Comments on: Will The Markets Be Higher Ten Years From Now? http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now/ Value Investing Blog Mon, 16 May 2011 10:55:06 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: Joe Ponzio http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now/#comment-2321 Joe Ponzio Sat, 25 Oct 2008 04:51:54 +0000 http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now#comment-2321 All great comments! I think we can all speculate as to why this would happen, and I think that some of you may have hit the nail on the head in part. I don't know why profits as a %age of GDP were rising or falling during these periods; but, I would suspect the answer requires a lot more space than we have here! The big key to all of this is valuation. The markets will be higher if the value of the businesses are higher. I've said before that your discount rate doesn't matter, but that is only because we can't compare it to the long-term treasury right now. If government bonds began paying 20% interest, we'd have to increase our discount rate and desired return, which would ultimately lower the valuations. Should we try to predict interest rates ten years from now? I don't think anyone can. All we can do is assume they'll be higher than today's unusually low rates, and use a higher discount rate. If, ten years from now, the 10-Year Treasury is paying 12%, we make our adjustments at that time. From where we are today, we have a long way to 9% or so interest rates; so, you needn't worry about predicting the future of interest rates today. All great comments!

I think we can all speculate as to why this would happen, and I think that some of you may have hit the nail on the head in part. I don’t know why profits as a %age of GDP were rising or falling during these periods; but, I would suspect the answer requires a lot more space than we have here!

The big key to all of this is valuation. The markets will be higher if the value of the businesses are higher. I’ve said before that your discount rate doesn’t matter, but that is only because we can’t compare it to the long-term treasury right now. If government bonds began paying 20% interest, we’d have to increase our discount rate and desired return, which would ultimately lower the valuations.

Should we try to predict interest rates ten years from now? I don’t think anyone can. All we can do is assume they’ll be higher than today’s unusually low rates, and use a higher discount rate. If, ten years from now, the 10-Year Treasury is paying 12%, we make our adjustments at that time.

From where we are today, we have a long way to 9% or so interest rates; so, you needn’t worry about predicting the future of interest rates today.

]]> By: Tonyhamm http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now/#comment-2313 Tonyhamm Fri, 24 Oct 2008 05:08:51 +0000 http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now#comment-2313 JC, It was expounded that huge growth in GDP can occur without the value of businesses rising, because even as a businesses SALE PRICS rise with rising GDP, a combination of pressures and factors; higher taxes, rising inflation, higher and rising interest rates, labour costs all leave the Returns to Capital Tiny. As a result the stock market goes nowhere for decades. Ultimately I think with the broad market - its about productivity ; A shareholder of a farm with 500 workers may get a small return from adding 1000 extra workers working a field as paying them all would leave only a small gain, dispite the 'farm economy' as a whole tripling in GDP, price to sales, and other measures of economic activity! If the farm got a John Deere Tractor, which did the work of 1500 workers, and sacked most of its workers, the value increase of the business would be huge as productivity gains would be huge. So the overall economy can bail out un-economic investments, add unproductive jobs, projects, etc... to 'mop up' the unemployed, without any real reference to productivity, and GDP can rise, economic activity can rise, but the value of businesses in the face of falling productivity, higher taxes, higher inflation, higher interest rates, stays static. JC, It was expounded that huge growth in GDP can occur without the value of businesses rising, because even as a businesses SALE PRICS rise with rising GDP, a combination of pressures and factors; higher taxes, rising inflation, higher and rising interest rates, labour costs all leave the Returns to Capital Tiny. As a result the stock market goes nowhere for decades.

Ultimately I think with the broad market – its about productivity ;

A shareholder of a farm with 500 workers may get a small return from adding 1000 extra workers working a field as paying them all would leave only a small gain, dispite the ‘farm economy’ as a whole tripling in GDP, price to sales, and other measures of economic activity!

If the farm got a John Deere Tractor, which did the work of 1500 workers, and sacked most of its workers, the value increase of the business would be huge as productivity gains would be huge.

So the overall economy can bail out un-economic investments, add unproductive jobs, projects, etc… to ‘mop up’ the unemployed, without any real reference to productivity, and GDP can rise, economic activity can rise, but the value of businesses in the face of falling productivity, higher taxes, higher inflation, higher interest rates, stays static.

