I mentioned the academic returns from Ibbotson & Associates again – the ones that showed the long-term average rate of compounding for investors who were passive and only held large, profitable businesses, with dividends reinvested came in around 10% with an experience range of 8% to 12% depending on the specific starting year – and received a message.
You “Pie-in-the Sky’ Gurus seem to provide these “Dreamscape” non existent anymore theoretical returns that only exist in your out of date heads.
I`m 62 and i indeed have saved a few million over many yaers with high compounding rates that all but evaporated at the turn of the century, i still have a few years left on 3% & 4% CD`s but that will be it for really long time once they mature.
STOP “Projecting” returns of percentages that do NOT exist without extreme risks, Jeesus!!, you guys really give people vapor Dreams….
Thank you for taking the time to write. I happen to be sitting at my desk going over some title papers and saw your message come through so I thought I’d respond.
Judging by your message, the tone, and the emotional rawness in your words, it seems fairly evident that this is a sensitive topic for you. What should be a cold, logical fact-checking mission to your local library with zero emotion at all – a fact is either true or it is not – is, instead, causing you distress. It sounds as if you were burned rather badly by owning stocks and now somehow think the problem is with the stock market itself. I’d wager to guess that your plans are frustrated, yields are virtually non-existent on assets, and you think someone is to blame.
But you took the time to write, so onward Christian soldiers! Here we go.
1. I am not a guru. I have no seminars to sell, don’t manage outside money, and am utterly agnostic on whether or not you think stocks are good for your own personal portfolio. If you can make more money selling air conditioners than buying shares of General Electric, by all means, sell air conditioners. Or roasted peanuts. Or carpets. Or whatever.
2. It’s not my return assumption, it is a historical fact and as someone who believes in conservatism when it comes to economic projections, I think it takes an extremely powerful reason to think that reversion to the mean can be avoided. The return calculations provided by Ibbotson & Associates, and confirmed by the best Ivy League universities in the nation, including the work of Dr. Jeremy Siegel at Wharton, include periods such as the post-2000 crash in the return calculations (which was really mild, a much worse case scenario was the 1973-1974 period), as well as things like survivorship bias. For example, a firm such as Eastman Kodak going bankrupt. Even then, returns were good for investors despite the stock going to $0 because of dividends: http://www.
3. In all 25-year periods, including those that include the Great Depression which the most horrific, God-awful economic disaster in 600 years, when an investor held a block of broadly diversified, conservative, large, blue chip stocks, reinvested the dividends, dollar cost averaged regularly to take advantage of crashes, and left the portfolio alone, he compounded his money between 8% and 12%, with 10% being the overwhelming average. There is no room for interpretation. There is no debating the reality. It’s a fact. If history had been different, I would have used another figure. I have no emotional attachment to 10%, I just think an investor needs a damn good reason to think that a 100-year period during which we saw the worst disaster in six centuries is somehow too optimistic going forward.
4. It is also a fact that most investors will not get those returns because most investors are emotionally incapable of managing their money. Morningstar did a study that confirmed over a period when assets were earning 9% to 10%, the actual investors were only making 2% to 3% because they were incompetent. They never picked good companies and locked them in a bank vault. Instead, they sat around trading pieces of paper all day, making brokers and bankers rich. This is precisely why the 401(k) system has been a disaster for most people as they cannot handle managing their own affairs; the pension system was far superior for the average worker as it outsourced the investment decisions to those who had the temperament to think long-term.
If the 2000 disaster was anything but a blip on your radar, you are fundamentally incapable of managing your own money in the capital markets. That’s okay. It is not a criticism. You can get very rich without ever owning a single share of stock – I have older relatives and friends who are the same boat, lose money every time they attempt to purchase an equity, yet amassed millions in real estate because the rent cash is more tangible to them and causes them to behave rationally.
There are no such thing as “stocks”. There are simply individual businesses, that generate a certain amount of profit, and you are buying that profit. The return you earn is determined by the price you pay for those earnings. The exact same company, the exact same stock, will have very different returns for an investor who paid $10 for every dollar in profits than one who paid $100 for every dollar in profits. Too many people fail to understand this and think buying Johnson & Johnson at 50x earnings is somehow acceptable because it’s a great company. I will say it is probably a safe bet, with a high degree of certainty, this had a lot to do with your compounding rate collapsing: http://www.joshuakennon.com/
The bottom line? If you think stocks can’t offer a 10% rate of return following the same recipe (6% real returns net of 4% inflation before tax adjustments), you shouldn’t buy them.
It’s that simple.
No one is telling you that you must own stocks. You’re perfectly free to sell all of your shares, lower the price for the rest of us, and let us take over your ownership at much more attractive rates.
In fact, it would be good for me in the long-term if more people thought like you. I long for the days when the average American was terrified of stocks. Back in 1973-1974, people were full of fear and great businesses lost 75% of their quoted market value in a very short period of time, while still churning out ever-increasing dividends and profits. That is a dream scenario to me. I can’t stand that some of the food stocks are 23x+ earnings right now. I don’t want to own them at those valuations. I want good businesses, churning out real profits. The more I have to pay for every $1 in profit, the sadder I become because I want to see my income go up each year.
So I like you already, Samuel, because you’re doing me an enormous favor. I’m very sincere in this. I benefit when you go on every message board you can, tell all of your friends, preach to your grandchildren, and take out advertisements on billboards in your hometown telling people that stocks are trash; that they will always lose you money; that you can’t win and there is no point in trying. Preach the gospel. Convert folks to your congregation. Shout the hymns and shake the tambourine.
By doing that you are, without realizing it, hugely beneficial to me. You’ll have helped make me even more successful, even wealthier, and even more emotionally content as I see wonderful firms fall in price. I’ve been watching Brown Forman for years now and investors just won’t part with their ownership stake. I’d love to see it fall so I can be there when it does, checkbook open, pen in hand. Hershey is also a brilliant company that is just too high. I’d love to buy a block of it and stick in a safe deposit box for my children and grandchildren, ignoring it for the next 50 years. Coke is fairly valued now, but it would be a steal at 10x earnings. I dream of my Disney shares collapsing from the $62 range they are in now to $45 or less. McDonald’s at $88 or less is fantastic so I’d love to see people suddenly hate fast food stocks.
Keep up the good work. You have no idea how much I appreciate the fact that people like you are so emotionally committed to driving interest in equities down. It is a wonderful gift.
P.S. Your certificate of deposits are not earning you 3% to 4%; not really, anyway. Inflation is running about that same rate and you have to pay full Federal, state, and local taxes on the interest income, so your return on those assets is negative. You shouldn’t think of them as investments. They are temporary places to park cash that happens to result in a loss of purchasing power at a rate slightly lower than that experienced in a checking account. Bemoaning their loss indicates a lack of sophistication that would make me think you might be better served by sucking up the 1% fee a well respected wealth management company charges so they can hold your hand and put together a collection of assets that is right for your own situation. You are repeating the same irrationality that caused you losses back in 2000. That may not matter given your age – a portfolio of several million can withstand a lot of folly if you are frugal – but you should still care, morally, if you plan on leaving something for your heirs or a charity as they will be the one losing out to the opportunity cost of your misallocation.