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Comment by cs702 | Hacker News Reader

Make sure also to read Warren Buffett's take, written way back in 1999:

https://fortune.com/1999/11/22/warren-buffett-on-stock-marke... [a]

For me, the most shocking passage of his piece is this one:

> ...from the end of 1964 through 1981. Here’s what took place in that interval:

  DOW JONES INDUSTRIAL AVERAGE
  Dec. 31, 1964: 874.12
  Dec. 31, 1981: 875.00

Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move. And here’s a major and very opposite fact: During that same 17 years, the GDP of the U.S.–that is, the business being done in this country–almost quintupled, rising by 370%. Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled. And yet the Dow went exactly nowhere.

[a] https://archive.ph/ZbKZK

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Why is the DJIA relevant to any discussion about total stock market returns?

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

This website shows a nominal 6.34% return with dividends reinvested from Dec 1964 to Dec 1981.

The point is that, despite massive economic growth (GDP quintupled) and very high rates of inflation (in the 1970's) during that 17-year period, at the end of those 17 years the market was valuing what at the time was the most prominent index of blue-chip companies at the same market capitalization they had at the beginning of the 17 years. In short, it seems that market valuations and economic performance can decouple for a very long time.

Note that the compound rate of inflation over that 17-year period was 6.5%. So, net of inflation, at the end of the 17 years, the market was valuing the DJIA's blue-chip companies at two-thirds less (!!!) than at the beginning of the 17 years. The S&P500, with all dividends reinvested, net of inflation, returned -0.2%/year over those 17 years.

despite massive economic growth (GDP quintupled)

In real dollars it less than doubled (https://fred.stlouisfed.org/series/gdpc1#0).

the market was valuing what at the time was the most prominent index of blue-chip companies at the same market capitalization they had at the beginning of the 17 years.

And during those 17 years those companies paid out roughly their entire original value in dividends.

It's true that the Dow lagged the overall economy during that period, but not nearly to the degree that the quote implies.

He was comparing the point value of an index at two points to the /nominal/ dollar value of GDP at the same interval. That firms in the Dow in returned a lot of capital to shareholders in the form of dividends doesn't mean the market value of their equity increased any during the period. You're mixing capital returns with capital appreciation which isn't what he said at all. What he said was completely accurate. I think he knows what it was like to have lived and invested through the period.

> Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled

Paying out a dividend devalues a company by the same amount it benefits the shareholders. So evaluating neither the appreciation nor the return make any sense without factoring in the dividend.

In theory, yes, but in practice market premiums are variable and greater than book values. It is true that dividend paying stocks fall somewhat on their ex-date. If they're undergoing capital appreciation too, that's generally made up for in short order.

I'm not saying to disregard dividends in terms of total return, either, only that Buffett wasn't talking about total return, so the "well, actually" I was responding to was just off the mark. If you or me were alive then and/or aware enough to watch the DJIA (classically in the 20th century, many American's measure of "the market" even if not technically the case) things really would have looked like they went nowhere (nominally) from the middle 60s until the early 80s.

> The point is that, despite massive economic growth (GDP quintupled) and very high rates of inflation (in the 1970's) during that 17-year period, at the end of those 17 years the market was valuing the index of blue-chip companies at the same market capitalization they had at the beginning of the 17 years.

Makes you think that perhaps the stock market is not a great reflection of any on-the-ground reality, and that then makes you wonder what it is a reflection of, and... well, best not to think about it. Let's destroy pensions and put all of our savings into this casino run by the wealthy.

> Let's destroy pensions and put all of our savings into this casino run by the wealthy.

The pensions are the reason why the US federal government will always bail out the stock market at large. All the investments the defined benefit pensions make are in those stocks (or correlated with them).

> Let's destroy pensions and put all of our savings into this casino run by the wealthy.

I'd rather take the gains from all companies in the US (or merely even be allowed to invest in whatever I want) than to utilize a pension from a specific company I worked for, for 40 years. Pensions are not even guaranteed to be paid out, there have been many examples in the past 30 years about this case, if the company goes bankrupt, doesn't have enough money, etc.

More often, I notice the people who advocate for pensions over 401ks or stocks know nothing about what the stock market is really like. Yes, if you put it all on GME or AMC, you'll lose your money, but as OP shows, you will make considerable wealth if you put it into VTI or another total stock market fund.