]]> By: batbeer http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now/#comment-2304 batbeer Thu, 23 Oct 2008 03:20:23 +0000 http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now#comment-2304 S&P 500 comps are often global players. More so as you look at the mega caps. This would lead to some nonlinear correlation between GDP and corporate profit for the S&P. - Exchange rates - US DP being different than the global rate. S&P 500 comps are often global players. More so as you look at the mega caps. This would lead to some nonlinear correlation between GDP and corporate profit for the S&P.

- Exchange rates

- US DP being different than the global rate.

]]> By: JC http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now/#comment-2302 JC Wed, 22 Oct 2008 12:29:28 +0000 http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now#comment-2302 Great article Joe. I even went back and read Buffett's original article in Fortune magazine. One question I still have is why was the corporate profit as percentage of GNP lower during the times of higher GDP growth. Higher GDP growth usually means increases in revenues. What made the bottom line profit margins lower in the 1961 %u2010 1981. Was it capex spending, taxes? Or did productivity gains during 1981 %u2010 2008 produced greater margins on less GDP growth? I think in Buffett's article he hints towards capex spending and business re-investment. Great article Joe. I even went back and read Buffett’s original article in Fortune magazine. One question I still have is why was the corporate profit as percentage of GNP lower during the times of higher GDP growth. Higher GDP growth usually means increases in revenues. What made the bottom line profit margins lower in the 1961 %u2010 1981. Was it capex spending, taxes? Or did productivity gains during 1981 %u2010 2008 produced greater margins on less GDP growth? I think in Buffett’s article he hints towards capex spending and business re-investment.

]]> By: Ty http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now/#comment-2301 Ty Wed, 22 Oct 2008 12:06:03 +0000 http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now#comment-2301 Good report. The metric of the Wilshire 5000 as a percentage of GDP is a good one to look at, however, why did the chart stop in February? If you continue the chart out to present day you will see that the Wilshire 5000 is currently only 63% of GDP, very attractive. Good report. The metric of the Wilshire 5000 as a percentage of GDP is a good one to look at, however, why did the chart stop in February? If you continue the chart out to present day you will see that the Wilshire 5000 is currently only 63% of GDP, very attractive.

]]> By: Jason http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now/#comment-2298 Jason Wed, 22 Oct 2008 00:19:15 +0000 http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now#comment-2298 Great article Joe. It was insightful and gave me a different perspective. Great article Joe. It was insightful and gave me a different perspective.

]]> By: Rene http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now/#comment-2297 Rene Tue, 21 Oct 2008 13:16:08 +0000 http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now#comment-2297 After my last post, I was wondering if I was being too polyannish. Then I watched this: <a href="http://www.charlierose.com/shows/2008/10/20/1/a-conversation-about-leadership-at-the-harvard-business-school-centennial-celebration" title="http://www.charlierose.com/shows/2008/10/20/1/a-conversation-about-leadership-at-the-harvard-business-school-centennial-celebration" target="blank" rel="nofollow">http://www.charlierose.co...</a> After my last post, I was wondering if I was being too polyannish. Then I watched this:

http://www.charlierose.co…

]]> By: Joel http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now/#comment-2295 Joel Mon, 20 Oct 2008 22:38:28 +0000 http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now#comment-2295 Interesting reading. I was at the Wesco annual meeting earlier this year, and Charlie Munger spent a good deal of time expounding on this very topic. As he put it, investors have been in "hog heaven" for the past 20 years and are in for some unpleasant surprises. He specifically counseled that the majority of investors would need tp "lower their expectations." He, too, put a figure of 5-7% returns as realistic. I did not fully understand how Munger had arrived at this conclusion until reading this article. Now, the scales have fallen from my eyes, so thank you once again, Joe. At the meeting, Munger also made a prediction as to what investors' psychology might be in the face of diminishing returns. He posited that investors would consciously or unconsciously assume greater risk chasing the kinds of yields that they had grown accustomed to. He predicted that this would be especially pernicious amongst pension fund managers and the like- people who's entire business is founded upon the belief that they will be able to earn annualized double-digit returns. Further positing that these people would much rather fail as a group (i.e. make mistakes but have the "cover" of many others making the same mistake) rather that take a risk as individuals, Munger speculated that these vast pools of money would likely create quite a few more bubbles as they all pile into the same assets at the same time chasing that extra point or two of yield. It should be an interesting decade or two. Interesting reading. I was at the Wesco annual meeting earlier this year, and Charlie Munger spent a good deal of time expounding on this very topic. As he put it, investors have been in “hog heaven” for the past 20 years and are in for some unpleasant surprises. He specifically counseled that the majority of investors would need tp “lower their expectations.” He, too, put a figure of 5-7% returns as realistic.

