7 ms·

Make sure also to read Warren Buffett's take, written way back in 1999: https://fortune.com/1999/11/22/warren-buffett-on-stock-market/ https://fortune.com/1999

by cs702 4y ago

Make sure also to read Warren Buffett's take, written way back in 1999: https://fortune.com/1999/11/22/warren-buffett-on-stock-market/ https://fortune.com/1999/11/22/warren-buffett-on-stock-marke... [a] For me, the most shocking passage of his piece is this one: > ...from the end of 1964 through 1981. Here’s what took place in that interval: DOW JONES INDUSTRIAL AVERAGE Dec. 31, 1964: 874.12 Dec. 31, 1981: 875.00 Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move. And here’s a major and very opposite fact: During that same 17 years, the GDP of the U.S.–that is, the business being done in this country–almost quintupled, rising by 370%. Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled. And yet the Dow went exactly nowhere. -- [a] https://archive.ph/ZbKZK https://archive.ph/ZbKZK

getToTheChopin 4y ago
Great call-out. Here's a non-paywall version to that article: https://www.berkshirehathaway.com/1999ar/FortuneMagazine.pdf https://www.berkshirehathaway.com/1999ar/FortuneMagazine.pdf Interesting to note that if you'd bought and held the S&P500 index for the 20-year period of 1998 to 2018, you would have invested through the dotcom bubble and the great recession -- but still ended with an average real total return of 3.3% per year over that timeframe (adjusted for dividends and inflation)! Edit: typo
- roflyear 4y ago
  I never thought this was being too honest, as no one just buys the SPY once and forgets about it. Most people invest at some interval (through their 401k, IRA, or whatever) and it is much better to run some kind of test that mimics this to some degree. If you bought the SPY once a year, once a month, once a XXX from 1998 to 2018, what are your returns looking like?
  - DMell 4y ago
    These backtests used to be fun when I had access to a Bloomberg terminal. But, yes.. this discussion shows the importance of dollar cost averaging.
    - roflyear 4y ago
      Yup! Also diversification. It is rare to have ONLY equities (in my experience, though I only have equity & cash positions!!) and having even 10-20% of bonds would make a MASSIVE difference, especially through the 70s, 80s, 90s!!! (when yields were an average, EYEBALLING, like 8-9% or something!) see: https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart https://www.macrotrends.net/2016/10-year-treasury-bond-rate-...
  - scottLobster 4y ago
    Paul Merriman has a fun "lifetime investment calculator" that can get you those numbers, it assumes investing Jan 1 of every year (It's tuned to their recommended allocations but includes the S&P 500 as a baseline). https://paulmerriman.com/lifetime-investment-calculator/ https://paulmerriman.com/lifetime-investment-calculator/ If you'd invested 100% in the S&P 500, say 10,000 a year on Jan 1 every year from 1998 to 2018, you'd have $522,135 from a $200,000 total principal, or roughly 13% annualized return (not including inflation)
  - teraflop 4y ago
    That question is also relatively easy to answer: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1998&firstMonth=1&endYear=2018&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=1&annualAdjustment=10000&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&leverageType=0&leverageRatio=0.0&debtAmount=0&debtInterest=0.0&maintenanceMargin=25.0&leveragedBenchmark=false&reinvestDividends=true&showYield=false&showFactors=false&factorModel=3&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=SPY&allocation1_1=100 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t... The "rate of return" isn't quite as simple to define when you're talking about multiple contributions over time. The most straightforward approach is to look at it as a weighted average, and the exact value depends on how you do the weighting. But in this case, it's in the ballpark of 7%/year nominal, which is probably 4-5%/year after inflation. As you can see, you get a big boost (at least in this cherry-picked example) by continuing to invest through the downturn.
  - getToTheChopin 4y ago
    Agreed that an example of buying once per year (or quarter / month) over time and calculating the return of that scenario is more applicable to the experience of a regular investor. This can be eye-balled on this chart: https://themeasureofaplan.com/wp-content/uploads/2023/01/Rolling-Returns-1074.png https://themeasureofaplan.com/wp-content/uploads/2023/01/Rol... The bottom graph shows the annualized return for each 20-year period in market history. 20-year holding periods have this behaviour: - Max: 13.2% - Min: 0.5% - Average: 6.6% - Std. Dev.: 3% So, if you dollar cost average over time and hold each of those investment cohorts for ~20 years, you should expect an average annual return of roughly 6% (+/- 3%).
eldaisfish 4y ago
Comparing the value of a stock market index at two arbitrary points is not a good analysis. Here are some reasons why - does this include dividends? Are the dividends reinvested? Does this include ongoing contributions in the interim, perhaps at times when the index was down, now leading to an increase in value?
- roflyear 4y ago
  Generally it would include dividends in their returns, yeah. However, unless your adjusting the size of the position when the dividend was paid, these analysis would not reinvest the dividends. Absolutely doesn't include ongoing contributions, I think that is the big thing. It is rare to just buy a stock or ETF and hold it for 20 years... usually people are buying more or selling the position during that period.
