Market forecast by Buffett back in 1999

[s8019]

17 years ago, in November 1999, Buffett made a following foreast:

 

"Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like--anything like--they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate--repeat, aggregate--would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that's 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more."

 

http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm

 

Who can calculate actual return for the last 17 years (he is referring to DJIA)? I'm not sure I can correctly estimate dividends.

 

 

[Ballinvarosig Investors]

17 years ago, in November 1999, Buffett made a following foreast:

 

"Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like--anything like--they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate--repeat, aggregate--would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that's 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more."

 

http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm

 

Who can calculate actual return for the last 17 years (he is referring to DJIA)? I'm not sure I can correctly estimate dividends.

http://fortune.com/2016/11/22/surprise-warren-buffett-turns-out-to-be-more-prescient-about-stocks-than-politics/

But the record shows that the period’s gross returns are anemic enough to confirm Buffett’s general accuracy. From mid-November, 1999, to last Friday’s trading day, the annualized total return to investors from the Dow Industrials was 5.9%.

So Buffett was completely wrong in his prediction, the DOW return was 5.9%, not the 6% he predicted.

[s8019]

Thanks, have not seen the article.

[Uccmal]

Thanks, have not seen the article.

 

Thankyou both.  They were good reads.  I love this piece:

 

"Move on to failures of airlines. Here's a list of 129 airlines that in the past 20 years filed for bankruptcy. Continental was smart enough to make that list twice. As of 1992, in fact--though the picture would have improved since then--the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero."

[racemize]

What's kind of funny is his two conditions for the market to keep growing at high rates actually ended up happening:

 

Now, I'd like to argue that we can't come even remotely close to that 12.9%, and make my case by examining the key value-determining factors. Today, if an investor is to achieve juicy profits in the market over ten years or 17 or 20, one or more of three things must happen. I'll delay talking about the last of them for a bit, but here are the first two:

 

(1) Interest rates must fall further. If government interest rates, now at a level of about 6%, were to fall to 3%, that factor alone would come close to doubling the value of common stocks. Incidentally, if you think interest rates are going to do that--or fall to the 1% that Japan has experienced--you should head for where you can really make a bundle: bond options.

 

(2) Corporate profitability in relation to GDP must rise. You know, someone once told me that New York has more lawyers than people. I think that's the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well. In addition, there's a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems--and in my view a major reslicing of the pie just isn't going to happen.

 

Anyway, we still have the same two problems now.  So another prediction of 6% growth for the next 17 years?  Seems reasonable to me.

[Jurgis]

Anyway, we still have the same two problems now.  So another prediction of 6% growth for the next 17 years?  Seems reasonable to me.

 

Yeah, that's the concern. OTOH, the valuations are lower than they were in 1999. But yeah, probably 4-6% per year from here for 17 years. And that might be optimistic.

[rb]

So basically the markets under performed WB's view 16 years ago since they did 6% with the help of rates going lower and margins going up a lot. But then he probably didn't anticipate a massive levering up and a financial crisis either.

[Peregrine]

So basically the markets under performed WB's view 16 years ago since they did 6% with the help of rates going lower and margins going up a lot. But then he probably didn't anticipate a massive levering up and a financial crisis either.

 

This. Given where interest rates and corporate profits have gone, the case can be made that stocks are cheap (relative to other asset classes).

[Investor20]

Using S&P 500 calculator from below website I am getting annualized total return (dividends re-invested) of 2.36% after inflation correction or 4.7% before inflation correction.

 

https://dqydj.com/sp-500-return-calculator/

 

Using below calculator for VFINX I am getting 4.5% before inflation correction.

 

http://www.buyupside.com/stockreturncalculator/stockreturncalcinput.php