The 10% Return on Equities Myth

According to historical records, the post-war return of the stock market has been around 12%. It’s a number that has used over and over again (more often people use the 10% value) as the benchmark for stock returns and project of future results, since it’s better than pulling a number out of thing air. However, yesterday afternoon I had the pleasure of reading Warren Buffet’s 2007 Letter to Shareholders of Berkshire Hathaway (if you’ve never read one, you should because it is both informative and entertaining, 2008’s is a mere 21 pages long and chocked full of fun facts).

On Page 18, right after Buffett chastizes 498 of the Fortune 500 for not recording stock options as expenses on their books, he starts talking about the Dow returning 5.3%, compounded annually, in the 20th Century. Wow, what happened to this 10% business? Why are we using it as a benchmark if the Dow’s return over the last hundred years (arguable, the last hundred years starting 8 years ago) is a meager 5.3%? I don’t know, but even assuming 5.3% is pushing it.

Buffett goes on to illustrate that a 5.3% annualized gain going forward would mean the Dow would have to pierce 2,000,000 (that’s two million!) by the end of 2099. That’s working with only 5.3%. If you want 10% annually then you’ll need the Dow to hit 24,000,000 by 2100. Twenty four million…

Though, nominal numbers are merely that, nominal. If you asked someone at the start of the 20th Century if the Dow was going to grow from 66 to 11,497 (especially after you told them the horrors that would come during the Great Depression), they probably would’ve laughed too. So, will Warren Buffett’s prediction that a 10% is outlandish and unreasonable hold true?

I don’t know but I’ll tell you what… while historical returns are not indicative of future results, Warren Buffett’s historical returns are better than my historical returns so I’m siding with him on this one.


Don’t Panic (About The Stock Market)

That’s a little maxim from The Hitchhiker’s Guide to the Galaxy and one you should heed if you’ve been watching the stock market tank in recent months and wondering if you should cut loose. Don’t panic. Markets go up and markets go down and mainstream media is the business of selling sensationalism. Why do you think the news is always about murders and burglaries? Because the heartwarming stories are for Oprah.

Still panicking? Check out the latest Ben Stein column in Yahoo, written in his trademarked dry humor style, and enjoy the awesome simplicity that is his advice. Here’s my favorite excerpt:

5. Trust the major newspapers to know more than Warren Buffett.

Yes, Buffett’s the best investor in history, and says to stay in the market and buy index funds. He also says now is the time that stupid money is leaving the market.

But pay no attention to that fool! Pay attention only to some new young gunslinger at The Wall Street Journal or Barron’s who tells you it’s time to sell. Even pay attention when someone with no investing track record tells you to sell out of Berkshire Hathaway, one of the most successful investments of all time.

No, don’t trust Buffett or other “geniuses” like John Bogle. Trust whoever comes across as the smartest-aleck and most glib, “on whom assurance sits, as a silk hat on a Bradford millionaire” (to quote T.S. Eliot).

And if you’ve never heard of The Hitchhiker’s Guide to the Galaxy, go borrow it from the library because it’s great humor (so much better than the movie!).

 Personal Finance 

Q&A with Bill Gates and Warren Buffet via FORTUNE

Don’t miss this article, a Q&A with $91 billion in net worth: Warren Buffett and Bill Gates: The $91 Billion Conversation. This is an interview following a Q&A the two had with 2,000 extremely lucky participants at University of Nebraska’s Lied Auditorium, the first since the two did it in 1998 at the University of Washington. I’ve hit up some highlights of the five page article below.

The first question is the best book they’ve read recently…

When asked about the S&P 500 in 5 years, both agreed it would likely return under 10% a year.

Both are concerned about the ballooning U.S. trade deficit.

And their favorite desert at a Berkshire subsidiary, Dairy Queen, differs when faced to choose between the Dilly Bar or the Blizzard. Buffett prefers the Blizzard and Gates the Dilly Bar.

There are many other topics covered such as inheritances and philanthropy, it’s an interesting and quick read. The interplay between the two men is very entertaining too.

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