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Old 03-01-2008, 06:04 PM   #21
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Well, he was saying that if he wasn't handicapped with a $50 Billion portfolio and only had to find places to invest a few million, he felt confident he could average 50% returns/year, as he saw a lot of opportunities.
I'm betting that if he only had a few million, he wouldnt see a lot of those opportunities...
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Old 03-01-2008, 11:45 PM   #22
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The arguments of Buffett and Bogle go something like this (I'm being a little loose with the numbers) ...

The total equity return in the 20th century was 10%. 5% of this return was due to market-value gain (e.g., Dow increased from 66 to 11,497) and 5% was due to dividends. Today, the dividend rate is only 2%. Hence, if we assume a 5% market-value gain and a 2% dividend rate for the 21st century, the total return will be only 7%.

I believe this argument is flawed because it doesn't consider the cause of the lower dividend rate. Why is it only 2%?

A lower dividend rate can be caused by the over valuation of equities. In essence, if equity prices are much higher than their earnings (PE ratio) then the dividend rate will be low. However, the PE ratio today is only slightly higher than the average PE ratio during the 20th century, which was about 15. Stocks are not excessively overvalued today and this is not the primary cause of the 2% dividend rate.

Alternatively, a lower dividend rate can be caused by companies reinvesting a greater percentage of their earnings in themselves rather than distributing them to share holders. They use their profits or earnings to build more stores, enhance factories, improve productivity, engage in R&D, develop new products, etc. This is done when companies believe that they can achieve greater growth by investing in themselves. This is what companies are doing today and it is the primary cause of lower dividends.

The reinvestment of earnings as opposed to share holder distribution may or may not be the most effective investor-friendly approach. If it is an effective approach it means that we can expect greater expansion and increased productivity that result in higher market-value gains (perhaps 8% in the 21st century instead of the 5% observed in the 20th century). If so, the estimated 7% total return is understated. The actual return easily could be 10%. The only difference from the 20th century would be that a greater fraction of return would come from increased growth (increased market-value gain) as opposed to the dividend rate.

Alternatively, reinvesting earnings may not help companies grow any faster than if these earnings were distributed to share holders. All their efforts at increasing growth are in vain. In effect, companies are "burning" their earnings. For the most part, I believe this is what Buffett and Bogle believe. If they are correct, it means that the total market return will be 7%, but only if companies continue with this unproductive approach. However, nothing is preventing companies from returning to the more dividend-friendly policies of the 20th century. They could decide to increase dividends tomorrow by simply distributing a greater percentage of their earnings to investors. If they did this, those arguing for a 7% total market return would be immediately forced to revise their estimate to the upside. They would be forced to do so not because of economic factors such as earnings and growth potential but because of administrative changes made by companies.

In essence, Buffett and Bogle are saying the following. "Investors in the 20th century made $100/yr. Today, at the beginning of the 21st century, investors make only $50/yr because companies burn the other $50 before distributing their profits back to investors. Hence, we expect investors to earn only $50 in the 21st century." Buffett and Bogle will be correct only if the reinvestment of earnings does not increase growth and only if companies continue to "burn their money" through unproductive efforts at growth. However, there are no economic factors preventing companies from change.

For these reasons, I believe that the lower market return estimates of Buffett and Bogle are flawed. Granted, they are incredibly wise and experienced individuals with demonstrated excellence. However, I've never seen them address the cause and implications of the lower dividend rate.
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Old 03-02-2008, 12:36 AM   #23
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How Fast Will S&P500 Earnings Grow

Apparently there is a correlation between dividend payout ratios and forward earnings but it is inverse to what you may think and actually makes sense. High dividend payout ratio's portend higher earnings for the future and low dividend payout ratios have portended lower earnings growth on average for the S&P500. When management is comfortable with long term growth trends they raise the dividend rate.
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Old 03-02-2008, 04:52 AM   #24
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Many companies have moved away from high dividends in preference for keeping the money and reinvesting it in the company. In other words, (in theory) company management thinks they can achieve better returns by revinvesting the money in the company rather than returning the moeny in dividends to the investors (so the investor can reinvest the money).

But part of the reason for lowering dividends was because of the double taxation on div and the lower cap gains rates offered a tax advantage.
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Old 03-02-2008, 07:57 AM   #25
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For these reasons, I believe that the lower market return estimates of Buffett and Bogle are flawed.
I don't view the dividend/price appreciation split particularly indicative of anything. It may change over long periods due to tax policies, investing community desires, etc.

Two real/structural reasons I think US equity returns will decrease going forward:

1. Information "transparency" - the volume and velocity of financial and marketing information continues to increase. I'd guess as there's more info, equities are a "safer bet" - therefore lower returns.