I did not fully understand how Munger had arrived at this conclusion until reading this article. Now, the scales have fallen from my eyes, so thank you once again, Joe.

At the meeting, Munger also made a prediction as to what investors’ psychology might be in the face of diminishing returns. He posited that investors would consciously or unconsciously assume greater risk chasing the kinds of yields that they had grown accustomed to. He predicted that this would be especially pernicious amongst pension fund managers and the like- people who’s entire business is founded upon the belief that they will be able to earn annualized double-digit returns.

Further positing that these people would much rather fail as a group (i.e. make mistakes but have the “cover” of many others making the same mistake) rather that take a risk as individuals, Munger speculated that these vast pools of money would likely create quite a few more bubbles as they all pile into the same assets at the same time chasing that extra point or two of yield.

It should be an interesting decade or two.

]]> By: Rene http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now/#comment-2294 Rene Mon, 20 Oct 2008 19:08:20 +0000 http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now#comment-2294 I love Warren Buffett and of course, he's one of my guiding stars. Nevertheless, I'm still a "shrug-my-shoulders kind of guy, when it comes to this stuff. Yes, it's valuable information for those who were planing to invest in "the market" through mutual funds, etc. In my case, I reduced my contribution to my employee plan drastically months ago because it does not allow for individual stocks or even ETFs, so I deemed it a loser a while back. The report is irrefutable, if you assume "business as usual" (now I see what you meant), but I don't believe in business as usual, specially not now. I believe several seismic changes are coming in green tech, infrastructure and health care. I also believe in the "division of labor" paradigm shift mentioned by BPal above as the global economy really gets into swing. Finally, as we all seem to agree on this site, what matters is buying great individual companies as cheaply as possible. As to predicting future GNP, interest rates, overall corporate profits, etc. good luck with that. If the message of the report is that buying an index fund will not be nearly as rewarding over the next X years as it has been in the last X years, the message has a high probability of being correct. Me I'm gonna keep consulting Buffett while I look for my Fisher home run, my Motorola. Or to quote Field of Dreams, I'm gonna look for low and away, but watch out for in my ear. I love Warren Buffett and of course, he’s one of my guiding stars. Nevertheless, I’m still a “shrug-my-shoulders kind of guy, when it comes to this stuff. Yes, it’s valuable information for those who were planing to invest in “the market” through mutual funds, etc. In my case, I reduced my contribution to my employee plan drastically months ago because it does not allow for individual stocks or even ETFs, so I deemed it a loser a while back.

The report is irrefutable, if you assume “business as usual” (now I see what you meant), but I don’t believe in business as usual, specially not now. I believe several seismic changes are coming in green tech, infrastructure and health care. I also believe in the “division of labor” paradigm shift mentioned by BPal above as the global economy really gets into swing. Finally, as we all seem to agree on this site, what matters is buying great individual companies as cheaply as possible.

As to predicting future GNP, interest rates, overall corporate profits, etc. good luck with that. If the message of the report is that buying an index fund will not be nearly as rewarding over the next X years as it has been in the last X years, the message has a high probability of being correct. Me I’m gonna keep consulting Buffett while I look for my Fisher home run, my Motorola. Or to quote Field of Dreams, I’m gonna look for low and away, but watch out for in my ear.

]]> By: Tom DeRossi http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now/#comment-2293 Tom DeRossi Mon, 20 Oct 2008 17:56:22 +0000 http://www.fwallstreet.com/article/162-will-the-markets-be-higher-ten-years-from-now#comment-2293 I was always a shrug-my-shoulders kind of guy. Now I get it. Like MaxO said, though, is that 6% from 8,800 or 6% from 14,000 or is it 6% from 80% of GNP? or...am I thinking too hard about it? I was always a shrug-my-shoulders kind of guy. Now I get it. Like MaxO said, though, is that 6% from 8,800 or 6% from 14,000 or is it 6% from 80% of GNP? or…am I thinking too hard about it?

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