Did Buffett really believe the stock market went nowhere from 1964 to 1981?

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Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by nisiprius » Wed Dec 07, 2016 9:16 pm

So I've decided to take some cautious nibbles at The Snowball, and right away I'm confronted by another mysterious Buffett utterance. This is in Chapter 2, "Sun Valley, Idaho, 1999." Buffett is giving a talk. This is of course the author's telling, so I don't know if she was working from an accurate transcript.
DOW JONES
INDUSTRIAL AVERAGE
December 31, 1964 874.12
December 31, 1981 875.00
He walked over to the screen and started explaining.
"During these seventeen years, the size of the economy grew fivefold. The sales of the Fortune five hundred companies grew more than fivefold. Yet during these seventeen years, the stock market went exactly nowhere."
Did Buffett mean what he said? Did he seriously overlook dividends on the Dow? That seems impossible. But, if not, what did he mean?

Total return over the full time period, with dividends reinvested, was 116%; annualized CAGR, 4.63%. In total return, it didn't "go exactly nowhere."

Well, what about inflation? He says "the size of the economy grew fivefold." According to this web page, Nominal GDP was $0.686 trillion in 1964; $3.211 in 1981. That's a factor of 4.68, so he is clearly talking in nominal, not real terms.

Adjusted for inflation, total return over the full time period was -28%; annualized CAGR, -1.94%. In total real return, it still didn't go "exactly nowhere," it lost money. But then, real inflation-adjusted GDP didn't "grow fivefold," it grew by a factor of $6.618 / $3.734 = 1.77 X, not even close to "fivefold."

Well, yet again... there doesn't seem to be any way to know what he actually meant. Did he really overlook dividends on the Dow? That seems impossible. But what, then, was he doing?

Source: "Dow Jones Return Calculator"
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Last edited by nisiprius on Thu Dec 08, 2016 10:42 am, edited 1 time in total.
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by lack_ey » Wed Dec 07, 2016 9:48 pm

I'm no Buffett fan in particular and don't have any insight on his thinking, but in many contexts you do hear people talking about the market going somewhere in reference to nominal price movements. This is a different phrasing from the market returning something.

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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by R2D2 » Wed Dec 07, 2016 9:58 pm

lack_ey wrote:I'm no Buffett fan in particular and don't have any insight on his thinking, but in many contexts you do hear people talking about the market going somewhere in reference to nominal price movements. This is a different phrasing from the market returning something.
Right, but I think Buffett really wanted to think that your total nominal return was zero.

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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by randomguy » Wed Dec 07, 2016 10:31 pm

R2D2 wrote:
lack_ey wrote:I'm no Buffett fan in particular and don't have any insight on his thinking, but in many contexts you do hear people talking about the market going somewhere in reference to nominal price movements. This is a different phrasing from the market returning something.
Right, but I think Buffett really wanted to think that your total nominal return was zero.
Why try and read stuff into it? Take it at face value: over the time frame the DJIA didn't change. Yes it is a bit meaningless when you ignore divs and inflation but I am guessing this was more of a throwaway line versus some thing that needs to be 100% correct to get the point across.

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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by triceratop » Wed Dec 07, 2016 10:39 pm

nisiprius wrote: Well, what about inflation? He says "the size of the economy grew fivefold." According to this web page, Nominal GDP was $0.686 trillion in 1964; $3.211 in 1981. That's a factor of 4.68, so he is clearly talking in real terms.
:?: :?: :?:

To me this proves he is clearly talking in nominal terms, not real terms; 4.68 is close enough to 5x for Buffett's level of care for detail. That coupled with the DJIA being listed on the screen means he simply left out dividends when saying the market went nowhere.
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by Iridium » Wed Dec 07, 2016 10:42 pm

nisiprius wrote:Did Buffett mean what he said? Did he seriously overlook dividends on the Dow? That seems impossible. But, if not, what did he mean?
I do not have any special insight, but to me, Mr. Buffet's argument is not that investors did not earn a return. It is that even though the companies in the DOW were intrinsically more valuable (their businesses grew multifold and have many more assets), the market wasn't paying any more for them. If he wanted to be strictly accurate, he probably should have referenced the market cap for the market as a whole, but showing the DOW not budge despite enormous improvement in the company's business is probably more intuitive and impactful for the overall point he was trying to make, which I would suspect would be that the market price can get quite divorced from reality.

