7 ms·

The author falls for the "past equals future" fallacy. The only way to truly take the randomness out of the stock market is to have a multi-decade

The author falls for the "past equals future" fallacy. The only way to truly take the randomness out of the stock market is to have a multi-decade time horizon. He says so after looking at the data of a few decades. That makes no sense. It is like looking at 3 people and saying "People come in groups no larger than 3". The whole article is based on that premise. He has something like 90 data points and assumes the next 90 data points will be alike. Is it possible the next 10 years will have a negative return? This is a very interesting question. But I doubt we can answer it by looking at historical returns. We need to look at the actual situation. What would have to happen in the world so we see negative returns? War? A natural desaster? Who says war and natural desasters cannot throw us back 100 years? 1000? 10000?

ahelwer 6y ago
I mean yes, past performance doesn't guarantee future results. But it does waggle its eyebrows suggestively at it, when you have a phenomenon that's gone unchallenged for probably a hundred years now. It isn't guaranteed. But nobody's lost their shirt betting it'll continue yet. People always bring up Japan in these discussions, of course. The Nikkei 225 peaked on 29 December 1989, still only at half that value over 30 years later.
- bryanlarsen 6y ago
  Or the German stock market of 1914. An 1914 investor would have had to have held for 100 years to get his investment back. The major point is that only looking at 90 years of American stock market returns is very serious cherry picking. We can get a lot more data by including non-American stock markets. The last century was a century of American ascendance. 100 years from now America still might be at the top, but I wouldn't take that bet. Even if it is, we won't get the gains we got from rising to the top.
  - ahelwer 6y ago
    The ultimate point of these discussions is coming to a conclusion about "what should we do?". I can give you quite a few reasons why dumping all your money in market index funds could end in disaster. I'm not under the illusion these gains are guaranteed. But what the hell else am I going to do?
    - EGreg 6y ago
      This is going to be a silly response, but how silly is it really? You asked what you would do with your money, to grow it... This is related to the Keynsian Beauty Contest for following fads actively instead of passively taking long positions for years: https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest How about hiring a person to research and buy the latest shitcoins on Uniswap and Pancakeswap? I can name several in the last month that have each been up 500% in 24 hours. For example, see these: SAFEMOON (weeks ago) https://coinmarketcap.com/currencies/safemoon/ https://coinmarketcap.com/currencies/safemoon/ SPORE finance https://coinmarketcap.com/currencies/spore-finance/ https://coinmarketcap.com/currencies/spore-finance/ PROMETEUS token https://coinmarketcap.com/currencies/prometeus/ https://coinmarketcap.com/currencies/prometeus/ By the time you hit these links, you may be astonished to see that the assets have risen in one day nearly half of the 900% the guy says the stock market would do in 30 years. I mean, isn’t the goal of growth investing to get the biggest returns? This seems to be that, massively accelerated. Then retire LOL. But seriously... the smallest cap projects in the newest industries — especially now that trading is available to anyone with no intemediaries — presents massive opportunities for huge crowds to descend on one thing or another, and if you are early to the party you make a lot. I find it a very strange aspect of capitalism, that seems to reward meme marketing and attracting crowds to fads, rather than actual value for society.
      - deleted 6y ago
        [deleted]
      - heliodor 6y ago
        Great! Now you have your retirement stash. You'll have to protect it for decades to come. How? Which brings you to the beginning: how do you invest your money?
  - xwdv 6y ago
    No they would not have had to wait 100 years. Makes for a spicy headline, but no one just throws a lump sum of money into the market once and hopes for the best. If you continue to invest regularly, your returns eventually cover your previous losses and your back to making profits sooner than later. Your portfolio balance over time is the only thing that matters, not the returns of individual investments. It’s why you shouldn’t be scared of a big crash. Do you plan to continue investing afterward? Yes? Then you’ll be fine.
    - bryanlarsen 6y ago
      Lots of people do something very similar. They throw money into the stock market regularly for years, and then on a single day they retire and start slowly taking it out instead.
  - panax 6y ago
