yadayada

if you look at GDP correlation it seems looking at it with dividends reinvested would just skew results? your looking at how much the S&P increased in valued no?

why not use common sense? you can clearly see accelerated growth from 1950 to 2000, where at first it lags, and then it grows faster , right around when emerging markets start to boom and when everything starts to consolidate. All you gotta do is just find what % of profits is foreign in S&P 500, and look at what % of revenue is taken from overall GDP? You wouldn't have to bother with that correlation crap then. I can see how buffett thinks it trails GDP growth though, since on average they grow at about the same pace. You really got to look by each 10 year period. My guess is if you do this, you will find a fast growing % of profits from the S&P coming from overseas markets, and a growing revenue % number of US GDP after 1950. Also it seems silly to compare results with dividends reinvested.

it seems to me ROE and ROIC will be better in emerging economies? There is less competition, demand outstrips supply more, less regulation and often the tax situation is better. And all those companies in their early stages have less bureacracy. Finally when looking at some of those emerging market companies, they often do business in other asian countries as well. And if there is only a small difference in ROE or ROIC, but your paying less then half, it takes a long time to catch up for the higher return company.

Do you know of any well established consumer brand companies that primarily sell into these fast growing markets that are trading at reasonable valuations? My guess is the korean stock exchange? My guess is , the US had a huge advantage in this because of their huge cultural influence in the world.

So isnt it a better idea to invest in emerging markets? They will likely have products that could do well internationally? And that will relatively provide much larger growth compared to their earnings now vs S&P 500 now?

Yeah another thing is international earnings growth and globalization. And the fact that there is a huge rise in middle class in developing countries. Looking at KO walmart etc, sometimes more then 50% of profits come from international sales. That is why before 1950, it is pretty much flat, vs 3% growth , and then after 1975 the S&P grows faster then GDP, with massive rise of emerging countries. So you have to wonder, will this continue? Given that a large part of consolidation is behind us? You would expect the S&P to stay flat, or maybe grow only a little from now on? Since you will not see that explosive international growth relative to current earnings.

There is a good book that has data that provides a very compelling case for inverse correlation between GDP growth and stock market returns. Triumph of the Optimists: 101 Years of Global Investment Returns Vinod So this would mean that over long periods stock returns are always negative right? If countries continue go grow (GDP growth) then returns should be negative over the long haul? If you extrapolate out a bit it would mean that equity investing is a losing game, as the world grows we're trying to swim against the tide. Yet this doesn't seem to be the market experience. Since we have numbers the US has grown as an economy and our market has been biased upwards. So how does this jive with the research? Dont take it too literally. It just means it would be a a bad idea to expect higher equity returns just because it has a higher growth rate. The data if you care to look in the book, shows that countries that have higher growth rate are priced higher. So equity returns tended to disappoint investors who naively investing in high growth countries. Does this remind you of value investing? Part of the explanation is also that to fund additional growth you need to make additional investments via debt and stock market issues which dilute existing shareholders. Vinod I guess I was thinking about this with a longer time window than most. I was thinking if you looked at 100/200/300 years of history what would you see? Someone mentioned short time periods, and in that vein I agree that growth in GDP doesn't correlate to returns. I'd like to see the data from 1906 to 2006 for example, what's the relationship between those two? My guess is that GDP growth and market growth are fairly tightly connected. All of the pessimism and optimism cancel out eventually. http://dqydj.net/sp-500-return-calculator/ http://www.measuringworth.com/growth/index.php 1.7% increase in real value of s&P 500. So S&P 500 went up less then GDP went up. But most of the return came from reinvesting earnings. I think this is heavily skewed. But if you look at 1955 to 2013, value of S&P 500 increased 2.7%, vs GDP of 3.1%. I think the increase here is because more products were produced by very large companies. For example if you look at 1975 to 2013, S&P real value increases over 4% , and real GDP only increased 2.9%. This also explains the higher profit margins? More consolidated industries, and more consumer products produced by fewer large corporations. When the walmarts of this world wipe out small companies not on stock exchanges, or too small for S&P500, the take from large corporations from GDP goes up. http://answers.google.com/answers/threadview?id=523867 That site actually says there werent even 500 companies in S&P 500 untill 1957! That also explains a lot I guess. A lot of these companies must have been private then or something?