2. US market maturity - Bernstein tells us that country market returns decrease as country gets more mature.

More important than returns, is the risk/return ratio shifting ?

If you believe returns are going down, and risk going down proportionally - is it prudent to change to "riskier stocks" and/or "higher equity percentage" ?
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Old 03-02-2008, 11:15 AM   #26
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I agree with the market maturity statement. However, I wonder what adding foreign and em will do. Will a globally diversified portfolio increase returns? Guess if I live long enough Ill find out.
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Old 03-02-2008, 12:27 PM   #27
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Do note that a lot of these guys like to hit you with a lowball to reduce your expecations.
That having been said, I wouldnt do any planning where expectations of >7% returns without any principal consumption were mandatory.
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If WB is correct 7% returns means the 4% theory wont hold water. Good luck getting inflation to co-operate.
Funny how the projections keep coming in around GDP and "SWR + inflation".

But a plot of Berkshire's returns over the years shows a definite flattening of the curve. No doubt he finds that a lot more challenging than turning $100M into $200M in three years, but it's responsible to issue stern warnings that past returns are history.

So... do we remain satisfied with Berkshire's steady 7% on an expense ratio of about zero while we await the Buffett transition? Is it possible that Berkshire could someday go the way of Standard Oil and AT&T, or just start spewing out dividends? Or should those of us who don't have any REIT or commodity exposure liquidate our Berkshire holdings for cheap REITs and commodities ETFs?

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However, I wonder what adding foreign and em will do. Will a globally diversified portfolio increase returns?
Do we expect the dollar to keep dropping against other currencies?
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Old 03-02-2008, 12:49 PM   #28
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Let me be honest: reason for this post is it is my first "dual quote"...
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I wonder what adding foreign and em will do.
Bernstein's book, "Birth of Plenty" showed a lot of equity returns across long time periods and across many "country lifecycles". Bottom line is a globally balanced equity portfolio has to return "historical equity" like returns (and I think with less risk/volatility).

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Is it possible that Berkshire could someday go the way of Standard Oil and AT&T
There's no synergy or "magic" that Buffett brings. I think the majority of his success comes from "choosing the right industries" - very defendable, long term durable consumer brands. A lot of conglomerates years ago got broken up because no value holding together- only GE is left.

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Do we expect the dollar to keep dropping against other currencies?
I do not see a sustainable recovery in the dollar until the trade deficit narrows and we stop "exporting dollars". In fact the decline could accelerate if China and oil companies start diversifying into other currencies (as they've started).
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Old 03-02-2008, 01:32 PM   #29
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"Do we expect the dollar to keep dropping against other currencies?"

If I had to guess I would say no. But then again Im just an average Joe.
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Old 03-02-2008, 03:39 PM   #30
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1. Information "transparency" - the volume and velocity of financial and marketing information continues to increase. I'd guess as there's more info, equities are a "safer bet" - therefore lower returns.

2. US market maturity - Bernstein tells us that country market returns decrease as country gets more mature.
I'm aware of Bernstein's take (he also considers information transparency). This argument by itself is reasonable but it is not the argument that most people make. Buffett, as an example, seems fixated on the dividend rate. This is the basis of his 7% estimate. IMO, this is all but meaningless for appropriately priced equities. The dividend rate by itself doesn't have enough information since it is influenced by a number of factors (as you point out).

I've always been curious about market maturity. I'm not certain how one determines if and when the US became a mature market. Did it happen on the stroke of midnight on January 1, 2001?

Reduction in risk, and hence return, due to information transparency or other factors is an important concept. However, it is not something I loose sleep about. I'm perfectly willing to accept lower returns if they come with less risk. The 4% SWR is not necessarily in jeopardy even if future returns of US equities will be less than the historical average. In an extreme case, a 7% return with zero risk and a fixed 3% inflation rate will also generate a 4% SWR (with no reduction in inflation-adjusted principle). Likewise, there always will be more risky investments that generate higher returns.
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Old 03-02-2008, 05:19 PM   #31
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Or should those of us who don't have any REIT or commodity exposure liquidate our Berkshire holdings for cheap REITs and commodities ETFs?
These two asset classes may provide further diversification and reduce risk. If you are comfortable with the risk of holding mostly BRK in your equity portion of your portfolio, the answer is no. My approach is to include as many uncorrelated asset classes in equal proportion as possible to reduce risk since I do not have the skills nor the time to optimize return based on economical news, forecast, financial insights, company financial information, industry trends, demographics, world events, etc.
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Old 03-02-2008, 08:35 PM   #32
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It is easy to play these 'number' games. If inflation went up 3% a year, in 100 years, a person earning $100,000.00 annually today, would be earning $1,921,863.20! Yet, no one challenges the inflation figure!