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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by abuss368 » Wed Dec 07, 2016 10:58 pm

Perhaps the DOW did not increase much, if at all during this time. Ignoring the very real cost of inflation, what about the impact of collecting dividends over this time period?
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by abuss368 » Wed Dec 07, 2016 11:00 pm

nisiprius wrote:So I've decided to take some cautious nibbles at The Snowball, and right away I'm confronted by another mysterious Buffett utterance. This is in Chapter 2, "Sun Valley, Idaho, 1999." Buffett is giving a talk. This is of course the author's telling, so I don't know if she was working from an accurate transcript.
DOW JONES
INDUSTRIAL AVERAGE
December 31, 1964 874.12
December 31, 1981 875.00
He walked over to the screen and started explaining.
"During these seventeen years, the size of the economy grew fivefold. The sales of the Fortune five hundred companies grew more than fivefold. Yet during these seventeen years, the stock market went exactly nowhere."
Did Buffett mean what he said? Did he seriously overlook dividends on the Dow? That seems impossible. But, if not, what did he mean?

Total return over the full time period, with dividends reinvested, was 116%; annualized CAGR, 4.63%. In total return, it didn't "go exactly nowhere."

Well, what about inflation? He says "the size of the economy grew fivefold." According to this web page, Nominal GDP was $0.686 trillion in 1964; $3.211 in 1981. That's a factor of 4.68, so he is clearly talking in real terms.

Adjusted for inflation, total return over the full time period was -28%; annualized CAGR, -1.94%. In total real return, it still didn't go "exactly nowhere," it lost money. But then, real inflation-adjusted GDP didn't "grow fivefold," it grew by a factor of $6.618 / $3.734 = 1.77 X, not even close to "fivefold."

Well, yet again... there doesn't seem to be any way to know what he actually meant. Did he really overlook dividends on the Dow? That seems impossible. But what, then, was he doing?
Hi nisi,

I think Buffett gets under your skin! Ha! I would agree with you that it is puzzling that someone can make a statement (90% S&P and 10% Treasuries) that will influence and impact so many folks and not provide any additional explanation or advice. Nothing! That can be frustrating.

I did read that Mr. Bogle wrote a letter to Warren Buffett asking about clarification to the S&P 500 recommendation over Total Stock Index. I believe Mr. Bogle noted that he did not receive a response. Really? That bothers me considering a man in Jack's position that has done so much!
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by abuss368 » Wed Dec 07, 2016 11:02 pm

Did you just start reading The Snowball? I have yet to read the book.
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by sperry8 » Wed Dec 07, 2016 11:04 pm

Iridium wrote:
nisiprius wrote:Did Buffett mean what he said? Did he seriously overlook dividends on the Dow? That seems impossible. But, if not, what did he mean?
I do not have any special insight, but to me, Mr. Buffet's argument is not that investors did not earn a return. It is that even though the companies in the DOW were intrinsically more valuable (their businesses grew multifold and have many more assets), the market wasn't paying any more for them. If he wanted to be strictly accurate, he probably should have referenced the market cap for the market as a whole, but showing the DOW not budge despite enormous improvement in the company's business is probably more intuitive and impactful for the overall point he was trying to make, which I would suspect would be that the market price can get quite divorced from reality.
Agreed that this was his point. The minutia was not what he was going for. He wanted to make us understand that the market price can get divorced from reality for long periods. And I don't think his point would be better served by adding in the slight loss the Dow took over that time. He has to keep it simple or the point will be lost.
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by MIretired » Wed Dec 07, 2016 11:35 pm

S&P 500 P/E:
Jan 1, 1965 18.76
Jan 1, 1982 7.73
source: http://www.multpl.com/table

But, I think it's rare for Buffett to use the term P/E, isn't it?

