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Learning, Sharing, and Teaching => Investor Alley => Topic started by: PartTime on June 25, 2016, 07:19:35 AM

Title: Interesting Forbes Article
Post by: PartTime on June 25, 2016, 07:19:35 AM
It took me a while to wrap my head around the rolling averages thing. I am nowhere near an expert on investing, but I found the article interesting nonetheless.

http://www.forbes.com/sites/brianportnoy/2016/06/23/what-does-the-stock-market-owe-you/2/#3599eaab71bb

Title: Re: Interesting Forbes Article
Post by: tralfamadorian on June 25, 2016, 08:04:28 AM
My favorite quote from the article-
"Whatís the shortest rolling time period over which the S&P 500 has never had a negative annualized return? The answer is 19 years, 11 months. In other words, in history back to 1928, no one who has held the S&P 500ís stocks for at least 20 years has lost money."
Title: Re: Interesting Forbes Article
Post by: bobechs on June 25, 2016, 10:38:08 AM
Rolling averages are a slight refinement, mostly offering greater granularity, not any vast improvement in spotting multi-decade trends. Yes, the stock market trends up in both nominal and real terms over time. 

The article does not disclose whether the percentage returns are calculated in real or merely nominal dollars and when that is left out of the story I assume the returns are nominal.  I suppose I could go back and re-work their numbers from scratch to figure out if that assumption is correct, but I'm not a peer-reviewer and so I won't.

To say that an investor who went all-in on exactly September 3, 1929 (on no margin and evenly spread across every common stock on the Dow (I know, I know, the DJIA is not the S&P 500, exactly) ) had broken even by 1949 misses the mark by about eight years and ignores the time value of money entirely. It also misses the churning in the companies that compose the indexes. Some good chunk of those had been liquidated in the twenties and thirties and been replaced by growing companies that our hypothetical 1929 investor had no position in.

Using the CPI as a decent proxy for the time value correction, by 1949 the purchasing power of the dollar had slipped by about 39%.  Wait for the Dow to hit around 520 instead of 380 would require waiting until about 1960 at the earliest. Meanwhile purchasing power slid another 24.4%...

What's the point?  This is a worst case scenario, and that is very unlikely to occur more than once, not in a lifetime but ever again.  And I don't think people should plan their affairs focused on the least likely events as if they were the most likely.  I guess I'm just aggravated at sloppy reasoning in financial journalism.  But if I rise to that bait every time it is offered, I'll have nothing else to do.

So,now  back to your regularly scheduled and half-baked programming.


WARNING: Not adjusted for anything

(https://upload.wikimedia.org/wikipedia/commons/thumb/c/c8/DJIA_historical_graph_to_jul11_%28log%29.svg/1280px-DJIA_historical_graph_to_jul11_%28log%29.svg.png)
Title: Re: Interesting Forbes Article
Post by: AdrianC on June 25, 2016, 07:29:36 PM
My favorite quote from the article-
"The sharp edge here is that it's up to us ... to set reasonable expectations at each step along the way. Indeed, there's ample evidence that investors still expect returns of about 10% per year".

Very unlikely. Over the long term expect around 4% real from stocks, 0% from bonds, and you're less likely to be disappointed.
Title: Re: Interesting Forbes Article
Post by: johnny847 on June 25, 2016, 07:40:07 PM
According to the Wikipedia page on the S&P 500 index, the S&P 500 index didn't exist in its current form until 1957. The predecessor was the Composite Index started in 1923, but only had a "small number of stocks". In 1926, it expanded to 90 stocks.

So from 1926 - 1957, it only had 90 stocks! That's hardly a good representation of the entire stock market.
Title: Re: Interesting Forbes Article
Post by: johnny847 on June 25, 2016, 07:46:44 PM
Rolling averages are a slight refinement, mostly offering greater granularity, not any vast improvement in spotting multi-decade trends. Yes, the stock market trends up in both nominal and real terms over time. 

