Buffett: Don't expect returns over 7% over next century

[Notmuchlonger]

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.

 

[Nords]

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.

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?

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?

 

[Delawaredave5]

Let me be honest: reason for this post is it is my first "dual quote"...

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).

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.

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).

 

[Notmuchlonger]

"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.

 

[Shawn]

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.

 

[Spanky]

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.

 

[walkinwood]

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.

 

[megacorp-firee]

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

 

[FIREd]

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...

 

[haha]

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

 

[Delawaredave5]

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.......

 

[FinanceDude]

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.........

 

[Notmuchlonger]

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.

 

[FIREd]

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.

 

[al_bundy]

send them to the glue factory

 

[clifp]

We do the same thing at work, telling management that the project will take X months to complete and getting it done in X-4 months.

I assume these weren't software projects.

My rule of thumb for estimating software projects was to take whatever the engineers estimated move to the next unit of time and than double it.

So a one week project was 2 months, two months project 4 quarters etc.

 

[clifp]

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.

I guess it is pointless to remind her that her SS check increases each year at the rate of inflation...

My mom is always trying to give me money, eventhough I have more than she does.

Reading about how others have to deal with family member who think that their LBYM lifestyle means they should subsidize there lifestyles makes me realize how lucky I am. Not to menition, while mom loved interior decorating her dad taught her not to waste money with silly color changes!

You have my sympathy FIREDreamer

 

[haha]

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.

It isn't directed at you, and it is not cynical. It's that old Red Queen problem once more.

Ha

 

[FIREd]

I guess it is pointless to remind her that her SS check increases each year at the rate of inflation...

My mom is always trying to give me money, eventhough I have more than she does.

Reading about how others have to deal with family member who think that their LBYM lifestyle means they should subsidize there lifestyles makes me realize how lucky I am. Not to menition, while mom loved interior decorating her dad taught her not to waste money with silly color changes!

You have my sympathy FIREDreamer

Thanks for your sympathy clifp. She is aware that her SS check increases each year at the government-established rate of inflation, but she thinks that the increases are way too low to keep up with real inflation.

 

[FinanceDude]

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

I believe a "reversion to the mean" will occur going forward. October 2002-October 2007.......we're not going to see that kind of 5-year growth again in my lifetime.............

 

[FIREd]

It isn't directed at you, and it is not cynical. It's that old Red Queen problem once more.

Ha

Oh! I am terribly sorry about misunderstanding your post. But when I am in a bad mood, I tend to take everything the wrong way. Maybe I should cheer up before I continue posting...

 

[haha]

Oh! I am terribly sorry about misunderstanding your post. But when I am in a bad mood, I tend to take everything the wrong way. Maybe I should cheer up before I continue posting...

Really, I agree with what I think is you point that boomers and especially pre-boomers had some things easier. Mainly, we were able to front-run the late boomers and those who came immediately after. But this will be changing with Boomer retirement, and things should be getting better for you.

College graduates today really have to scramble, and even when work is secured it is hard and not very secure for most.

My post was about the trap of extrapolating the past into the future. Eighteen fat years is rarely followed by another 18 fat years.

Ha

 

[clifp]

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....

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.

[deleted lots of good analysis about dividend rates]

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.

I'd add there are structural reasons why we have lower dividend rates now than in the past.
First investor philosphy has changed dramatically. Before WWII and the 50s investors demanded higher yields from stocks than bonds, because of the risker nature of dividends. The compounding effecting of rising dividends payments wasn't really comprehended by investors.

Second the management composition of major companies changed from founder and then their children/relatives (e.g. Ford Motor company) to professional managers. This is often a good thing, as a bitter ex Ford shareholder, I believe that the excessive cash flow via dividends and prefered stocks (and special voting rights stocks) into the Ford family coffers helped kill the company.

However, CEO/professional managers have much different incentive than CEO/owners. Owners love dividends cause you get income while retaining control. In contrast, CEO gets paid in large part based on the size of the company. Every dollar paid in dividends is one dollar less in retained earning that can be used to fund internal growth, or more often used to fund acquistions. Acquistions are one of those visible CEO activities that compensation boards tend to reward CEOs with bigger salary/bonuses. Finally less dividends also allows for more cash for stock buy backs. Stock buy backs increases the value of stock options and restricted stocked awards etc. Since a CEO typical only lasts for 5 years at company there is strong incentive to focus on the short or intermediate term and not long term (decades).

So I partially agree that Buffet and Boggle are sandbagging by saying that dividends have dropped form 5% to 2% therefore total returns going forward are 7% (5% price appreciation + 2% dividends). The obvious implications is a that lower dividend rates means higher retained earning providing potential for more growth in the future. For example I imagine that R&D investment as percentage of revenue for US corporations as a whole is much higher now than it was 50 years ago.

Where I think they make good points is that people are far more comfortable with investing in the stock market than they were 100 years ago and even 20 or 30 years. Stock market investing = gambling to lot of people even 20 or 30 years ago. That isn't true any more and so we see more investments in the market which lowers the risk premium of the stock market from its historic levels. This is a basic supply and demand argument.

 

[Nords]

Here is another article on the subject:
The bull market won't come back - Mar. 3, 2008

That reminds me of Business Week's special issue on "THE DEATH OF STOCKS?" published in August 1979. It only took three more years to hit bottom.

So we should be back on track by 2012, right?

I'd add there are structural reasons why we have lower dividend rates now than in the past.
Second the management composition of major companies changed from founder and then their children/relatives (e.g. Ford Motor company) to professional managers. This is often a good thing, as a bitter ex Ford shareholder, I believe that the excessive cash flow via dividends and prefered stocks (and special voting rights stocks) into the Ford family coffers helped kill the company.
However, CEO/professional managers have much different incentive than CEO/owners. Owners love dividends cause you get income while retaining control. In contrast, CEO gets paid in large part based on the size of the company. Every dollar paid in dividends is one dollar less in retained earning that can be used to fund internal growth, or more often used to fund acquistions. Acquistions are one of those visible CEO activities that compensation boards tend to reward CEOs with bigger salary/bonuses. Finally less dividends also allows for more cash for stock buy backs. Stock buy backs increases the value of stock options and restricted stocked awards etc. Since a CEO typical only lasts for 5 years at company there is strong incentive to focus on the short or intermediate term and not long term (decades).

Hey, if dividends were outlawed then only outlaws would have dividends.

I think that Ford (and many other companies) would have found the rocks & shoals by a number of ways, and dividends were just one of their petards. Yet various academic financial studies claim that piling up cash is an invitation to managerial death by acquisition or buybacks, and a certain amound of management discipline is imposed by having to pay a quarterly dividend. Witness Apple being hassled to do something, anything with their cash-- it reminds me of Microsoft deciding to pay their "special" dividend.

Another nice aspect of dividends is a financial truth that's difficult to mess with. You can do a lot of accounting tricks with stock buybacks and acquisitions, but it's hard to mess around with a dividend yield. That's one of the main reasons we use a dividend ETF for international equities, and it's a big drive behind Siegel's "The Future For Investors".

I'm waiting for the study that compares dividend yields to tax & accounting law. I bet when dividends are heavily taxed that the dividend yield drops, and when dividends are lightly taxed then the yield goes up.

 

[megacorp-firee]

I believe a "reversion to the mean" will occur going forward. October 2002-October 2007.......we're not going to see that kind of 5-year growth again in my lifetime.............

There are a lot of ways to interpret that ... I hope you are ok health wise.