Or maybe his next statement would be, "See! All the returns came from dividends!" --NOT. Not Buffett, right? :)

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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by jimb_fromATL » Wed Dec 07, 2016 11:39 pm

R2D2 wrote:
lack_ey wrote:I'm no Buffett fan in particular and don't have any insight on his thinking, but in many contexts you do hear people talking about the market going somewhere in reference to nominal price movements. This is a different phrasing from the market returning something.
Right, but I think Buffett really wanted to think that your total nominal return was zero.
Looks to me like he may know something about how money works. :?

I took a quick look at a table of the CPI and CD rates from the BLS that I happened to have from a while back. The CAGR for the CPI from 1965 through 1981 was 6.53%. The S&P CAGR for total return was 6.27%. Even worse after any fees. So ... if your money in your investments wouldn't buy as much in 1981 as it did in 1964, that's sure not getting anywhere.

Incidentally, while I don't have records handy for the first couple of years, I see that the CAGR for CDs from 1967 through 1981 averaged 7.69%. So most folks would probably have been better off staying out of the market altogether..

jimb

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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by abuss368 » Thu Dec 08, 2016 12:41 am

Mr. Buffett loves dividends! He writes about them in a lot of Shareholder letters.
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by nedsaid » Thu Dec 08, 2016 10:32 am

If the stock market had a real total return of -1.94% a year from 1964 to 1981, that fits my definition of going nowhere. Inflation was higher than the 4% or so you got from dividends.

In other threads, I have talked about inflation and stocks and that it can take some time for you to get your inflation adjustment. Inflation spikes are bad for both stocks and bonds but the markets better adjust to gradual increases in inflation. The later 1960's and the 1970's saw periods of higher inflation and the markets didn't give you the inflation adjustment until the 1980's when both interest rates and inflation fell.

I think Buffett was essentially right. What Nisiprius shows are the problems of speaking in short hand. Generally true but the details aren't exactly right.
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by dbr » Thu Dec 08, 2016 10:41 am

The DOW went from 874 to 875. That IS exactly nowhere. He said exactly what he meant and meant what he said.

If you have a problem with that take it up with Mr. Buffett :)

So, seriously, this is just another example of a well-known person, from whom we would like to extract insight and advice about investing, getting up in some context and "sounding off" to make some point or another that seems to escape us. Personally, I just shrug my shoulders and classify it as noise.

Or, one can do what is presented in this thread and look at the data more accurately, dividends included, clarity as to real or nominal accounting, and discuss the comparison of stocks to the economy and try to draw some conclusion relevant to some issue of interest. A surprise might be that Mr. Buffett actually was making a valid point even if stating it in a confusing and hyperbolic manner.

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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by nisiprius » Thu Dec 08, 2016 10:42 am

triceratop wrote:
nisiprius wrote: Well, what about inflation? He says "the size of the economy grew fivefold." According to this web page, Nominal GDP was $0.686 trillion in 1964; $3.211 in 1981. That's a factor of 4.68, so he is clearly talking in real terms.
:?: :?: :?:

To me this proves he is clearly talking in nominal terms, not real terms; 4.68 is close enough to 5x for Buffett's level of care for detail. That coupled with the DJIA being listed on the screen means he simply left out dividends when saying the market went nowhere.
:oops: Yeah, that's what I meant to say.
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by dodecahedron » Thu Dec 08, 2016 10:55 am

Dividends were taxed very heavily during that time. (There was no such thing as a "qualified dividend" back in the day. Also, no IRAs before 1981. 401k was invented shortly before the end of the period but not really a prevalent option.) The top marginal tax rate on dividends was 70% during this period (and there were additional state and local income taxes in some places.) Also, commissions were artificially high due to minimum regulations that applied during most of this period. So the effective (after tax) real rate of return was even worse than nisiprius calculated.

http://seekingalpha.com/article/285468- ... since-1961

http://www.sechistorical.org/museum/gal ... rev02c.php

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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by abuss368 » Thu Dec 08, 2016 11:46 pm

I believe Berkshire collects $4 BILLION in dividends a year.
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by HurdyGurdy » Thu Dec 08, 2016 11:54 pm

Even with dividends reinvested, the market went one direction: down!

