The Myth of the Rising Stocks over Time

[GhastMaster]

I ran into this article at zero hedge. It got me thinking about the recent news of GE being pulled from the Dow Jones Industrial average.

People, even professionals, often cite stocks rising over time as a reason to invest in the market. Frequently they say something to the effect of, "Don't worry about downturns, over any 20 year period of time you'll be up"
One flaw in this logic is that the DOW is heavily manipulated. In the linked article you can see the image below, which illustrates that there has been very little nominal movement in the Nikkei. Similarly, the S&P has seen little growth.

(source: zerohedge.com)

Even with manipulation, looking at the inflation adjusted DOW: There was a period from 1966 to 1995 with zero growth.

(source: economix.blogs.nytimes.com)

​From 1966 to 1982 the DOW went from ~$7600 to ~$2100 inflation adjusted dollars(IAD).

Now consider, we are in a similar peak not a trough. If the markets dropped similarly over the course of the next 16 years, the DOW would settle at ~$6600 IAD(very close to the nominal intraday low in 2009).
That would be (2018+16yrs =2034) - 1964= 70 years of zero growth.

[kandrathe]

I really never looked at the DOW as an indicator. There seem to be some high twitch, day traders who play the market like a slot machine. When I invest, it is usually in 100 share amounts for a long, long time. E.g. I’ve owned Amgen since the late 80s. My window now is shorter, like 10-20 years. When I was 25 my portfolio view was more like 30 years, but required periodic refinement when futuristic estimates are wrong or shocking changes happened.

I spend time researching the specific company looking at how it is run, and the decisions their leadership have made. I look at the industry, look at its potential, and risks. I look at their competition and what they are doing.

Often, you can be led to profitable upswings by looking at big trends affecting populations... even heat waves, or drought in the SW USA can be potentially profitable. If there is a company that needs investment to cure cancer, improve lives, or curb anthropogenic environmental effects, that may... and I mean a cautious may, be a good investment if a bunch of things go right. If you are wrong , then get out when you can minimize loss, or as conscience dictates. I’m careful to invest in companies who are moral, and if they do something I can’t support, I get out.

[GhastMaster]

I spend time researching the specific company looking at how it is run, and the decisions their leadership have made. I look at the industry, look at its potential, and risks. I look at their competition and what they are doing.

That is a really good idea. Sadly, the vast majority of lay people have their investments in 401k, IRA or have otherwise relinquished control to "investment advisors".

[LavCat]

And then some of us have no investments.

[Lissa]

I'm follow something similar to what Kandrathe does, I look for dividend paying stocks then look at what they pay as a dividend then analyze to see how strong the company is and whether the dividend is appropriate. If it is found as such, then I grab some of the stock and hold it get the dividend and reinvest the dividends back into the stock. That way by retirement, I can have a number of dividend paying stocks taking care of most of my bills and then have things like 401k/IRA/SS to cover the rest.

[GhastMaster]

I'm follow something similar to what Kandrathe does, I look for dividend paying stocks then look at what they pay as a dividend then analyze to see how strong the company is and whether the dividend is appropriate. If it is found as such, then I grab some of the stock and hold it get the dividend and reinvest the dividends back into the stock. That way by retirement, I can have a number of dividend paying stocks taking care of most of my bills and then have things like 401k/IRA/SS to cover the rest.

That brings up a good point. My original post does not take into account dividend yields, stock splits, or buybacks. Dividends and splits would make the charts virtually useless in illustrating my point. Buybacks(which have been happening en masse) would of course add to it. It is hard to quantify these things for me, with limited resources.

And then some of us have no investments.

Indeed.

edit: preferred pronoun did not make sense

[Bolty]

My original post does not take into account dividend yields, stock splits, or buybacks.

I came into the thread late, but that was my immediate reaction to the original post - first, it comes from ZeroHedge, a site dedicated to manipulating truth to always present a world-is-falling viewpoint at all given times, and second, the data shown is just not factoring in a lot of data surrounding dividends and other elements that make up a significant amount of growth in a portfolio. Dividends alone account for roughly 40% of the growth of money invested in the S&P500 over decades.

There has been a completely insane amount of study of stock growth over the history of world stock markets. While it's true that the American stock market has enjoyed a growth rate higher than average due to its nearly century-long dominance of world economies, and that can't go on forever, it's also true that in the long term, there really isn't any better investment vehicle. If you can handle the volatility and potentially long periods of slow/no growth, as was the case from 1966 to 1981.

[GhastMaster]

I came into the thread late, but that was my immediate reaction to the original post - first, it comes from ZeroHedge, a site dedicated to manipulating truth to always present a world-is-falling viewpoint at all given times, and second...

