Wednesday, March 5, 2008

Can the Dow Reach 24,000,000 by the Year 2100?

Yesterday I recommended lazy portfolios for long-term investing. To help make my case, I quoted Warren Buffet from his annual letter to Berkshire Hathaway shareholders.

Warren Buffet has many other interesting perspectives in his annual letter to shareholders including the following thought:

“I should mention that people who expect to earn 10% annually from equities during this century – envisioning that 2% of that will come from dividends and 8% from price appreciation – are implicitly forecasting a level of about 24,000,000 on the Dow by 2100. If your adviser talks to you about doubledigit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: “Why, sometimes I’ve believed as many as six impossible things before breakfast.” Beware the glib helper who fills your head with fantasies while he fills his pockets with fees.”
- Warren Buffet
Price appreciation of 8% takes the Dow to about 24,000,000 by the year 2100. For investors who expect price appreciation of 10%, the Dow would reach astronomical levels. So the next time your financial advisor promises future returns of 10% per year, perhaps you should remind him at that pace the Dow would reach 158,437,353 by the year 2100. I don’t know about you, but this doesn’t seem achievable to me.


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