    I feel reasonably confident that we will probably continue to see decent gains over the medium term of the next few decades, barring major wars. But what is always in the back of my mind is just how long can human civilization continue this incredible rate of exponential growth. If you assume that economic growth requires any amount of increase in energy consumption, then there are physical limits to how much growth can occur over the long term and we are rapidly approaching them[1]. Eventually growth will need to slow and it looks like this is already starting to happen [2]. Japan may be the endgame for most of us. Eventually there could be zero growth and then things become zero-sum which may encourage conflict. If we are able to colonize other parts of the solar system and export industry off the planet that will allow for several more decades and probably centuries (millenia?) of growth. Hopefully civilization will survive conflict long enough to make this transition. [1] https://arxiv.org/abs/2005.05244 https://arxiv.org/abs/2005.05244 [2] https://www.economist.com/graphic-detail/2021/03/15/young-people-stand-to-make-dismal-returns-on-their-investments https://www.economist.com/graphic-detail/2021/03/15/young-pe...
  - rorykoehler 6y ago
    The world has changed now though. Betting against America is essentially betting against human progress.
- deleted 6y ago
  [deleted]
- slv77 6y ago
  The stock market is nothing more then a claim on a future stream of dividends over a roughly 50 year time horizon. The longer the investment horizon the greater the uncertainty and the greater the volatility. To compensate for that investors typically demand higher returns. Yields on 30 year bonds are typically higher then 10 year bonds. Long term returns on the stock market can be broken down into two categories: - Increase in corporate earnings - Increase in the price that investors are willing to pay for those earnings Increases in long term corporate earnings are constrained by long term growth in GDP unless earnings as a percentage of GDP increases. GDP is a function of demographics and productivity increases. Assuming that future returns will match historical returns is a bet that GDP growth rates will be close to historical trends along with earnings as a percentage of GDP will continue to increase. Demographics are long term trends that can be mostly predicted 20+ years into the future (you can’t go back in time and make a baby) and are mostly unfavorable compared to historical norms (lower percentage population in prime working age). There is also a limit on corporate earnings as a percentage of GDP unless taxes and wages go to zero. So a bet on future returns matching historical trends is essentially a bet on a massive productivity growth across all sectors of the economy over the next 50 years. In addition the bulk of that productivity growth will need to fall into corporate coffers rather then tax revenues or wages. And it will need to sustain that over a 50 year time horizon.
  - ahelwer 6y ago
    Future-discounted series of dividends is one theory of stock market valuation. It isn't the only one. Keynesian beauty contest is another.
- EVa5I7bHFq9mnYK 6y ago
  The nikkei 225 peaked at 38k in 1989. It is 29k now, 76% of the old value.
  - moneywoes 6y ago
    That’s without dividend reinvestment though no?
berkes 6y ago
> the data of a few decades. 1926-2020 is 95 years. Calling that "a few decades" is downplaying it. I'd say it is safe to take 95 years and from that extrapolate a 30 year future with wide margins. In your analogy: looking at 95 people and saying "the average group size is between 2 and 5". > ... 90 data points and assumes the next 90 data points will be alike. Are we reading the same article? I don't see it predicting anything 90-points forward. Even the predictions for 30 points forward are very much on the safe side: merely a caution and establishment of a (well-known) generalism. A conclusion in that article: > don’t know if the next 30 years will be this kind to investors in U.S. stocks. You could make the case investors should reduce their expectations going forward. > But if those lower expectations turn out to be correct this makes thinking and acting for the long-term even more important than ever.
jimbokun 6y ago
The author makes clear that the next 30 years may very well not follow this trend, given the entire dataset contains only 95 data points.
spurgu 6y ago
> The author falls for the "past equals future" fallacy. Isn't this more about random events? The stock market is not random, it merely fluctuates a lot.
ryanar 6y ago
A war? A natural disaster? That is the point! If this happens, it doesn’t matter what you invested in, money is worthless. So outside of that, it is now safe to say invest and hold is a safe strategy for guaranteeing returns over a long time horizon (30 years).
- bryanlarsen 6y ago
  WW2 didn't make money worthless, COVID-19 didn't make money worthless. A limited nuclear war won't make money worthless. Climate change won't happen fast enough to make money worthless.
  - mrlinx 6y ago
    I'd say crypto have the bigger chance. Good or bad, leave that up to the reader.
bob1029 6y ago
This is a very tiresome argument that I have to continuously have with friends & family. These days I just sit on the sidelines and watch people I care about throw money into raging infernos because they genuinely believe that a historical time series has some notion of inertia/momentum/hocus pocus/etc behind it. After a certain point you have to stop trying to save other people from shitty ideas or you will drive yourself mad.
- beckingz 6y ago
  Reminds me of the nose and bean principle from consulting: https://archive.uie.com/brainsparks/2011/07/08/beans-and-noses/ https://archive.uie.com/brainsparks/2011/07/08/beans-and-nos...