  - cpncrunch 4y ago
    No, those figures are just the Dow Jones index at those dates, it doesn't include dividends. You can use this site to calculate total return with dividends reinvested: https://dqydj.com/dow-jones-return-calculator/ https://dqydj.com/dow-jones-return-calculator/ Plugging in those dates gives 0.078% return without reinvesting dividends (basically the figures given in the parent comment), 4.632% with dividends reinvested, and -1.941% with dividends reinvested and taking CPI into account. So, you still come out negative due to inflation, even after reinvesting the dividends.
    - lotsofpulp 4y ago
      But no credible investment advice in the last many decades has suggested investing in DJIA.
  - eldaisfish 4y ago
    I am almost 100% certain that the figures you quoted are solely the index values. Dividends are not part of the index values and never have been. Zero change in index value over any period of time does not necessarily imply zero growth, especially when the time frame involved is over a decade.
lotsofpulp 4y ago
Why is the DJIA relevant to any discussion about total stock market returns? https://dqydj.com/sp-500-return-calculator/ https://dqydj.com/sp-500-return-calculator/ This website shows a nominal 6.34% return with dividends reinvested from Dec 1964 to Dec 1981.
- cs702 4y ago
  The point is that, despite massive economic growth (GDP quintupled) and very high rates of inflation (in the 1970's) during that 17-year period, at the end of those 17 years the market was valuing what at the time was the most prominent index of blue-chip companies at the same market capitalization they had at the beginning of the 17 years. In short, it seems that market valuations and economic performance can decouple for a very long time. Note that the compound rate of inflation over that 17-year period was 6.5%. So, net of inflation, at the end of the 17 years, the market was valuing the DJIA's blue-chip companies at two-thirds less (!!!) than at the beginning of the 17 years. The S&P500, with all dividends reinvested, net of inflation, returned -0.2%/year over those 17 years.
  - medvezhenok 4y ago
    Even less than that if you account for taxes.
    - cs702 4y ago
      Yes. Anyone who bought the indices in 1964 lost money before and after taxes for the better part of two decades. In the past, the stock market has sometimes behaved in ways that in hindsight make no sense to anyone, with valuations staying depressed for much longer than anyone ever expected at the outset. I'd be wary of any predictions of stock market behavior for the next 5, 10, and 20 years.
  - deleted 4y ago
    [deleted]
  - coldpie 4y ago
    > The point is that, despite massive economic growth (GDP quintupled) and very high rates of inflation (in the 1970's) during that 17-year period, at the end of those 17 years the market was valuing the index of blue-chip companies at the same market capitalization they had at the beginning of the 17 years. Makes you think that perhaps the stock market is not a great reflection of any on-the-ground reality, and that then makes you wonder what it is a reflection of, and... well, best not to think about it. Let's destroy pensions and put all of our savings into this casino run by the wealthy.
rr888 4y ago
Outside America this has been pretty common or even worse. FTSE100 (UK), CAC40 (France) are right now trading the same values as 1999. Nikkei is the same level as 1988. HK is same as 2007.
bityard 4y ago
I read this as Buffet criticizing the validity of using the DJIA as a proxy for real market performance. I'm not an economist or big time investor but even I know to basically ignore the DJIA for all useful purposes.
- danielmarkbruce 4y ago
  That's not what he was doing. He was pointing out that stocks and the economy aren't the same thing. As in his example, if prices are too high at point X, then over the next 17 years prices can go down even if GDP is going up. It's an expectations market.
  - lotsofpulp 4y ago
    Buffett advises investing in SP500, because it does serve as a proxy for the economy. Assuming you think the US is going to be around in 10, 20, 30, 40 years in any formidable form, then surely the performance of its largest 500 businesses is some sort of proxy for the performance of its economy.
    - danielmarkbruce 4y ago
      He advises investing in the SP500 because for people who don't know what they are doing he doesn't see a better alternative. And he's right. And sure, it will almost certainly track the economy in some sense over decades, but it need not do that over 10-15 (or 17 in his example), and it isn't some law of physics type situation. The underlying factors that drive returns on capital through time (strong property rights, reasonable labor laws, stable government) also likely drive economic growth.
vikingerik 4y ago
Of course, those are cherry-picked selective endpoints used to make the point look more extreme than it is. Look at any other 17-year interval, or better yet the average of all of them, and you will see that the expected value of growth is indeed solidly high.
deleted 4y ago
[deleted]
nonethewiser 4y ago
> Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled The sp500 is going to look a lot more like the fortune 500 than the DOW. The takeaway I see here is that the Dow may be riskier. But, it would be interesting to see the sp500 during this time.