The article does not disclose whether the percentage returns are calculated in real or merely nominal dollars and when that is left out of the story I assume the returns are nominal.  I suppose I could go back and re-work their numbers from scratch to figure out if that assumption is correct, but I'm not a peer-reviewer and so I won't.

To say that an investor who went all-in on exactly September 3, 1929 (on no margin and evenly spread across every common stock on the Dow (I know, I know, the DJIA is not the S&P 500, exactly) ) had broken even by 1949 misses the mark by about eight years and ignores the time value of money entirely. It also misses the churning in the companies that compose the indexes. Some good chunk of those had been liquidated in the twenties and thirties and been replaced by growing companies that our hypothetical 1929 investor had no position in.

Using the CPI as a decent proxy for the time value correction, by 1949 the purchasing power of the dollar had slipped by about 39%.  Wait for the Dow to hit around 520 instead of 380 would require waiting until about 1960 at the earliest. Meanwhile purchasing power slid another 24.4%...

What's the point?  This is a worst case scenario, and that is very unlikely to occur more than once, not in a lifetime but ever again.  And I don't think people should plan their affairs focused on the least likely events as if they were the most likely.  I guess I'm just aggravated at sloppy reasoning in financial journalism.  But if I rise to that bait every time it is offered, I'll have nothing else to do.

So,now  back to your regularly scheduled and half-baked programming.


WARNING: Not adjusted for anything

(https://upload.wikimedia.org/wikipedia/commons/thumb/c/c8/DJIA_historical_graph_to_jul11_%28log%29.svg/1280px-DJIA_historical_graph_to_jul11_%28log%29.svg.png)

I can tell from your graph that it's a price chart. This ignores the reinvestment of dividends.

Want to know how big an efect that can be? Well starting in 1896 and reinvesting dividends back into your portfolio tracking the Dow Jones Industrial average wouldn't result in a portfolio worth 17.4k. It'd be worth $1.3M.
http://www.marketwatch.com/story/is-it-dow-17000-or-13-million-2014-10-29 (http://www.marketwatch.com/story/is-it-dow-17000-or-13-million-2014-10-29)
Title: Re: Interesting Forbes Article
Post by: bobechs on June 26, 2016, 09:49:16 AM


I can tell from your graph that it's a price chart. This ignores the reinvestment of dividends.

Want to know how big an efect that can be? Well starting in 1896 and reinvesting dividends back into your portfolio tracking the Dow Jones Industrial average wouldn't result in a portfolio worth 17.4k. It'd be worth $1.3M.
http://www.marketwatch.com/story/is-it-dow-17000-or-13-million-2014-10-29 (http://www.marketwatch.com/story/is-it-dow-17000-or-13-million-2014-10-29)


And I can tell by your link that your source's analysis appears to neglect considering the effects of both -significantly- monetary inflation and -very significantly- taxation of dividends along the way.

So, in the end we wind up with another half-baked financial journalism turtle standing on the back of other turtles.

It's half-baked turtles all the way down....
Title: Re: Interesting Forbes Article
Post by: johnny847 on June 26, 2016, 11:06:18 AM


I can tell from your graph that it's a price chart. This ignores the reinvestment of dividends.

Want to know how big an efect that can be? Well starting in 1896 and reinvesting dividends back into your portfolio tracking the Dow Jones Industrial average wouldn't result in a portfolio worth 17.4k. It'd be worth $1.3M.
http://www.marketwatch.com/story/is-it-dow-17000-or-13-million-2014-10-29 (http://www.marketwatch.com/story/is-it-dow-17000-or-13-million-2014-10-29)


And I can tell by your link that your source's analysis appears to neglect considering the effects of both -significantly- monetary inflation and -very significantly- taxation of dividends along the way.

So, in the end we wind up with another half-baked financial journalism turtle standing on the back of other turtles.

It's half-baked turtles all the way down....

This is all true. But I never claimed that my figures solved the problem of inflation, which you also have. Furthermore, while taxes on dividends are an issue, ignoring dividends entirely is a much more significant error in analysis than including dividends and them ignoring taxes on them.