Rose colored glasses will not confirm my bias though.

...the data shown is just not factoring in a lot of data surrounding dividends and other elements that make up a significant amount of growth in a portfolio. Dividends alone account for roughly 40% of the growth of money invested in the S&P500 over decades.

Check this out. It shows exactly what you are saying.
The tool on this site allows you to calculate returns with or without CPI calculated. They both use the average dividend yield of the S&P 500.

There has been a completely insane amount of study of stock growth over the history of world stock markets.

Nominal growth is insane. Real growth, however, is pretty good. After taking into consideration the dividend yields, I think the picture is a little bit better than I had originally thought. I am still %100 positive the USA cannot survive the near future without massive amounts of inflation, and the buzzards are circling the chickens that are coming home to roost.

[Lionlip]

https://www.youtube.com/watch?v=wM6exo00T5I

*Shrugs*

[Obi2Kenobi]

Investment math is hard.

Some people in this thread have already mentioned some of this, but I think it's both harder to calculate and a more positive picture than has been mentioned. But first, some stock fundamentals from the perspective of a value investor:

In theory, the total valuation of a company (which is called "market cap" and is calculated as price per share * number of shares) reflects the intrinsic value of a company. Buying stock in a company is buying partial ownership in that company, so you are entitled to the profits of a company in proportion to your ownership interest. The valuation of a company is determined by investors and typically reflects (in the long run) the price at which an investor is likely to make approximately 10-11% return per year, adjusting for risk.

When you have companies like Tesla being traded at large multiples of their earnings, this means that the current profits do not support such a high long-term payout, but enough investors believe that the company will grow large enough quickly enough that they will pay a premium now to buy it at current prices, so that in the future they will be making more than that.

The price per share of a stock is entirely arbitrary and determined in large part by the company issuing the stock. I say it is determined by that company because they get to decide how many shares they issue. As I described previously, the market cap is determined by the expected future profitability of the company (adjusted for risk), and the formula for market cap is market cap = price per share * number of shares. The company gets to set the number of shares, therefore, they also get to set the price per share (market cap / number of shares = price per share).

This leads me to my first agreement with previous commentators, which is that the Dow is kind of ridiculous. It picks 30 large companies that it believes represent the US economy and the price of the index is determined by the price per share (an arbitrary number) of each component. This means that if, say, Apple were to have done a 2:1 stock split (which does not change any fundamentals of the company) prior to being added to the Dow, it would have had (approximately) half of the influence on the overall performance of the Dow. Once companies are in, however, they get magic adjustment factors to try to keep things like stock splits from changing the price of the index. You can read a similar take from someone who knows far more about investing than I do here: https://www.joshuakennon.com/what-do-you...nt-system/

The decision to graph stock price over time is also strange, but sadly, common. As mentioned, the compounding effect of dividends are huge. There are two main ways for a company to pay its shareholders, and they make sense only in the context of thinking of shares as actual partial ownership in a business, and share price being a mostly meaningless number (with total company valuation, or market cap, being the interesting number).

The first way for companies to pay their owners (shareholders), which people are probably most familiar with, is to pay out dividends. A dividend is when a company has some cash on hand and decides that rather than reinvest all of it into the company to create future growth, they want to pay some of it out to all of the shareholders in proportion to how much they own. Some companies have a policy of always paying out some amount on a fixed schedule, others pay out irregularly. When a company decides to pay out dividends of $100,000 (so if they have 1 million shares, a dividend of $0.10 / share), it means that their market cap immediately drops by $100,000. This makes sense, because the company now has $100,000 less in assets. This means that all of the stock that everyone owned is less valuable, but they have cash exactly equal to that drop in value.

The second way for companies to pay their owners (shareholders), which is more common in recent times, is through a stock buyback. With dividends, the company has money and pays all of its owners, and the owners all maintain the same ownership interest they had before the dividend. With a stock buyback, the company instead spends its money to buy shares back from some of the shareholders. The remaining owners (those who did not sell their shares) do not have any more money than they had before, but instead their shares are now worth a larger portion of the company. If there were previously 1 million shares outstanding and the company bought 100,000, then if I had 100,000 shares I would now own 1/9 of the company instead of 1/10. If I want to get my money out, I can sell some number of my shares. If I sell 10,000 shares I would have 90,000 / 900,000 shares, meaning I would go back to owning 10% of the company. My shares were worth $1 / share before the buyback, but the shares are now more valuable (because there are fewer of them), so I can sell them for $1.11 / share. This means I get back $10,000 in cash for the sale. This is exactly the amount of money I would have gotten in the dividend case.