by cs702 4y ago

getToTheChopin 4y ago

Great call-out. Here's a non-paywall version to that article: https://www.berkshirehathaway.com/1999ar/FortuneMagazine.pdf https://www.berkshirehathaway.com/1999ar/FortuneMagazine.pdf Interesting to note that if you'd bought and held the S&P500 index for the 20-year period of 1998 to 2018, you would have invested through the dotcom bubble and the great recession -- but still ended with an average real total return of 3.3% per year over that timeframe (adjusted for dividends and inflation)! Edit: typo

roflyear 4y ago
I never thought this was being too honest, as no one just buys the SPY once and forgets about it. Most people invest at some interval (through their 401k, IRA, or whatever) and it is much better to run some kind of test that mimics this to some degree. If you bought the SPY once a year, once a month, once a XXX from 1998 to 2018, what are your returns looking like?
- DMell 4y ago
  These backtests used to be fun when I had access to a Bloomberg terminal. But, yes.. this discussion shows the importance of dollar cost averaging.
  - roflyear 4y ago
    Yup! Also diversification. It is rare to have ONLY equities (in my experience, though I only have equity & cash positions!!) and having even 10-20% of bonds would make a MASSIVE difference, especially through the 70s, 80s, 90s!!! (when yields were an average, EYEBALLING, like 8-9% or something!) see: https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart https://www.macrotrends.net/2016/10-year-treasury-bond-rate-...
- scottLobster 4y ago
  Paul Merriman has a fun "lifetime investment calculator" that can get you those numbers, it assumes investing Jan 1 of every year (It's tuned to their recommended allocations but includes the S&P 500 as a baseline). https://paulmerriman.com/lifetime-investment-calculator/ https://paulmerriman.com/lifetime-investment-calculator/ If you'd invested 100% in the S&P 500, say 10,000 a year on Jan 1 every year from 1998 to 2018, you'd have $522,135 from a $200,000 total principal, or roughly 13% annualized return (not including inflation)
- teraflop 4y ago
  That question is also relatively easy to answer: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1998&firstMonth=1&endYear=2018&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=1&annualAdjustment=10000&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&leverageType=0&leverageRatio=0.0&debtAmount=0&debtInterest=0.0&maintenanceMargin=25.0&leveragedBenchmark=false&reinvestDividends=true&showYield=false&showFactors=false&factorModel=3&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=SPY&allocation1_1=100 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t... The "rate of return" isn't quite as simple to define when you're talking about multiple contributions over time. The most straightforward approach is to look at it as a weighted average, and the exact value depends on how you do the weighting. But in this case, it's in the ballpark of 7%/year nominal, which is probably 4-5%/year after inflation. As you can see, you get a big boost (at least in this cherry-picked example) by continuing to invest through the downturn.
- getToTheChopin 4y ago
  Agreed that an example of buying once per year (or quarter / month) over time and calculating the return of that scenario is more applicable to the experience of a regular investor. This can be eye-balled on this chart: https://themeasureofaplan.com/wp-content/uploads/2023/01/Rolling-Returns-1074.png https://themeasureofaplan.com/wp-content/uploads/2023/01/Rol... The bottom graph shows the annualized return for each 20-year period in market history. 20-year holding periods have this behaviour: - Max: 13.2% - Min: 0.5% - Average: 6.6% - Std. Dev.: 3% So, if you dollar cost average over time and hold each of those investment cohorts for ~20 years, you should expect an average annual return of roughly 6% (+/- 3%).

eldaisfish 4y ago

Comparing the value of a stock market index at two arbitrary points is not a good analysis. Here are some reasons why - does this include dividends? Are the dividends reinvested? Does this include ongoing contributions in the interim, perhaps at times when the index was down, now leading to an increase in value?

