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The next 20 years


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What will returns over the next 20 years be? Considering today's valuations probably pretty similar to the returns over the last 20 years or even worse if interest rates are much higher at the endpoint. Isn't that an amazing chart? Who would have thought in 2000 that the Dow, S&P and the Nasdaq would have performed equally well after 20 years (excluding dividends)? 

Today reminds me a lot of 2000, crazy speculation in some parts of the market and reasonable valuations in other parts. Fortunately this valuation divergence is again the basis for future outperformance.

 

Nominal Gains

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Here’s a famous 1999 article in Fortune where Warren Buffett predicted returns for the next 17 years. (Spoiler alert, he nailed the prediction.)

 

And, more importantly, he lays out all the key factors you need to consider to make the prediction.

 

In short, don’t expect the next 20 years to look like the last 20.

 

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

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Yeah I remember that article very well! You are probably right that returns will be worse considering record profit margins, ultra low interest rates and beginning valuations.

Fortunately that doesn't matter too much for small scale stock pickers.

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Eh I read super compelling and thoughtful research 5 years ago that predicted negative returns for the following decade. Then we have a redonkulous 5 year stretch. 
 

The future can unfold in ways we either underestimate or can’t predict so IMO it’s better to just focus on owning quality stuff and then managing the risk on, risk off aspect.

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Sure but it's still fun to estimate future market returns and more than an interesting excercise for people who invest in index funds. Of course no one knows the future, so it's best to think about future returns in terms of a probability distribution.

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Yea no I actually find a lot of ultimately useless exercises to be good workouts for your mental agility in terms of investing framework. Kind of like batting practice before the game. You’ll have an easier time hitting a pitch you’ve seen before than one that’s totally new. And if you don’t see that pitch, so what? So running through these exercises can have benefits. I just wouldn’t place too much weight on the conclusions they come to.

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That reminds me of that Hussman guy, I used to read his comments a couple of years ago, he always made a compelling case for a big correction. If I recall correctly his stock picks weren't bad at all but he had hedged away all gains.

I just looked at his funds performance, what a desaster! He's the perfect example why it's not a good idea to base investment decisions on such models.

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1 hour ago, Gregmal said:

Eh I read super compelling and thoughtful research 5 years ago that predicted negative returns for the following decade. Then we have a redonkulous 5 year stretch. 
 

The future can unfold in ways we either underestimate or can’t predict so IMO it’s better to just focus on owning quality stuff and then managing the risk on, risk off aspect.

 

I remember people kept saying "we're turning Japanese".  I kept saying the PE of Japan's stock market was quite high after they turned Japanese.  Today, looks like we've turned Japanese just like they worried about.

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3 hours ago, Thrifty3000 said:

Here’s a famous 1999 article in Fortune where Warren Buffett predicted returns for the next 17 years. (Spoiler alert, he nailed the prediction.)

 

And, more importantly, he lays out all the key factors you need to consider to make the prediction.

 

In short, don’t expect the next 20 years to look like the last 20.

 

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

 

Interesting, thanks for sharing. Reading the article reminded me of a piece in the WSJ discussing investor's expectations for the future:  https://www.wsj.com/articles/when-a-59-annual-return-just-isnt-enough-11625238010

 

Feel like a lot of people will be disappointed going forward. Assuming that US stock market returns follow a similar pattern over the next 17 years as outlined in Buffett's 1999 article (i.e. 4% real annual returns), what strategies can we use to get better results?

 

 

 

 

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I guess if you think it's going to be a flat market you should focus on special situations. Merger arb, spinoffs, tenders, etc.  You could probably grind out a few percentage points higher, if nothing else. Redeploy to growth opportunities during the inevitable busts.  However there are no guarantees, we could also continue to have lopsided winner take all markets where you underperform if you don't own FAANG.  It's a risk you have to take.  Just pick a general proven strategy and stick to it no matter what.

 

My strategy is to go after high quality stuff when it goes on sale.  Plus special situations, if I understand them. Plus plain old value if they are returning capital. It got me through 2008 just fine.  

Edited by no_free_lunch
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Yup. Whatever the returns the last decade, there were huge outliers and pockets of returns well in excess of that. Find the pockets of outperformance, and pound that. Or, find pockets of stable but mediocre returns and then get creative. Definitely not as hard as they like to make it seem.

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With returns going down, it becomes a more winning strategy to trade and exploit the volatility vs just buy and hold. I think traders might beat the compounder buy and hold investor going forward. Of course trading right is not easy either.

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I always thought Buffett

8 hours ago, Thrifty3000 said:

Here’s a famous 1999 article in Fortune where Warren Buffett predicted returns for the next 17 years. (Spoiler alert, he nailed the prediction.)

 

And, more importantly, he lays out all the key factors you need to consider to make the prediction.

 

In short, don’t expect the next 20 years to look like the last 20.

 

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

 

I always thought the 17 lean years would always be followed by 17 fat years, at least that was the case until 1999. So far so good from 2016-2022 ..., maybe we are in for 11 more fat years until 2033 🙂

 

 

 

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5 hours ago, Spooky said:

Feel like a lot of people will be disappointed going forward. Assuming that US stock market returns follow a similar pattern over the next 17 years as outlined in Buffett's 1999 article (i.e. 4% real annual returns), what strategies can we use to get better results?

 

 

 

 


Very good question. Depends on your time horizon and investment appraisal abilities.

 

If you have eff-you money and can comfortably live off the annual dividends from the Vanguard All World index then just set it and forget it. (You can’t really get anymore diversified for the money than that.)

 

If you’re an amateur investor with a 50-year horizon and plan to dollar cost average for the rest of your career then continuing to invest in the S&P 500 (and never selling when it tanks) is probably about as good as you can hope to do. Today’s high valuation will be barely detectable on a historical chart 50 years from now. The cost and tax benefits of buying and holding a continuously evolving group of America’s 500 strongest companies will almost certainly beat any other tactics long term. Plus, you’ll get to spend your life doing whatever you most enjoy rather than stressing about individual investment decisions.

 

If you want to beat the S&P 500 long term (after taxes and fees) then you have to invest in assets whose value will outpace the value of the S&P 500. Therefore you have to be able to correctly appraise the value of assets, pay a reasonable price for them AND have the temperament to hang on to the investment when Mr. Market tries to convince you you misjudged it. (Not easy!)

 

I think Bloomstran laid out the clearest explanation I’ve ever seen on how Buffett and other value investors consider investment opportunities (in terms of earnings, growth/return on equity, earnings multiples, etc.). I believe it was his 2018 annual letter, but it could have been the year before or after.

 

Bloomstran creates simplified financial statements comparing the S&P to his portfolio to make the point that his portfolio has higher cash flow margins, less leverage, higher roe, a lower PE multiple, and therefore better long term prospects than the S&P. 
 

And, I think that’s the ticket. If you think the S&P is dangerously overvalued then invest in assets that aren’t. Personally, right now I don’t own any S&P, and I prefer Vanguard’s all world index excluding the S&P 500 (VXUS). I think the earnings and dividends will chug along in similar fashion to the S&P, however, it has been selling for a much lower multiple than the S&P in recent years. I picked up a pretty big chunk of the VXUS back during the 2018 interest rate tantrum, and it has been slightly outpacing my expected 8% to 10% annual growth ever since. And, these days Vanguard is even advising having 40 to 50% of your portfolio invested outside the US (because of the US’s lofty valuations).

 

In summary and in summation, buy low, sell high and never lose money.

Edited by Thrifty3000
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