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fundamental premise
Old 02-28-2007, 04:42 PM   #1
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fundamental premise

There is a fundamental premise operative that, over the "long run," the equity market will beat inflation and reward the patient. A few decades of history support the propositon but is there anything else in the science of the known universe to bolster this faith? Hoping so . . .
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Re: fundamental premise
Old 02-28-2007, 04:57 PM   #2
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Re: fundamental premise

Yeah, every time I've sat on the sidelines waiting for a correction, I've watched it go up and up and I ended up paying more to get back in.


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Re: fundamental premise
Old 02-28-2007, 05:05 PM   #3
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Re: fundamental premise

There are some simple ways to look at the long-term "physics" of the stock market. They usually go something like this:

returns = dividend yield + earnings/dividend growth + speculative yield

earnings/dividend growth is a function of real GDP growth, inflation, dilution, and buy-backs

speculative yield is a function of P/E growth

So, your long-term bet that stocks will grow faster the inflation is pretty safe, assuming that going from a high P/E to a low P/E doesn't take too much away from returns in the term under consideration.
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Re: fundamental premise
Old 02-28-2007, 05:08 PM   #4
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Re: fundamental premise

Quote:
Originally Posted by windsurf
There is a fundamental premise operative that, over the "long run," the equity market will beat inflation and reward the patient. A few decades of history support the propositon but is there anything else in the science of the known universe to bolster this faith? Hoping so . . .
Not really. In fact there are more examples that it will go broke someday. - I think all companies eventually fail, go bankrupt or are bought out by someone. With that said if you are 50 years old, all you have to care about is the next 50 years, because you will die probably by then

You will run out of time, but you will probably die with a boatload of money.
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Re: fundamental premise
Old 02-28-2007, 06:43 PM   #5
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Re: fundamental premise

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Originally Posted by windsurf
A few decades of history support the propositon but is there anything else in the science of the known universe to bolster this faith? Hoping so . . .
There is no law of nature that requires stocks to go up, even over the very long-term.

The equity market, and the supporting economy, is a human contrivance. And as such, it is vulnerable to the fallibility of humans and human institutions. I'm occasionally struck by how fragile our peace, prosperity, and democracy really is. A quick look at the anarchy following the New Orleans levy break or the election of an aspiring dictator in Venezuela is enough to illustrate how precariously our good fortune is balanced.

But life is not without risks.

A long-term investment in the equity market is essentially a bet on the durability of our current political and economic systems. Those systems are wired to reward innovation and efficiency in the name of meeting and creating needs. To the extent that such systems are allowed to work largely unfettered innovative people will continue to create things of increasing value, each of which adds to the overall prosperity of humanity. It is from these broad economic drivers that long-run equity returns are derived.

Nothing is ever guaranteed. But as long as people are given free reign to improve their lives; as long as exogenous disasters are limited in scope; as long as innovators can continue to tease higher productivity out of limited human work hours and are incentivized to do so, the world economy, and returns to the owners of capital, will continue to grow over the long-term.

It is, no doubt, a matter of faith. But the alternative carries its own risks.
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Re: fundamental premise
Old 02-28-2007, 07:13 PM   #6
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Re: fundamental premise

3 years, that is a helluva an articulate synopsis.
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Re: fundamental premise
Old 02-28-2007, 07:17 PM   #7
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Re: fundamental premise

The Swiss, US and British stock markets are about the only ones with an uninterupted history. Most other countries markets "reset to zero" at some point in their history. I hate to think of it but it will likely happen to those three at some point.
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Re: fundamental premise
Old 02-28-2007, 07:22 PM   #8
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Re: fundamental premise

Quote:
Originally Posted by windsurf
There is a fundamental premise operative that, over the "long run," the equity market will beat inflation and reward the patient. A few decades of history support the propositon but is there anything else in the science of the known universe to bolster this faith? Hoping so . . .
Not really.

See The Long Term Risks of Global Stock Markets from Jorion

Irrational Optimism from Dimson, Staunton, + Marsh

- Alec
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Re: fundamental premise
Old 02-28-2007, 07:37 PM   #9
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Re: fundamental premise

So, the message is to diversify globally to avoid single-country risk. Seems prudent. You don't need to rely on innovation. Just assume that the global population will continue to grow, and somebody somewhere will continue to provide them with "stuff."
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Re: fundamental premise
Old 02-28-2007, 07:50 PM   #10
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Re: fundamental premise

Quote:
Originally Posted by windsurf
A few decades of history support the propositon ..
The stock data goes back to 1871, so a lot more than a few decades.

