5 ms·

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 t

by 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.
- satvikpendem 4y ago
  > Let's destroy pensions and put all of our savings into this casino run by the wealthy. I'd rather take the gains from all companies in the US (or merely even be allowed to invest in whatever I want) than to utilize a pension from a specific company I worked for, for 40 years. Pensions are not even guaranteed to be paid out, there have been many examples in the past 30 years about this case, if the company goes bankrupt, doesn't have enough money, etc. More often, I notice the people who advocate for pensions over 401ks or stocks know nothing about what the stock market is really like. Yes, if you put it all on GME or AMC, you'll lose your money, but as OP shows, you will make considerable wealth if you put it into VTI or another total stock market fund.
  - coldpie 4y ago
    > I'd rather take the gains from all companies in the US As the post I was replying to said: > 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. That's the point, the stock market is not related to the economy. You're not getting the gains. You're getting whatever scraps the bored rich people playing poker with each other accidentally drop off the table.
    - satvikpendem 4y ago
      That's only a 17 year span. If you're funding retirement you should look at longer timescales. Also, DJIA is not the total market, and as someone else pointed out, S&P 500 "shows a nominal 6.34% return with dividends reinvested from Dec 1964 to Dec 1981." > That's the point, the stock market is not related to the economy. You're not getting the gains. You're getting whatever scraps the bored rich people playing poker with each other accidentally drop off the table. I am, though. I am getting the gains. Over the past X years, my and my family's gains from investing in the total stock market in the last 50 years (not even outliers like Google or Amazon or GameStop) have been enormous, on average 7% real as TFA shows. Maybe you're not, if you're not investing, but the stock market has consistently given us gains. Again, most people who mention the kind of "rich boys club" reasoning have been in my experience people who don't, won't, or can't invest in the stock market.
pc86 4y ago
My takeaway from that is that either DJIA has the wrong companies in it, or it's representative of a sector that experienced negative growth during that time.
lotsofpulp 4y ago
> 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. This means nothing because the DJIA means nothing, and is not a good proxy for anything. >The S&P500, with all dividends reinvested, net of inflation, returned -0.2%/year over those 17 years. This means something, which is that reward is proportionate to risk. Investing in the broad US market means your investment is backed by the federal US government, which means it is riskless on a sufficiently long timeline (assuming the US is still relatively powerful in the world stage). You invest in SP500 (or Russell 3000 or whatever broad market fund) to keep up with inflation, over many years, not to earn more than inflation. If you want to do that, you have to take risks.
- danielmarkbruce 4y ago
  DJIA is a decent proxy for market returns. If you don't think so, just look at the DJIA and the s&p total return index. They track pretty closely overall. Buffett isn't a dummy. If DJIA meant nothing, he wouldn't have quoted it.
  - deleted 4y ago
    [deleted]
orangecat 4y ago
despite massive economic growth (GDP quintupled) In real dollars it less than doubled (https://fred.stlouisfed.org/series/gdpc1#0 https://fred.stlouisfed.org/series/gdpc1#0). 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. And during those 17 years those companies paid out roughly their entire original value in dividends. It's true that the Dow lagged the overall economy during that period, but not nearly to the degree that the quote implies.
- spinchange 4y ago
  He was comparing the point value of an index at two points to the /nominal/ dollar value of GDP at the same interval. That firms in the Dow in returned a lot of capital to shareholders in the form of dividends doesn't mean the market value of their equity increased any during the period. You're mixing capital returns with capital appreciation which isn't what he said at all. What he said was completely accurate. I think he knows what it was like to have lived and invested through the period.
  - 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 Paying out a dividend devalues a company by the same amount it benefits the shareholders. So evaluating neither the appreciation nor the return make any sense without factoring in the dividend.
    - spinchange 4y ago
      In theory, yes, but in practice market premiums are variable and greater than book values. It is true that dividend paying stocks fall somewhat on their ex-date. If they're undergoing capital appreciation too, that's generally made up for in short order. I'm not saying to disregard dividends in terms of total return, either, only that Buffett wasn't talking about total return, so the "well, actually" I was responding to was just off the mark. If you or me were alive then and/or aware enough to watch the DJIA (classically in the 20th century, many American's measure of "the market" even if not technically the case) things really would have looked like they went nowhere (nominally) from the middle 60s until the early 80s.
cko 4y ago
GDP growth is uncorrelated with stock market valuations. https://m.youtube.com/watch?v=DEV49qY0TP8 https://m.youtube.com/watch?v=DEV49qY0TP8
- cs702 4y ago
  Exactly his point. In his example, a prominent group of blue-chip companies grew for 17 years and their valuations remained flat (and net of inflation, declined).