> I'd rather take the gains from all companies in the US

As the post I was replying to said:

> The point is that, despite massive economic growth (GDP quintupled) and very high rates of inflation (in the 1970's) during that 17-year period, at the end of those 17 years the market was valuing what at the time was the most prominent index of blue-chip companies at the same market capitalization they had at the beginning of the 17 years.

That's the point, the stock market is not related to the economy. You're not getting the gains. You're getting whatever scraps the bored rich people playing poker with each other accidentally drop off the table.

That's only a 17 year span. If you're funding retirement you should look at longer timescales. Also, DJIA is not the total market, and as someone else pointed out, S&P 500 "shows a nominal 6.34% return with dividends reinvested from Dec 1964 to Dec 1981."

> That's the point, the stock market is not related to the economy. You're not getting the gains. You're getting whatever scraps the bored rich people playing poker with each other accidentally drop off the table.

I am, though. I am getting the gains. Over the past X years, my and my family's gains from investing in the total stock market in the last 50 years (not even outliers like Google or Amazon or GameStop) have been enormous, on average 7% real as TFA shows. Maybe you're not, if you're not investing, but the stock market has consistently given us gains. Again, most people who mention the kind of "rich boys club" reasoning have been in my experience people who don't, won't, or can't invest in the stock market.

I'm glad you got lucky at the casino. You know all those articles about how market downturns can affect your retirement plans[1] or your compensation affecting your shorter-term plans[2]? It's funny how the people with the biggest impact on the market somehow never have their retirement plans or lifestyle impacted by market downturns. They don't even have to sell their yachts.

The house always wins.

[1] There's a bazillion, here's one. https://finance.yahoo.com/news/worried-retiring-during-marke...

[2] https://www.parkworth.com/blogs/how-worried-should-you-be-ab...

You're still not getting it. I explicitly said we invested in the total stock market, not specific stocks. That's not a casino, much as you think it to be. There are also ways to ameliorate market downturns for retirement, it's not an unsolved problem. See guides over at /r/personalfinance or /r/financialindependence if you want examples of how.

Again, if you're not investing, that's your problem, but don't blame it on the stock market itself. Thinking it's just another casino where you have to get "lucky" will cost you a lot of money in the future.

Edit: I just took a look at your links, they literally contradict the retirement doom and gloom you're referring to. From [1]:

> Historically Speaking, You Shouldn't Panic When the Market Crashes

> Nevertheless, history says that most well-diversified portfolios can and do recover over time.

> What Retirement Savers Can Do

> Even though the situation may seem dire given the long time horizon to recovery, there are multiple ways to guard against asset depletion. For example, investors can avoid selling off assets in a down market by holding one to two years' worth of planned withdrawals in cash. Worldwide, high-net-worth individuals often keep 21-28% of their assets in cash or cash equivalents, with the percentage leaning towards the higher end of the range during times of market crisis. This also opens an opportunity for better buys when the market eventually improves.

> Being flexible with withdrawal rates is also key to mitigating sequence risk. Morningstar analysts recommend: withdrawing a fixed percentage of your portfolio's value every year, not adjusting your withdrawal rate for inflation (i.e. not increasing your withdrawal percentage when inflation is high) or using a so-called guardrail approach where you reduce your withdrawal rate if it surpasses a set threshold.

Yeah there's strategies to help ease a bad pull at the slot machine, but it's still a slot machine. Remember the 2008 crash? Lots of people got rich in the lead-up to that, and the people who paid for their gains were the people who had to cash out their chips during the following decade for whatever reason. The people running the market won, as they always will.

The actual data of what's happened historically contradicts what you're claiming because you keep comparing poor strategy (eg individual or narrow stock selection and/or limited time periods) with correct strategy which demonstrably delivers the results claimed within the quantified risk parameters. It's just math and it is objectively correct.

That doesn't mean that there are no risks. There are always risks but the math allows us to quantify those risks to make informed choices. Executing an effective strategy requires understanding the data, identifying an approach that fits your goals and then, most of all, the financial discipline to rigorously stick to the plan over many years despite emotional ups and downs (eg fear in downturns, exuberance in upswings).