Fwiw, it seems productivity growth was over 2% in the last 65 years. Cannot find data before that, but would be interesting. I can imagine it would be massive as we went from horses to ocean flights in 50 years. So I can imagine a huge increase there as well. So 2% in productivity and about 1% in population growth. Debt load grew 4% a year since 1950. Nominal GDP grew 6.5%. Real gdp about 3.3%. I guess you add up debt growth, money printed and population growth and you get Nominal GDP? Then you subtract inflation and add back productivity growth? So if productivity growth was 2% , then real inflation was like 5%? But productivity growth of 2% partially made up for that, to net out at about 3%? A reason why earnings growth is not correlated could be that a bigger share of the pie is generated by a smaller amount of conglomerates? Like how you used to have lot's of convenience stores in the 50's, and now it is just walmart? That must impact the S&P 500 quite a bit. You used to have lot's of smaller brands of ketchup and beans, and now it is just Heinz? Lot's of car companies to only a few large ones etc.

Isn't the problem with China that financials are heavily overrepresented in the index? It is not very balanced? I really underestimated the effect of reinvesting dividends though. After playing around with that calculator, Even investing in the middle of the dot com boom, and selling now 15 years later, you get a after inflation return of 2%. And in 2002 it is already 4%. So if you average in, then getting less then 4% seems extremely unlikely over a 15-20 year period. Even if another financial armageddon happens in the mean time. Edit: I think what we are confusing here is returns if you DONT invest the dividends. That really skews it. Over the long term, real GDP growth does seem to correlate with growth in value of stocks. If you take out dividends reinvested, then they do correlate almost exactly. So growth of the S&P 500 would correlate, but actual growth if you reinvested dividends, does not correlate. That is much higher.

yeah it seems you are right, the S&P500 barely moved between 1900 and 1950, and you saw a huge delevering, yet real return is still over 5%. It still seems you are better off investing in emerging countries though. If they have a balanced index, your returns will likely be 6-8% over the long run. If you invested in 1920 when the market was cheap, and sold near the end of the century, your return is 8%! If you invested in 1982 and sold in 1998, your real return is 14% lol. So it can make a huge difference if you start at the right time.

Constructive try this: http://dqydj.net/sp-500-return-calculator/ If you dont reinvest dividends your average return is 3.89%, but if you do reinvest them then the return is 7%. So it is certainly correlated to real GDP growth. Also note that some of this return is due to multiple expansion (id say about 0.5-1%). And buybacks would jack up return without dividends reinvested as well. I guess I should take into account though that if real GDP grows like 1%, you still get a several % boost by reinvesting earnings.

Which EM countries? I have looked at a few, but couldn't really find good exchanges: Botswana Population: 2m people Population growth: almost 2% GDP per capita: 15k$ (higher then Mexico I think?) Debt GDP: less then 100% total I think (cannot find exact figures) Government debt GDP: 23% Corruption: it ranks as least corrupt country in Africa at nr 30. Much lower corruption then China even. And most jobs are in services, and main export seems to be diamonds. They dont have oil. And if I look at stocks, they seem to trade at multiples of around 10x earnings and almost all growing at double digits. But I cannot find a stock index. Malaysia Population: 30 million people Population growth: still about 1.5% but shrinking GDP per capita: 11k$ Debt gdp: 86% for consumer and 55% for government. So about 150% total? Corruption: ranks at nr 60, still lower then China. But number of people with internet, and literacy, it ranks quite good. I can't find how expensive Malaysia is, as they do have an index fund. It seems putting 25-30% of your money in these two countries would be a better idea then in western countries. For example to illustrate how little corruption these countries have, Italy ranks at place nr 69! And is considered first world. So they both rank better. Jim rogers on Malaysia: South Korea Population: 50m Population growth: 0.2 % ( :( ) GDP per capita: 28k$ Debt GDP: government debt is 33% of gdp and consumer debt about 35%? Which seems really low. Corruption: Can't find exact rating, but it ranks very good on corruption, probably best of 3 so far. And it seems Korean stock index is quite cheap? I dont know where to find exact PE of those. But GDP is growing very slowly. But if North korea opens up, that will cause population growth, and will be very good for South Korea. So with low debt, low corruption, and a lot of high tech industries there, it seems to be a good candidate to invest in for the next 30 years? Jim rogers also thinks Korea is very interesting: If you add up productivity growth, population growth, and an expansion of debt/gdp, then it seems very likely those countries will see a nominal gdp growth of 4-6% in the next 30 years.

