Long/Short Investments
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Long/Short Investments in L/S Equity: Valuation and Ideas,

Warren Buffett’s Prediction Of 1999-2017 Returns Was Stealthily Accurate

Warren Buffett rarely comments on the level of a stock market – his reputation as one of the greatest investors (if not the greatest) of all time would move markets – but he did so in a way back in November 1999 as it pertained to internet valuations back then.

Buffett’s basic premise was that based on GDP growth and interest rate expectations, he expected stocks to average about 6% in nominal terms of the next 17 years. (He chose a 17-year period to illustrate how the market moved little from 1964 to 1981 despite 370%+ GDP growth over that time due to increased interest rates.)

Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like--anything like--they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate--repeat, aggregate--would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that's 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more.

The full article can be found here.

What have stocks returned (in real terms) since this article was published in Fortune magazine on November 12, 1999 (through late July)?

Basically the exact 4% that he said.

Buffett made a point in a different part of the article that new investors were expecting returns of about 22% per year, while investors who had invested for at least 20 years were still expecting 12% forward returns.

But the common sense approach that assets cannot outrun their earnings potential long-term, and that interest rates would need to drastically lower in order to provide a higher nominal return than nominal GDP (plus dividends), is also relevant today.

If we assume 2% GDP growth and 2% inflation plus a 2% dividend yield over the next ten years – 6% nominal returns – we would need interest rates to lower from their current point (1.25% at the Fed, effectively 0% everywhere else in the developed world) in order to see better returns than this.

This may not have any bearing on where the market goes in the short-term, but will be relevant over a long enough timeframe. While the bull market rages on currently, buying in now is to miss most of the gains that have already been had.