roflyear 4y ago
Generally it would include dividends in their returns, yeah. However, unless your adjusting the size of the position when the dividend was paid, these analysis would not reinvest the dividends. Absolutely doesn't include ongoing contributions, I think that is the big thing. It is rare to just buy a stock or ETF and hold it for 20 years... usually people are buying more or selling the position during that period.
- cpncrunch 4y ago
  No, those figures are just the Dow Jones index at those dates, it doesn't include dividends. You can use this site to calculate total return with dividends reinvested: https://dqydj.com/dow-jones-return-calculator/ https://dqydj.com/dow-jones-return-calculator/ Plugging in those dates gives 0.078% return without reinvesting dividends (basically the figures given in the parent comment), 4.632% with dividends reinvested, and -1.941% with dividends reinvested and taking CPI into account. So, you still come out negative due to inflation, even after reinvesting the dividends.
  - lotsofpulp 4y ago
    But no credible investment advice in the last many decades has suggested investing in DJIA.
- eldaisfish 4y ago
  I am almost 100% certain that the figures you quoted are solely the index values. Dividends are not part of the index values and never have been. Zero change in index value over any period of time does not necessarily imply zero growth, especially when the time frame involved is over a decade.

lotsofpulp 4y ago

Why is the DJIA relevant to any discussion about total stock market returns? https://dqydj.com/sp-500-return-calculator/ https://dqydj.com/sp-500-return-calculator/ This website shows a nominal 6.34% return with dividends reinvested from Dec 1964 to Dec 1981.

cs702 4y ago
The point is that, despite massive economic growth (GDP quintupled) and very high rates of inflation (in the 1970's) during that 17-year period, at the end of those 17 years the market was valuing what at the time was the most prominent index of blue-chip companies at the same market capitalization they had at the beginning of the 17 years. In short, it seems that market valuations and economic performance can decouple for a very long time. Note that the compound rate of inflation over that 17-year period was 6.5%. So, net of inflation, at the end of the 17 years, the market was valuing the DJIA's blue-chip companies at two-thirds less (!!!) than at the beginning of the 17 years. The S&P500, with all dividends reinvested, net of inflation, returned -0.2%/year over those 17 years.
- medvezhenok 4y ago
  Even less than that if you account for taxes.
  - cs702 4y ago
    Yes. Anyone who bought the indices in 1964 lost money before and after taxes for the better part of two decades. In the past, the stock market has sometimes behaved in ways that in hindsight make no sense to anyone, with valuations staying depressed for much longer than anyone ever expected at the outset. I'd be wary of any predictions of stock market behavior for the next 5, 10, and 20 years.
- deleted 4y ago
  [deleted]
- coldpie 4y ago
  > The point is that, despite massive economic growth (GDP quintupled) and very high rates of inflation (in the 1970's) during that 17-year period, at the end of those 17 years the market was valuing the index of blue-chip companies at the same market capitalization they had at the beginning of the 17 years. Makes you think that perhaps the stock market is not a great reflection of any on-the-ground reality, and that then makes you wonder what it is a reflection of, and... well, best not to think about it. Let's destroy pensions and put all of our savings into this casino run by the wealthy.

rr888 4y ago

Outside America this has been pretty common or even worse. FTSE100 (UK), CAC40 (France) are right now trading the same values as 1999. Nikkei is the same level as 1988. HK is same as 2007.

bityard 4y ago

I read this as Buffet criticizing the validity of using the DJIA as a proxy for real market performance. I'm not an economist or big time investor but even I know to basically ignore the DJIA for all useful purposes.

danielmarkbruce 4y ago
That's not what he was doing. He was pointing out that stocks and the economy aren't the same thing. As in his example, if prices are too high at point X, then over the next 17 years prices can go down even if GDP is going up. It's an expectations market.
- lotsofpulp 4y ago
  Buffett advises investing in SP500, because it does serve as a proxy for the economy. Assuming you think the US is going to be around in 10, 20, 30, 40 years in any formidable form, then surely the performance of its largest 500 businesses is some sort of proxy for the performance of its economy.
  - danielmarkbruce 4y ago
    He advises investing in the SP500 because for people who don't know what they are doing he doesn't see a better alternative. And he's right. And sure, it will almost certainly track the economy in some sense over decades, but it need not do that over 10-15 (or 17 in his example), and it isn't some law of physics type situation. The underlying factors that drive returns on capital through time (strong property rights, reasonable labor laws, stable government) also likely drive economic growth.

vikingerik 4y ago

Of course, those are cherry-picked selective endpoints used to make the point look more extreme than it is. Look at any other 17-year interval, or better yet the average of all of them, and you will see that the expected value of growth is indeed solidly high.

deleted 4y ago

[deleted]

nonethewiser 4y ago

> Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled The sp500 is going to look a lot more like the fortune 500 than the DOW. The takeaway I see here is that the Dow may be riskier. But, it would be interesting to see the sp500 during this time.