ahelwer 6y ago

I mean yes, past performance doesn't guarantee future results. But it does waggle its eyebrows suggestively at it, when you have a phenomenon that's gone unchallenged for probably a hundred years now. It isn't guaranteed. But nobody's lost their shirt betting it'll continue yet. People always bring up Japan in these discussions, of course. The Nikkei 225 peaked on 29 December 1989, still only at half that value over 30 years later.

bryanlarsen 6y ago
Or the German stock market of 1914. An 1914 investor would have had to have held for 100 years to get his investment back. The major point is that only looking at 90 years of American stock market returns is very serious cherry picking. We can get a lot more data by including non-American stock markets. The last century was a century of American ascendance. 100 years from now America still might be at the top, but I wouldn't take that bet. Even if it is, we won't get the gains we got from rising to the top.
- ahelwer 6y ago
  The ultimate point of these discussions is coming to a conclusion about "what should we do?". I can give you quite a few reasons why dumping all your money in market index funds could end in disaster. I'm not under the illusion these gains are guaranteed. But what the hell else am I going to do?
  - EGreg 6y ago
    This is going to be a silly response, but how silly is it really? You asked what you would do with your money, to grow it... This is related to the Keynsian Beauty Contest for following fads actively instead of passively taking long positions for years: https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest How about hiring a person to research and buy the latest shitcoins on Uniswap and Pancakeswap? I can name several in the last month that have each been up 500% in 24 hours. For example, see these: SAFEMOON (weeks ago) https://coinmarketcap.com/currencies/safemoon/ https://coinmarketcap.com/currencies/safemoon/ SPORE finance https://coinmarketcap.com/currencies/spore-finance/ https://coinmarketcap.com/currencies/spore-finance/ PROMETEUS token https://coinmarketcap.com/currencies/prometeus/ https://coinmarketcap.com/currencies/prometeus/ By the time you hit these links, you may be astonished to see that the assets have risen in one day nearly half of the 900% the guy says the stock market would do in 30 years. I mean, isn’t the goal of growth investing to get the biggest returns? This seems to be that, massively accelerated. Then retire LOL. But seriously... the smallest cap projects in the newest industries — especially now that trading is available to anyone with no intemediaries — presents massive opportunities for huge crowds to descend on one thing or another, and if you are early to the party you make a lot. I find it a very strange aspect of capitalism, that seems to reward meme marketing and attracting crowds to fads, rather than actual value for society.
    - deleted 6y ago
      [deleted]
    - heliodor 6y ago
      Great! Now you have your retirement stash. You'll have to protect it for decades to come. How? Which brings you to the beginning: how do you invest your money?
- xwdv 6y ago
  No they would not have had to wait 100 years. Makes for a spicy headline, but no one just throws a lump sum of money into the market once and hopes for the best. If you continue to invest regularly, your returns eventually cover your previous losses and your back to making profits sooner than later. Your portfolio balance over time is the only thing that matters, not the returns of individual investments. It’s why you shouldn’t be scared of a big crash. Do you plan to continue investing afterward? Yes? Then you’ll be fine.
  - bryanlarsen 6y ago
    Lots of people do something very similar. They throw money into the stock market regularly for years, and then on a single day they retire and start slowly taking it out instead.
- panax 6y ago
  I feel reasonably confident that we will probably continue to see decent gains over the medium term of the next few decades, barring major wars. But what is always in the back of my mind is just how long can human civilization continue this incredible rate of exponential growth. If you assume that economic growth requires any amount of increase in energy consumption, then there are physical limits to how much growth can occur over the long term and we are rapidly approaching them[1]. Eventually growth will need to slow and it looks like this is already starting to happen [2]. Japan may be the endgame for most of us. Eventually there could be zero growth and then things become zero-sum which may encourage conflict. If we are able to colonize other parts of the solar system and export industry off the planet that will allow for several more decades and probably centuries (millenia?) of growth. Hopefully civilization will survive conflict long enough to make this transition. [1] https://arxiv.org/abs/2005.05244 https://arxiv.org/abs/2005.05244 [2] https://www.economist.com/graphic-detail/2021/03/15/young-people-stand-to-make-dismal-returns-on-their-investments https://www.economist.com/graphic-detail/2021/03/15/young-pe...
- rorykoehler 6y ago
  The world has changed now though. Betting against America is essentially betting against human progress.
deleted 6y ago
[deleted]
slv77 6y ago
The stock market is nothing more then a claim on a future stream of dividends over a roughly 50 year time horizon. The longer the investment horizon the greater the uncertainty and the greater the volatility. To compensate for that investors typically demand higher returns. Yields on 30 year bonds are typically higher then 10 year bonds. Long term returns on the stock market can be broken down into two categories: - Increase in corporate earnings - Increase in the price that investors are willing to pay for those earnings Increases in long term corporate earnings are constrained by long term growth in GDP unless earnings as a percentage of GDP increases. GDP is a function of demographics and productivity increases. Assuming that future returns will match historical returns is a bet that GDP growth rates will be close to historical trends along with earnings as a percentage of GDP will continue to increase. Demographics are long term trends that can be mostly predicted 20+ years into the future (you can’t go back in time and make a baby) and are mostly unfavorable compared to historical norms (lower percentage population in prime working age). There is also a limit on corporate earnings as a percentage of GDP unless taxes and wages go to zero. So a bet on future returns matching historical trends is essentially a bet on a massive productivity growth across all sectors of the economy over the next 50 years. In addition the bulk of that productivity growth will need to fall into corporate coffers rather then tax revenues or wages. And it will need to sustain that over a 50 year time horizon.
- ahelwer 6y ago
  Future-discounted series of dividends is one theory of stock market valuation. It isn't the only one. Keynesian beauty contest is another.
EVa5I7bHFq9mnYK 6y ago
The nikkei 225 peaked at 38k in 1989. It is 29k now, 76% of the old value.
- moneywoes 6y ago
  That’s without dividend reinvestment though no?