Basing future stock returns by selectively changing historical facts - in this case, keeping stock price growth returns constant, but changing the assumption on dividend yield - is suspect at best.

There may be ways to forecast future returns, but I don't buy this one.
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Old 03-02-2008, 10:20 PM   #33
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Do note that a lot of these guys like to hit you with a lowball to reduce your expecations.

... Then when he exceeds those reduced expectations, he's a hero.
sssssshhhhh you've just articulated the secret to my w*rking success. The big secret is to make your lowball prognositications seem credible.


... buy low, sell high ... promise less, deliver more
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Old 03-03-2008, 11:28 AM   #34
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Here is another article on the subject:

The bull market won't come back - Mar. 3, 2008

So if like me you are in your 30's, not only won't you get full SS benefits (if any) at retirement age, not only won't there be any pension to rely on (for most of us at least), but your personal savings/investments are expected to return a lot less than your parents'... When I hear people from my parents' generation complain, it better not be about not having enough money...
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Old 03-03-2008, 01:33 PM   #35
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Here is another article on the subject:

The bull market won't come back - Mar. 3, 2008

So if like me you are in your 30's, not only won't you get full SS benefits (if any) at retirement age, not only won't there be any pension to rely on (for most of us at least), but your personal savings/investments are expected to return a lot less than your parents'... When I hear people from my parents' generation complain, it better not be about not having enough money...
Oh Dear Lord, tell us this is not so. We are your chosen people, we surfed on 20 years of astounding returns, we feared not the market but obedient to thy grand plan sought time-in-the-market. We cast out our intelligence and careful judgment, knowing that thy indexes gave bountifully to all thy believers.

We revered thy prophets Bogle and Bernstein. Financial Planners went forth and multiplied to serve in thy righteous army.

We have learned to seek 20 years of employment followed by 60 years of heedless pleasure. We need robust returns to live the lives you have led us to; Lord do not forsake us now!

Where have we sinned, Lord? What sacrifice is wanted?

Ha
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Old 03-03-2008, 01:54 PM   #36
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Here is another article on the subject:

The bull market won't come back - Mar. 3, 2008

So if like me you are in your 30's, not only won't you get full SS benefits (if any) at retirement age, not only won't there be any pension to rely on (for most of us at least), but your personal savings/investments are expected to return a lot less than your parents'... When I hear people from my parents' generation complain, it better not be about not having enough money...
I saw these same articles in 2002. Who knows about market going forward.

But you people in your 30's are scr_wed on the corporate pensions and SS fronts - the baby boomers spent it - sorry.......
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Old 03-03-2008, 02:07 PM   #37
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Maybe Warren's getting a little senile, or misty about the past? Of course, he would never be seen as "sly like a fox"..........

Hey at 7%, your money doubles every 10 years.........so tell your kids to START early.........
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Old 03-03-2008, 02:09 PM   #38
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If you are in your 20's and 30's. Start up a business that takes advantage of all the boomers. There has to be alot of money to made off them.
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Old 03-03-2008, 02:43 PM   #39
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Oh Dear Lord, tell us this is not so. We are your chosen people, we surfed on 20 years of astounding returns, we feared not the market but obedient to thy grand plan sought time-in-the-market. We cast out our intelligence and careful judgment, knowing that thy indexes gave bountifully to all thy believers.

We revered thy prophets Bogle and Bernstein. Financial Planners went forth and multiplied to serve in thy righteous army.

We have learned to seek 20 years of employment followed by 60 years of heedless pleasure. We need robust returns to live the lives you have led us to; Lord do not forsake us now!

Where have we sinned, Lord? What sacrifice is wanted?

Ha
Sorry, I don't know what to do with your post. It is so laced with cynicism that I don't quite understand what point you are trying to make.

I was just ranting. I am in a bad mood after spending the weekend listening to a couple of boomers whining about their situation. First, my FIL is hitting us for big time money to take care of a few "mistakes". Then, my mom was complaining that inflation was eating through her social security check and that life was becoming tough (meaning she might need "help"). Coming from the woman who just bought new sofas to replace a perfectly good 5 year old sectional, but the color did not suit anymore, you see... When I told her that at least she was lucky to get SS, and that I probably will not be so lucky, her answer was just: So what? I am just sick and tired of it right now.
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Old 03-03-2008, 02:44 PM   #40
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send them to the glue factory
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