Personally, I've been executing such a plan for decades now and I can assure you it feels nothing like a "casino" or gambling. Instead, it's downright boring. Once a year I make a predetermined algorithmic rebalance to the broad portfolio and otherwise I do nothing and don't even think about it. When the portfolio was way up a couple years ago, I didn't cash in any extra nor even 'celebrate'. Now that the portfolio is down this year, I'm not selling or thinking about cutting "losses." Why? Because they aren't losses unless I need to sell and I don't need to sell now because those prior "winnings" from a few years ago are more than enough to cover several more years of downturn if necessary. I'm not worried. The same thing happened in 2001 and 2009 and both times the plan worked. So far, the overall multi-decade results are so far ahead of plan it would take a substantially larger and longer global crash than has ever happened to go negative (just as the article predicted at >20 years).

It's working, as predicted, and within parameters. What I'm doing isn't even complicated much less clever. It's just the standard "Bogglehead"-type strategy that's been studied forever, used by millions and freely available all over the web (eg buy and hold a balanced and broadly diversified self-managed portfolio of very low cost ETFs (VTI etc)). I have no stock broker, financial planner or advisor, I'm no financial guru and I only spend about 90 minutes once a year on my investment portfolio. Hell, I've never even bought an individual stock.

Do you think pensions are kept in some other types of investments? Here are holdings of California Public Employees Retirement System:

https://stockzoa.com/fund/calpers/

Reflection of deregulation and reduced competition.

> 5%. So, net of inflation, at the end of the 17 years, the market was valuing the DJIA's blue-chip companies at two-thirds less (!!!) than at the beginning of the 17 years.

This means nothing because the DJIA means nothing, and is not a good proxy for anything.

>The S&P500, with all dividends reinvested, net of inflation, returned -0.2%/year over those 17 years.

This means something, which is that reward is proportionate to risk. Investing in the broad US market means your investment is backed by the federal US government, which means it is riskless on a sufficiently long timeline (assuming the US is still relatively powerful in the world stage).

You invest in SP500 (or Russell 3000 or whatever broad market fund) to keep up with inflation, over many years, not to earn more than inflation. If you want to do that, you have to take risks.

DJIA is a decent proxy for market returns. If you don't think so, just look at the DJIA and the s&p total return index. They track pretty closely overall.

Buffett isn't a dummy. If DJIA meant nothing, he wouldn't have quoted it.

My takeaway from that is that either DJIA has the wrong companies in it, or it's representative of a sector that experienced negative growth during that time.

GDP growth is uncorrelated with stock market valuations.

https://m.youtube.com/watch?v=DEV49qY0TP8

Exactly his point.

In his example, a prominent group of blue-chip companies grew for 17 years and their valuations remained flat (and net of inflation, declined).

Even less than that if you account for taxes.

Yes. Anyone who bought the indices in 1964 lost money before and after taxes for the better part of two decades.

In the past, the stock market has sometimes behaved in ways that in hindsight make no sense to anyone, with valuations staying depressed for much longer than anyone ever expected at the outset. I'd be wary of any predictions of stock market behavior for the next 5, 10, and 20 years.

I read this as Buffet criticizing the validity of using the DJIA as a proxy for real market performance.

I'm not an economist or big time investor but even I know to basically ignore the DJIA for all useful purposes.

That's not what he was doing. He was pointing out that stocks and the economy aren't the same thing. As in his example, if prices are too high at point X, then over the next 17 years prices can go down even if GDP is going up.

It's an expectations market.

Buffett advises investing in SP500, because it does serve as a proxy for the economy. Assuming you think the US is going to be around in 10, 20, 30, 40 years in any formidable form, then surely the performance of its largest 500 businesses is some sort of proxy for the performance of its economy.

He advises investing in the SP500 because for people who don't know what they are doing he doesn't see a better alternative. And he's right.

And sure, it will almost certainly track the economy in some sense over decades, but it need not do that over 10-15 (or 17 in his example), and it isn't some law of physics type situation. The underlying factors that drive returns on capital through time (strong property rights, reasonable labor laws, stable government) also likely drive economic growth.

Comparing the value of a stock market index at two arbitrary points is not a good analysis.

Here are some reasons why - does this include dividends? Are the dividends reinvested? Does this include ongoing contributions in the interim, perhaps at times when the index was down, now leading to an increase in value?

