rates are high, you can achieve the same return. Now because RF is so low its more unlikely for discount rates to be high. I’m going to say at least 2% less than historical… but thats just a wild guess.
So the 95% confidence interval is for an ERP between 1% and 9%. Assuming a 33% payout ratio, a long term growth rate of 3% and a 1% RFR, that leads to a justifiable PE on the S&P 500 somewhere between 4.7 and infinity. If we assume earnings grow at 6%, as they have historically, that would suggest a value between 8.5 and infinity. Wow.
If we take a mean ERP at 5% and a growth rate of 3%, that suggests a justifiable PE of around 11. A 6% growth rate would be a PE of infinity, because you’d be growing infinitely at the discount rate because the RFR is so small.
At a market PE of around 18 today, with a 1% RFR and 5% ERP, and dividend payouts of about 1/3, we can back out that earnings are expected to grow around 4.2% annually over the long term, or about 2% less than the historical growth rate… This seems consistent with the “death of equities” hypothesis.
I also agree that the ERP is likely to be lower than the historical norm, which would tend to raise the PE ratio over the historical average. The reason being that more and more people “need” growth, so they are willing to put more money at risk in the hopes of getting it. That would tend to raise the PE over the historical average. So maybe the market isn’t overpriced in a quantitative sense - it’s just that people may be accepting more risk than they really should simply because they feel there is no alternative that can meet their liabilities and projected needs.
My understanding is that Buffet buys large enough stakes in a company to warrant him a real say (not a token vote) in how the company is managed, and he intends to hold these shares and their rights long enough to use them as such. Most of us have 1) shorter holding periods, and 2) not nearly enough shares to have any serious influence on company management, and 3) don’t use this power even when we have it.
Probably his reputation also helps. He buys 5% of WFC, then goes on the news and says the company is so great. People then think “if WB is buying this, surely it is a good investment”.
Not sure if WB has actually influenced management to do things that they would not otherwise have done. However, I might just be ignorant about this…
Warren Buffet IMO has to be the biggest piece of sh*t in finance. I rate him a step above Bernie Madoff. He takes positions in companies then runs to the media to get it out there, and then people buy. No different IMO than some POS in a chatroom pumping and dumping stocks.
I loved it when he came out commented on metals, “Why would I want to own gold/silver (or whatever he was buying)? I want to own great companies.” Then the price dips and he goes out and takes large positions.
Or when he was class baiting with the whole “My secretary pays more in taxes than I do.” Sure she does you POS. You have no wage income, all of your income is dividend and LT cap gains. There is nothing illegal in that.
Read some of the stuff out there about the relationships he has with his kids. I don’t even think they speak.
I would absolutely love to see him in the fed pen on insider trading if they could get him.
Either way, I’d rather have a “chump” like Buffett around than most or any other financier. Honestly, however it is that he’s making his money he’s doing a lot of good with it. To me, one of the biggest game changers when it comes what it means to be wealthy and how to live with all that wealth.
I’ve seen the dude at the Berk Hath annual meeting. He’s not all that. Much like his coin flipping contest example, he’s been lucky more often than not giving him preference over other investors for sourcing deals, meeting management, and moving the market with his words.