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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by itstoomuch » Fri Dec 09, 2016 12:41 am

We just moved to the DC area and were looking for auto ins.
Geico was bankrupt or nearly so, and it was big news that a Shirt Company was buying an insurance co.
BK-Buffett always bought on value.
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by dumbmoney » Fri Dec 09, 2016 4:42 am

These articles may help clarify:

http://archive.fortune.com/magazines/fo ... /index.htm
http://archive.fortune.com/magazines/fo ... /index.htm

Basically Buffett likes to look at the ratio of stock market value to GDP as an indicator. When he says the market went nowhere, he means market value went nowhere. Not that investor return was zero.
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by magneto » Fri Dec 09, 2016 6:52 am

Similar (lost period) thing in the UK with the FTSE100 still today just below the level of Dec 99 :!:
However a poster produced data in another thread, showing that with dividends included, the UK FTSE100 surprisingly near matched the total return of the S&P over the same period.

Well done the dividends!

An investor with a sensible Investment Plan and Rebalancing Strategy, hopefully would also be adding low and reducing high, taking advantage of such a cycling sideways market. How one can calculate the additional benefits of such rebalancing is beyond this investor!
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by jimb_fromATL » Fri Dec 09, 2016 10:46 am

dumbmoney wrote:These articles may help clarify:

http://archive.fortune.com/magazines/fo ... /index.htm
http://archive.fortune.com/magazines/fo ... /index.htm

Basically Buffett likes to look at the ratio of stock market value to GDP as an indicator. When he says the market went nowhere, he means market value went nowhere. Not that investor return was zero.
The ratio of the stock market to the GDP probably makes more of a difference to Warren Buffett because he owns so much of it. But to most folks, the effect of inflation -- measured by the CPI -- is a better indicator of how much of the GDP your money will buy.

jimb

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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by Stormbringer » Fri Dec 09, 2016 8:07 pm

nisiprius wrote:Well, yet again... there doesn't seem to be any way to know what he actually meant. Did he really overlook dividends on the Dow? That seems impossible. But what, then, was he doing?
Buffett was explaining the effect of interest rates and corporate profits on valuations. He was not discussing returns.
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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by MIretired » Fri Dec 09, 2016 8:24 pm

jimb_fromATL wrote:
dumbmoney wrote:These articles may help clarify:

http://archive.fortune.com/magazines/fo ... /index.htm
http://archive.fortune.com/magazines/fo ... /index.htm

Basically Buffett likes to look at the ratio of stock market value to GDP as an indicator. When he says the market went nowhere, he means market value went nowhere. Not that investor return was zero.
The ratio of the stock market to the GDP probably makes more of a difference to Warren Buffett because he owns so much of it. But to most folks, the effect of inflation -- measured by the CPI -- is a better indicator of how much of the GDP your money will buy.

jimb
These are interesting observations into an investor's thinking. You are not buying past returns, but the current valuations.

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Re: Did Buffett really believe the stock market went nowhere from 1964 to 1981?

Post by Boglegrappler » Fri Dec 09, 2016 9:22 pm

take a look at what a new Chevy sedan cost you in 1964, and then in 1984. That might shed some light on the "went nowhere" measurement.

You can parse out the dividend returns during those years, but when you do them after tax I don't think anyone would think his statement isn't pretty much accurate. In periods of high inflation and rising interest rates, the after-tax returns have sucked. Technically speaking, of course.

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