🚀 go-pugleaf

In <slrnb4d8o9.hs.joel-garry@zr1.vista1.sdca.cox.net>, Joel Garry wrote:
>>
>>  Sorry to hear your misinformation, but total USA stock market rate of
>>return is already discounted for stocks that belly-up.
>
>Eh?  Please say how.

  How about total return of the S&P 500 index including that of companies 
that fail after being included in the S&P 500 index?  And ones that get 
taken over at fire sale prices after turning down after becoming included 
in the S&P 500 index?

>>  Now for what a reasonably expected rate of return should be:  USA annual 
>>GDP growth plus the reciprocal of average USA stock P/E ratio, however 
>>appropriately weighted.  Ever since the Industrial Revolution, USA 
>>economic growth has outpaced inflation by almost 3 percent per year!  Add 
>
>Historical trending is a big mistake here.  It assumes what will be true
>in the future is the same as the past, and that does not hold up with 
>changing, er, paradigms.  

  As true for real estate as true for stocks.

>>to this the reciprocal of P/E ratio - this yields reinvestment of USA 
>>publicly-traded corporations into themselves and/or each other - even at
>>the current/recently inflated 25-30 (compared to historical 15) PE ratio
>>this means annual rate of return 3.3-4 percent ahead of USA population 
>>growth and inflation.  Subtract a bit for buyers following the herd and 
>>buying high, and this still means probably 2-3.5% annual rate of return 
>>beyond the sum of inflation and population growth.  Detract from that 
>>increase in the number of competing corporations - but for over half a 
>>century the 500 biggest publicly traded corporations in the USA have held
>>a roughly 60-70% piece of the stock-exchange-traded pie!
>
>Funny, but that half a century conveniently misses the huge world-wide
>economic meltdown.  The one, along with wars and other big bad things,
>that come every 60 to 70 years.

  I said that from the 1929 high to the high around 2,000, the USA stock 
market annual total return was 9%.  Come to think of it, I think I 
now remember material stating that the total return of the S&P 500 
was about 9.5% from the 1929 high to some point in the late 90's.  
Includes the Great Depression and WWII.

>>  Sounds like a broad USA stock index mutual fund should in the very long 
>>term have an annual total return at least 7-8%, with some mobility towards 
>>the 9% average experienced even from the 1929 high until now.  Compare to 
>
>You are looking at it from peak to peak.  The problem is, you need a 
>shorter time period,

How about 1929 to 1971?  1971 to 2000?  9-percent-plus!

> and you don't know the period of peak to trough.

  I do know that from the 1929 high to the 1982 low was somewhere close to
7% average annual total return.

>>real estate price appreciation - how do you project most peaple to have 
>>such wage growth to afford such a thing?  I do agree that real estate 
>>will 
>
>Fixed mortgages.

  And how long will that allow people whose wages increase 5% annually 
(per-capita GDP plus inflation) to afford real estate of price that 
increases faster?

>>outperform inflation at least a little bit and will probably outperform 
>>long term trends in commodities, but stocks reinvest profits of businesses 
>>(or let you do so, mostly automatic with mutual funds) and that means a 
>>few percent total return beyond the combination of inflation and economic 
>>growth.
>
>Stocks are overly focussed on quarterly returns, so do _not_ maximise
>profit reinvestment.

  If companies planned more for the long term than for looking good in the 
next quarter, then our economy and the stock market would do even better 
than they actually do.

>With the coming tax changes favoring dividend payouts, that will be even 
>worse.

  As I remember it, historical P/E ratio of the S&P 500 was 15 (reciprocal 
is 6.7%) and dividend payout was historically a good 3% - 2% was until the 
'90's bull market and last decade's cuts in capital gains taxes a sign of 
stocks being overbought.  3% out of 6.7% meant companies paying about 45% 
of their profits out as dividends and they sure haven't done close to that 
the last several years.  I will worry if dvidend payouts get really far 
above that 45% figure.  One thing we had more of since cuts in the capital 
gains tax was companies buying back their own shares as an alternative to 
paying dividends because of tax advantages (to shareholders) of spending 
money to cause capital gains rather than paying dividends.  Share buyback 
is not reinvestment into additional profitable corporate assets any more 
than dividend payout is.
  And if the companies give you some of their money, then you reinvest it 
as you see fit, including buying more shares of the companies.  This 
happens automatically for you in an index fund.  Or buy shares of 
companies that run their businesses in a manner you approve of.

 - Don Klipstein (don@misty.com)