Quote:
Originally Posted by windsurf
... but is there anything else in the science of the known universe to bolster this faith?
I think faith is too strong. Not sure what's the correct, proper word is though. Barring catastrophic events that take humanity, society back a few hundred years, I'd say the stock market is predictable for the long run.

Is this a philosophical question? If so, ignore my comment.

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Re: fundamental premise
Old 02-28-2007, 07:53 PM   #11
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Re: fundamental premise

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Originally Posted by wab
So, the message is to diversify globally to avoid single-country risk. Seems prudent. You don't need to rely on innovation. Just assume that the global population will continue to grow, and somebody somewhere will continue to provide them with "stuff."
Actually the 'Growth' thing is a house of cards. It cannot continue forever, so it will end eventually. So I tend to think of it as a Global game of musical chairs. Instead of being seated when the music stops, just plan on being dead.

I see good times for the next 70 years or so and I'll be dead for sure by then!
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Re: fundamental premise
Old 02-28-2007, 07:54 PM   #12
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Re: fundamental premise

Quote:
Originally Posted by Sam
The stock data goes back to 1871, so a lot more than a few decades.
When we're talking about 40-50 year retirements, does 130 years seem very long to you? To me, that's like trying to predict the weather for the next week based on the last 3 weeks of weather data.
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Re: fundamental premise
Old 02-28-2007, 07:58 PM   #13
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Re: fundamental premise

To me, it's sufficiently long. But let's take your view, what next? Do nothing, live in constant fear? I'm listening.
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Re: fundamental premise
Old 02-28-2007, 07:59 PM   #14
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Re: fundamental premise

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Originally Posted by Sam
To me, it's sufficiently long. But let's take your view, what next? Do nothing, live in constant fear? I'm listening.
Global diversification.
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Re: fundamental premise
Old 02-28-2007, 08:02 PM   #15
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Re: fundamental premise

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Originally Posted by Cut-Throat
Actually the 'Growth' thing is a house of cards. It cannot continue forever.
I'm curious as to why this is so.

The existing world population can support countless decades of growth by simply bringing everyone up to 21st century living standards. Further population growth is not necessarily constrained by the limited resources of our planet. So population growth is, perhaps, without a reasonably foreseeable limit. Productivity, a multiplier of population growth, is limited only be the constraints of science and we seem to be in no danger of reaching a limit here.

I see plenty of reasons why growth may not continue indefinitely. I have a hard time imagining why it must not continue indefinitely.
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Re: fundamental premise
Old 02-28-2007, 08:14 PM   #16
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Re: fundamental premise

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Originally Posted by 3 Yrs to Go
I have a hard time imagining why it must not continue indefinitely.
Well, we could talk about population growth vs the carrying capacity of the earth, but that's more depressing than even long-term stock returns.
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Re: fundamental premise
Old 02-28-2007, 08:38 PM   #17
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Re: fundamental premise

Quote:
Originally Posted by wab
Global diversification.
So you have better, longer data for the world to support this "faith"?
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Re: fundamental premise
Old 02-28-2007, 08:44 PM   #18
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Re: fundamental premise

Quote:
Originally Posted by Sam
So you have better, longer data for the world to support this "faith"?
The historical data only gives you faith about returns, SWRs, mean reversion, etc. I don't expect the future to look much like history.

The fundamentals of population growth, scientific improvements, economic activity, etc give you the assurance that investing in the economic engines of the world will pay better than monetary inflation.

When you buy a stock, you're buying a piece of the economic engine. Engines will sputter, but if the world as a whole sputters, we'll probably have more to worry about than stock returns.
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Re: fundamental premise
Old 02-28-2007, 08:45 PM   #19
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Re: fundamental premise

Quote:
Originally Posted by wab
Well, we could talk about population growth vs the carrying capacity of the earth, but that's more depressing than even long-term stock returns.
But who says the population is limited to the earth.

Even without that, the world still has vast, wide open spaces. Notwithstanding relatively new concerns about CO2, the developed world has increased economic growth while actually reducing pollution. North American forest density has actually improved for the better part of the last 100 years. Technology and economic progress are wonderful things that tend to solve these pesky little problems that seem intractable at the time.
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Re: fundamental premise
Old 02-28-2007, 08:51 PM   #20
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Re: fundamental premise

IMHO the population will have to stabilize (or worse, reset downward) but there will still be room for market growth based on increased productivity. A lot slower growth but still some. And there will still need to be a market since supply & demand will not be repealed.
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