yeah and about 60-70% of gdp growth came from debt growth in the last 60 years. So you get 1% productivity growth (the wildcard) and maybe 0.5% population growth? If the debt load shrinks in the next 20-30 years, then that will cause negative growth. So it seems even 3-4% is probably optimistic? Your lucky if you do 1-2% after inflation? And probably with huge variance. So a decent chance you will have your money locked up for at least 20 years if you dont want to take a loss. So what is the best strategy here as a passive investor? Let's say you have 50k$. How about spreading out in countries with growth, low corruption (relatively), low debt, pe multiple of <15x and still larger population growth then west? And keeping like 50% in cash in case of a market crash in the west.

I keep hearing that if you invested in the general market in the past 50 years, you would have done somewhere between 5-7%. Now some people asked me about advice and I wanted to say index fund, but im having some second thoughts. For starters, if you invested in the general market in the 50's, there was very little leverage, and the population was growing at almost 2% a year. debt GDP was like 120%. Now debt GDP is more like 350%, and the population is growing only 0.7% a year. And generall GDP growth comes from population growth, debt growth and productivity growth. Given that population isn't growing, and there is not much room for debt growth, wouldn't investing in an index fund that is heavily weighted on the EU and the US be a bad idea? If debt would decline to 240% GDP, that would be negative for GDP and holders of index funds. Growth would have to come from productivity (only about 1%) or population growth, (less then 1%). On top of that, shiller PE is almost at all time highs now. And in the 50's PE ratio was about half it is now! The odds of a 5-6% return without huge variance over the next 10-20 years dont look good to me at all. To break it down, ~4% of GDP growth came from debt growth, 1% productivity growth, and about 1.5% from population growth. This is nominal GDP growth, and an index roughly tracks nominal growth? This growth: Comes mostly from debt growth. And the fact that multiples were low in the 50's. I dont think the odds would be good to see a repeat in this, given that debt is unlikely to grow and population is actually likely to shrink in the first world! Looking at this, you can see that in a leveraging and then a deleveraging, you would ahve done badly with the S&P 500 in the first 50 years of the 20th century: Might as well buy real estate then? At least you would have made something in rental payments. (edit: i guess you get dividends, but with real estate, your networth has less volatility). I guess to conclude, my thesis that an index fund is a really bad idea now is based on the fact that growth comes from three things, productivity (more money can be spent on other things and costs come down), debt growth and population growth. So to be wrong here you would have to see productivity growth accelerating. Since the other ones are extremely unlikely to grow.

It is not rational for them to do it. Either they suffer for 1-2 years, and scare the living shit out of the rest of the oil market and take some market share and get to higher prices, or they cut supply and still have 60-70$ oil, except with lower production. Which one would you choose? Especially if you have enough forex reserves for the next 10 years. Plus as a bonus, you will piss off your arch enemy and can pretend to help your ally the US to put the screws on Russia.

Not relevant at all. That is a bold statement. :) It is not relevant because they cannot dictate oil prices, and they have large forex reserves. If they lower output, north america simply increases output to fill up the lack of demand, so you will keep low oil prices, but now with less output. And if you got 1 trillion $ in the bank, why would you not shake some of these players out of the market and scare them off a bit to get higher oil prices in the longer term? And If SA is not cutting, it is not in best interest of venezuela to cut either for the same reasons mentioned above, so they will ramp up if anything, because they are desperate and really need the money. That is also why you have Saudi's saying stuff like 'oil will never go above 100$' and 100$ oil history! They are trying to scare the market in being more disciplined so they will profit from higher oil prices in the future when excess supply is shaken out. To sustain production at >90m barrels, new investments need to be made in the next 1-2 years. And the fewer investments are made, the larger will SA's market share be when that excess supply is shaken out. It is all simply game theory really. Unless you think SA is irrational.