Whether a company chooses to use dividends or stock buybacks to pay its owners is mostly driven by tax consequences, but otherwise they have the same effect. Given this, it would be crazy to show them differently on a graph, but that's exactly what almost all financial graphs do. If you are not looking at a total return graph, you are saying you want to ignore dividends but include stock buyback (and this is probably not what you actually want to do). The total return graph (which is not the graph in the first post) includes dividends and assumes you reinvest them back into the stock (which is what happens by default in a stock buyback scenario).

Combining all of this together, and using the dqydj calculator you linked (which seems to give the correct numbers), we can compare to the graph in your first post going back to 1947. When I do so and do not adjust for inflation, we get about 11.3% total annual return on the S&P500. Adjusting for the CPI (which has its flaws, I would rather have the 2018 basket of goods than the 1970 basket of goods, even if they are considered the "same" price in inflation adjusted terms), this gives us an annualized return of about 7.5%. This means that $1000 invested in 1947 gives you an inflation adjusted $170,000 today. There were some periods in there where you did not make as much, but there were others where you made a lot more.

In short, I believe that if I put $1000 into a broad-based index of stocks today, that 10 years from now I will have about $2000 adjusting for inflation (or the same in about 7 years not adjusting), because that is a long enough time horizon for me to expect any short-term trends to revert to the mean. For most people who don't really want to think about their stock portfolio, they should not feel at all bad about putting all of the money they have for stock investments into the US Total Stock Market Index (https://investor.vanguard.com/mutual-fun...file/VTSMX) if you can, otherwise the S&P 500 Index is just fine, too. The important thing is to put your money into a broad base of companies and then leave it there until you need it.

[GhastMaster]

Adjusting for the CPI (which has its flaws, I would rather have the 2018 basket of goods than the 1970 basket of goods, even if they are considered the "same" price in inflation adjusted terms)

It certainly does have flaws. However, it is commonly referenced and "understood". Items that are entering or leaving the market are given lower or higher weights in the calculation. The weights are arguably wrong of course. Considering it is literally impossible to calculate the price of a modern cell phone in 1970, due to the non existing technological know how and or the combination of replaced technology, I think the best calculation for my taste would include only "necessary" items such as housing/rent per square foot, basic food items, and electricity/natural gas. These items have hardly changed technologically. What has changed is how some of them are derived. We of course have to remember that CPI is only useful when compared to something else. CPI alone does not tell a story. For instance, if I compare the CPI to wages I get a better idea of where the average consumer is financially.

Great read. Thanks for the reply.

[kandrathe]

... If you can handle the volatility and potentially long periods of slow/no growth, as was the case from 1966 to 1981.

But mostly due to inflation, caused by bad fiscal, and monetary policy.

Was the 1966-1982 stock market really bad?



The bigger world of investing gets very complicated when you include property, commodity futures, precious metals or bonds.

If you had a fixed rate mortgage locked in at a low price, it was a great deal to invest in land before inflation took off. In borrowing, you pay back todays investment with tomorrow's inflated money.

E.g. my parents bought a 160 acre farm in 1969 for ~ $200 per acre, then (unintentionally) sold off 10 acres +house+farm buildings in 1977 for $200k. My dad, being also a carpenter, then took part of the net (~ $80k) and built a new house, with new outbuildings for the new farm. All things considered, a 6x ROI for the ~ $20,000 initial value in 8 years. My parents weren't avid investors, but they just accidently did the right thing at the right time and ended up that era with a nice nest egg.

[kandrathe]

... If you can handle the volatility and potentially long periods of slow/no growth, as was the case from 1966 to 1981.

But mostly due to inflation, caused by bad fiscal, and monetary policy.

Was the 1966-1982 stock market really bad?



The bigger world of investing gets very complicated when you include property, commodity futures, precious metals or bonds.

If you had a fixed rate mortgage locked in at a low price, it was a great deal to invest in land before inflation took off. In borrowing, you pay back todays investment with tomorrow's inflated money.

E.g. my parents bought a 160 acre farm in 1969 for ~ $200 per acre, then (unintentionally) sold off 10 acres +house+farm buildings in 1977 for $200k. My dad, being also a carpenter, then took part of the net (~ $80k) and built a new house, with new outbuildings for the new farm. All things considered, a 6x ROI for the ~ $20,000 initial value in 8 years. My parents weren't avid investors, but they just accidently did the right thing at the right time and ended up that era with a nice nest egg.

Maybe as a graph is easier to see the relationship between shortages, (which drive up prices) to recession, or depression.