berkes 6y ago

> the data of a few decades. 1926-2020 is 95 years. Calling that "a few decades" is downplaying it. I'd say it is safe to take 95 years and from that extrapolate a 30 year future with wide margins. In your analogy: looking at 95 people and saying "the average group size is between 2 and 5". > ... 90 data points and assumes the next 90 data points will be alike. Are we reading the same article? I don't see it predicting anything 90-points forward. Even the predictions for 30 points forward are very much on the safe side: merely a caution and establishment of a (well-known) generalism. A conclusion in that article: > don’t know if the next 30 years will be this kind to investors in U.S. stocks. You could make the case investors should reduce their expectations going forward. > But if those lower expectations turn out to be correct this makes thinking and acting for the long-term even more important than ever.

jimbokun 6y ago

The author makes clear that the next 30 years may very well not follow this trend, given the entire dataset contains only 95 data points.

spurgu 6y ago

> The author falls for the "past equals future" fallacy. Isn't this more about random events? The stock market is not random, it merely fluctuates a lot.

ryanar 6y ago

A war? A natural disaster? That is the point! If this happens, it doesn’t matter what you invested in, money is worthless. So outside of that, it is now safe to say invest and hold is a safe strategy for guaranteeing returns over a long time horizon (30 years).

bryanlarsen 6y ago
WW2 didn't make money worthless, COVID-19 didn't make money worthless. A limited nuclear war won't make money worthless. Climate change won't happen fast enough to make money worthless.
- mrlinx 6y ago
  I'd say crypto have the bigger chance. Good or bad, leave that up to the reader.

bob1029 6y ago

This is a very tiresome argument that I have to continuously have with friends & family. These days I just sit on the sidelines and watch people I care about throw money into raging infernos because they genuinely believe that a historical time series has some notion of inertia/momentum/hocus pocus/etc behind it. After a certain point you have to stop trying to save other people from shitty ideas or you will drive yourself mad.

beckingz 6y ago
Reminds me of the nose and bean principle from consulting: https://archive.uie.com/brainsparks/2011/07/08/beans-and-noses/ https://archive.uie.com/brainsparks/2011/07/08/beans-and-nos...