Generally it would include dividends in their returns, yeah. However, unless your adjusting the size of the position when the dividend was paid, these analysis would not reinvest the dividends.

Absolutely doesn't include ongoing contributions, I think that is the big thing. It is rare to just buy a stock or ETF and hold it for 20 years... usually people are buying more or selling the position during that period.

No, those figures are just the Dow Jones index at those dates, it doesn't include dividends. You can use this site to calculate total return with dividends reinvested:

https://dqydj.com/dow-jones-return-calculator/

Plugging in those dates gives 0.078% return without reinvesting dividends (basically the figures given in the parent comment), 4.632% with dividends reinvested, and -1.941% with dividends reinvested and taking CPI into account.

So, you still come out negative due to inflation, even after reinvesting the dividends.

But no credible investment advice in the last many decades has suggested investing in DJIA.

I am almost 100% certain that the figures you quoted are solely the index values. Dividends are not part of the index values and never have been.

Zero change in index value over any period of time does not necessarily imply zero growth, especially when the time frame involved is over a decade.

I didn't quote anything, and I specified when looking at returns.

Outside America this has been pretty common or even worse. FTSE100 (UK), CAC40 (France) are right now trading the same values as 1999. Nikkei is the same level as 1988. HK is same as 2007.

Of course, those are cherry-picked selective endpoints used to make the point look more extreme than it is. Look at any other 17-year interval, or better yet the average of all of them, and you will see that the expected value of growth is indeed solidly high.

Great call-out. Here's a non-paywall version to that article: https://www.berkshirehathaway.com/1999ar/FortuneMagazine.pdf

Interesting to note that if you'd bought and held the S&P500 index for the 20-year period of 1998 to 2018, you would have invested through the dotcom bubble and the great recession -- but still ended with an average real total return of 3.3% per year over that timeframe (adjusted for dividends and inflation)!

Edit: typo

I never thought this was being too honest, as no one just buys the SPY once and forgets about it.

Most people invest at some interval (through their 401k, IRA, or whatever) and it is much better to run some kind of test that mimics this to some degree.

If you bought the SPY once a year, once a month, once a XXX from 1998 to 2018, what are your returns looking like?

Paul Merriman has a fun "lifetime investment calculator" that can get you those numbers, it assumes investing Jan 1 of every year (It's tuned to their recommended allocations but includes the S&P 500 as a baseline).

https://paulmerriman.com/lifetime-investment-calculator/

If you'd invested 100% in the S&P 500, say 10,000 a year on Jan 1 every year from 1998 to 2018, you'd have $522,135 from a $200,000 total principal, or roughly 13% annualized return (not including inflation)

That question is also relatively easy to answer: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...

The "rate of return" isn't quite as simple to define when you're talking about multiple contributions over time. The most straightforward approach is to look at it as a weighted average, and the exact value depends on how you do the weighting. But in this case, it's in the ballpark of 7%/year nominal, which is probably 4-5%/year after inflation.

As you can see, you get a big boost (at least in this cherry-picked example) by continuing to invest through the downturn.

Agreed that an example of buying once per year (or quarter / month) over time and calculating the return of that scenario is more applicable to the experience of a regular investor.

This can be eye-balled on this chart: https://themeasureofaplan.com/wp-content/uploads/2023/01/Rol...

The bottom graph shows the annualized return for each 20-year period in market history. 20-year holding periods have this behaviour: - Max: 13.2% - Min: 0.5% - Average: 6.6% - Std. Dev.: 3%

So, if you dollar cost average over time and hold each of those investment cohorts for ~20 years, you should expect an average annual return of roughly 6% (+/- 3%).

These backtests used to be fun when I had access to a Bloomberg terminal. But, yes.. this discussion shows the importance of dollar cost averaging.

Yup! Also diversification. It is rare to have ONLY equities (in my experience, though I only have equity & cash positions!!) and having even 10-20% of bonds would make a MASSIVE difference, especially through the 70s, 80s, 90s!!! (when yields were an average, EYEBALLING, like 8-9% or something!) see: https://www.macrotrends.net/2016/10-year-treasury-bond-rate-...

> Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled

The sp500 is going to look a lot more like the fortune 500 than the DOW. The takeaway I see here is that the Dow may be riskier.

But, it would be interesting to see the sp500 during this time.

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