Do stocks really go up over the long run?

hans37 · Nov 27, 2005

Quote from Pekelo:

I am undecided on the question, but I have serious doubt about the generally accepted "stocks go up over the long run".
(Of course depends on what we call long run.)

Until the discussion picks up, here is a Dow chart for the last 100 years, including the inflation adjusted one:

www.dogsofthedow.com/dow1925cpilog.htm

You might notice that after adjusting for inflation, the Dow was exactly at the same level in 1986 then 50 years earlier...

No wonder you can't figure it out.
The question you ask is not related to the assertion you doubt.

you might have a point if you thought the adage went "stocks go up in the long run even relative to inflation"

Pabst · Nov 27, 2005

Quote from originalskunk:

The problem with "exact numbers" is that such a thing does not exist -- it depends who you ask. According the CPI inflation calulator here

http://data.bls.gov/cgi-bin/cpicalc.pl

$10000 in 1928 has the same buying power as $116491.23 in 2005. And if you believe the official gubmint numbers then...

I guessed $150,000 and I was high.

$116,491 so roughly 12x

Totally believable. Until this last decade in stocks and the last few years in housing, neither investment appreciated at a rate any greater than CPI. Ironically the recent explosion in asset prices has come in a very benign inflation environment.

FireWalker · Nov 27, 2005

ironically...

http://www.zealllc.com/commentary/explode.htm

cakulev · Nov 27, 2005

It's really simple.

Stocks represent the economy. So long the economy grows (in real term, inflation adjusted), stocks will provide real return.

If you take all possible stocks out there, blue chips, penny stocks, etc. their aggregate return can not be higher then GDP growth (on the long term, short term sentiment is changing from manic to depressive).

The real GDP growth has been around 3.5% in the past few decades.

So we start from there. Next we add inflation, another 3-3.5%
Now we have 7% nominal return. Next when we add survival bias with stocks in the index we arrive with famous 10-11% nominal return.

hirsch.im.wald · Nov 27, 2005

I'd like to give some fundamental input to this.

There are two major undisputable trends: scientific progress and integration of global markets

I'd like to picture that as a number of connected pools. The pools grow, and the connections grow until there is a final merger.

What does that mean:
-"Big Fishes" will be larger than they are now.(i.e. Toyota)
-Market entry hurdles for markets of existing products and services will be higher. ( A function of the minimum infrastructure you have to set up to compete in a global market.)
Market entry hurdles ultimately define profit potential.
- Intermediate size firms will die out. (Yes, that does include GM. Muscle is relevant, not body fat.)
- Well rooted, small global specialists will be relatively most successful (i.e. Porsche)

Conclusions:
I hold that random stock picking does not break even. Random stock picking with a functional stop loss (random index following) should.
The losers will be comparatively few but large. Avoiding them shouldn't be that hard.

bellman · Nov 28, 2005

You guys can't see the forest for the trees. Here is the simple answer, and I do beg any of you to PROVE me wrong: ultimately over the long run as t => infinity, stocks => 0.

Edit: Excluding payout from dividends of course.

EqtTrdr · Nov 28, 2005

Quote from bellman:

You guys can't see the forest for the trees. Here is the simple answer, and I do beg any of you to PROVE me wrong: ultimately over the long run as t => infinity, stocks => 0.

Enron

fiveOmar · Dec 7, 2005

Quote from Pekelo:

Could it be that stocks only go higher because there are more money coming into the markets over the years, thus it is not the performance of the businesses, but the more buying power chasing the relative smaller number of stocks. (the incoming money grows faster than the number of stocks)??

I actually had the same theory, I was thinking that the increased valuation of the stocks caused the "growth" rather than earnings performance. I'm guessing a good way to test this theory would be to obtain a historic chart of average earnings increase %'s of stocks within the market and another chart showing the average P/E ratio. This would tell us whether there was true growth (greater earnings) or whether the market "grew" simply because investors valued stocks higher.