by cs702 4y ago

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.

satvikpendem 4y ago
> Let's destroy pensions and put all of our savings into this casino run by the wealthy. I'd rather take the gains from all companies in the US (or merely even be allowed to invest in whatever I want) than to utilize a pension from a specific company I worked for, for 40 years. Pensions are not even guaranteed to be paid out, there have been many examples in the past 30 years about this case, if the company goes bankrupt, doesn't have enough money, etc. More often, I notice the people who advocate for pensions over 401ks or stocks know nothing about what the stock market is really like. Yes, if you put it all on GME or AMC, you'll lose your money, but as OP shows, you will make considerable wealth if you put it into VTI or another total stock market fund.
- coldpie 4y ago
  > I'd rather take the gains from all companies in the US As the post I was replying to said: > 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. That's the point, the stock market is not related to the economy. You're not getting the gains. You're getting whatever scraps the bored rich people playing poker with each other accidentally drop off the table.
  - satvikpendem 4y ago
    That's only a 17 year span. If you're funding retirement you should look at longer timescales. Also, DJIA is not the total market, and as someone else pointed out, S&P 500 "shows a nominal 6.34% return with dividends reinvested from Dec 1964 to Dec 1981." > That's the point, the stock market is not related to the economy. You're not getting the gains. You're getting whatever scraps the bored rich people playing poker with each other accidentally drop off the table. I am, though. I am getting the gains. Over the past X years, my and my family's gains from investing in the total stock market in the last 50 years (not even outliers like Google or Amazon or GameStop) have been enormous, on average 7% real as TFA shows. Maybe you're not, if you're not investing, but the stock market has consistently given us gains. Again, most people who mention the kind of "rich boys club" reasoning have been in my experience people who don't, won't, or can't invest in the stock market.

pc86 4y ago

My takeaway from that is that either DJIA has the wrong companies in it, or it's representative of a sector that experienced negative growth during that time.

lotsofpulp 4y ago

> 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. This means nothing because the DJIA means nothing, and is not a good proxy for anything. >The S&P500, with all dividends reinvested, net of inflation, returned -0.2%/year over those 17 years. This means something, which is that reward is proportionate to risk. Investing in the broad US market means your investment is backed by the federal US government, which means it is riskless on a sufficiently long timeline (assuming the US is still relatively powerful in the world stage). You invest in SP500 (or Russell 3000 or whatever broad market fund) to keep up with inflation, over many years, not to earn more than inflation. If you want to do that, you have to take risks.

danielmarkbruce 4y ago
DJIA is a decent proxy for market returns. If you don't think so, just look at the DJIA and the s&p total return index. They track pretty closely overall. Buffett isn't a dummy. If DJIA meant nothing, he wouldn't have quoted it.
- deleted 4y ago
  [deleted]

orangecat 4y ago

despite massive economic growth (GDP quintupled) In real dollars it less than doubled (https://fred.stlouisfed.org/series/gdpc1#0 https://fred.stlouisfed.org/series/gdpc1#0). 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. And during those 17 years those companies paid out roughly their entire original value in dividends. It's true that the Dow lagged the overall economy during that period, but not nearly to the degree that the quote implies.

spinchange 4y ago
He was comparing the point value of an index at two points to the /nominal/ dollar value of GDP at the same interval. That firms in the Dow in returned a lot of capital to shareholders in the form of dividends doesn't mean the market value of their equity increased any during the period. You're mixing capital returns with capital appreciation which isn't what he said at all. What he said was completely accurate. I think he knows what it was like to have lived and invested through the period.
- 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 Paying out a dividend devalues a company by the same amount it benefits the shareholders. So evaluating neither the appreciation nor the return make any sense without factoring in the dividend.
  - spinchange 4y ago
    In theory, yes, but in practice market premiums are variable and greater than book values. It is true that dividend paying stocks fall somewhat on their ex-date. If they're undergoing capital appreciation too, that's generally made up for in short order. I'm not saying to disregard dividends in terms of total return, either, only that Buffett wasn't talking about total return, so the "well, actually" I was responding to was just off the mark. If you or me were alive then and/or aware enough to watch the DJIA (classically in the 20th century, many American's measure of "the market" even if not technically the case) things really would have looked like they went nowhere (nominally) from the middle 60s until the early 80s.

cko 4y ago

GDP growth is uncorrelated with stock market valuations. https://m.youtube.com/watch?v=DEV49qY0TP8 https://m.youtube.com/watch?v=DEV49qY0TP8

cs702 4y ago
Exactly his point. In his example, a prominent group of blue-chip companies grew for 17 years and their valuations remained flat (and net of inflation, declined).