That is not relevant at all. First of all SA has huge reserves. Second, if you look at the game theory, it would not make sense for them at this point to cut production. If anything countries like venezuele will produce more at these prices because they are dead broke.

That is like saying that deflation causes a crisis. It is a sympton. The oil price crashed because of a drop in demand after the financial crisis. This is because there is a fragile balance between supply and demand. If demand would drop 5% in a year, it woulc cause a massive crash in oil prices. And if supply only exceeds demand by a small amount, prices crash too. You did not see a fall in consumption in 2014, only a smaller rise then expected. And a lot more supply then the market could handle because of a lack of discipline with NA oil drillers. If you assume savings of 60$ per month per consumer, let's take 150m consumers in the US. That is 108 billion$ . That is like .6% of GDP. And this is not netting out the jobs lost in the oil sector.

http://i62.tinypic.com/2gydn6b.png According to Podemos: Interesting what is happening in greece. Minister of finance just said they will not negotiate, and Dijnselbloem walked out right after that: http://www.keeptalkinggreece.com/2015/01/30/dijsselbloem-you-just-killed-troika-varoufakis-wow-video-pics/ Honestly I understand why they dont want to sell off state assets. It will not really help paying that debt, and your letting innocent people bleed basically. And those assets will be sold for too cheap most likely. Very interesting what will happen. Minister of finance is not really a politician at all, he even said he does not like politicians because they debate to make eachother look bad. They dont want to have discussions to find solutions. Interview with finance minister after dijnselbloem drama: http://deredactie.be/cm/vrtnieuws/buitenland/1.2224641 Im a big fan of this guy already! Other Pig countries should be envious.

No I wouldn't. If I cut one of my fingers off because I was an idiot, my solution would not be to cut off additional ones. The Greeks have a hugely dysfunctional and incredibly bureaucratic economic system which hasn' t been reformed in the slightest. They have just elected a communist party that wants to roll back the tiny reforms that were made. They are completely insane! They is unemployment is Greece precisely because of parties like Syriza. Syriza want to increase the size of Greece's public sector!!!! Its already a monstrosity. And their solution is to make it bigger?!? The Greek economy does not work unless it gets huge subsidies from Europe which it has been getting for a long time. What we are seeing now in Greece is not austerity. Its economic truth. he did choose what is basicly a very right finance minister that seems like smart guy. Not sure how much he can do though. It will be interesting to follow. But I dont think these guys are as left as they claim to be.

why not just leave it alone? I dont see many bargains. OPAP doesnt look that cheap. Only thing that looks cheap is intralot. But a lot of these securities traded much lower in 2012 then today.

Grivalia looks interesting. Fairfax is a majority holder I think. They have prime real estate in greece, and unlevered, but not that cheap.

Also called Libertarian marxism :) . http://blogs.valvesoftware.com/economics/why-valve-or-what-do-we-need-corporations-for-and-how-does-valves-management-structure-fit-into-todays-corporate-world/#more-252 He is current minister of finance of Greece, and used to work at valve (the steam platform that is quite brilliant really). I think he presents some interesting idea's. Any thoughts on why this corporate marxism would fail miserably at different type of companies? And what its weaknesses are? The idea is surely interesting. Here is a interview with him, for interested people. Seems like Greece is lucky to have him. http://www.econtalk.org/archives/_featuring/yanis_varoufaki/ He also wrote a few books that I just ordered.

So right about Hope. And hope's best friend is greed. I think everyone has to work between greed and fear. Some people have more greed, and some people more fear. I can be a bit too careless, so i gotta keep greed in check.

http://www.econtalk.org/archives/_featuring/yanis_varoufaki/ Interview with finance minister of Greece. He used to be a manager at valve. very interesting thoughts on that company as well . Seems like a very smart and competent guy.