I was invited back on WBBM’s Noon Business Hour the other day to discuss the economy and whether or not (or when) people should get into the markets. You can listen to the full 6 minute 16 second clip below.
(Don’t be too critical – I caught myself making a mistake or two; but, the overall ideas are, in my opinion, sound.)
Filed under: How to Think About Investing
yes, seems very hard to repeat 20th century returns. Especially if we don’t adopt alt. energy. This just sticks out to me
the Dow Jones Industrial Average surged from 66 to 11,497 during the 20th century. That is a huge rise – yet it averages out to just 5.3% compounded annually, Buffett writes. What’s more, were the DJIA to repeat that 5.3% average annual gain throughout the 21st century, its value on Dec. 31, 2099, would approach 2 million.
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Do you think that in 1901 they thought the DOW would be at 11,497? No, that number seemed as large to the people living then, as the Dow in the Millions seems to us. These numbers are silly to even discuss.
The whole concept of compounding is that numbers grow faster than you expect a few years down the line when growing at a constant rate because this growth is exponential. This is why we all put money away and invest it in the stock market to begin with.
Just to get an idea of the unimportant future price of the dow, take the equation Ae^(rt) ; where A is the current price of the dow (lets say 8300) , e is 2.718 (for non-math people, this is a constant number) , r is the annual growth rate, and t is the number of years (lets 91 to get us to 2099).
With 2% growth, the Dow ends at 51K. 3% – 127K. 4% – 315K.
The range between 2-4% is already d times the lower bound (315-51 is larger than 5X 51). There is absolutely no way that anyone could come close to accurately predicting the growth rate with any confidence, and as we see the Dow’s price in 2099 is EXTREMELY sensitive to this unpredictable number.
Time is better spent trying to find undervalued companies. Also, Joe I would like to hear your thoughts on why you think AEO is no longer a good investment. I never bought the stock, but I do think that they are in one of the best positions for the future among their competitors.
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You conducted yourself very well. Sounded just like them analysts on CNBC or Bloomberg, except you made sense.
-RY
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