Do stocks always go up long term?

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stockpickerted
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Do stocks always go up long term?

Post by stockpickerted » Mon May 15, 2017 5:14 pm

How is it possible that indexes like the S&P 500 show positive gains over the long term. There have been many companies that went out of business or their stocks went down dramatically. Do the indexes drop losers and add in winners to make it appear that over the long term you cannot lose money? If you truly can't lose why doesn't everyone just buy the index and stop trading?

harvestbook
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Re: Do stocks always go up long term?

Post by harvestbook » Mon May 15, 2017 5:17 pm

Because simply not losing is not enough for many people. They need to win.
I'm not smart enough to know, and I can't afford to guess.

fabdog
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Re: Do stocks always go up long term?

Post by fabdog » Mon May 15, 2017 5:26 pm

A lot of the gain comes from a small percentage of the stocks. Most of us aren't able to predict in advance which ones of those they will be, hence get the index and take the overall performance. Usually when companies are in trouble they end up out of the S&P long before they are delisted, so the index takes some hit.

And stocks vary widely. Great article today on Amazon... if you bought it at the IPO and held on, you made a fortune. Most folks didn't make it thru the tech bust when it lost 95% of its value :)

Mike

lack_ey
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Re: Do stocks always go up long term?

Post by lack_ey » Mon May 15, 2017 5:27 pm

Indexes show gains over the long term if the weighted performance of constituents shows gains.

The S&P 500 regularly turns over, maybe something around 20 stocks a year (some of the smallest ones, usually), obviously depending on the year. This has some impact but it's not that significant because the bulk of the S&P by market cap remains the same from year to year.

If you really want you could check total market indexes, which perform similarly to the S&P 500 for the US market anyway. Those don't turn over constituents on account of losing some value; if there's a delisting or the stock becomes insufficiently liquid for feasible trading and meeting their requirements, then sure. Anyway, the point is that these have gone up over time just the same.

The underlying behavior is that public equities generally gain value over time. The businesses represented in the aggregate can create more wealth from improving processes, expanding, and so on. Many individual stocks may lose money, but the winners have outgained and more than compensated for the losses from the losers. A lot of times, the biggest gains are concentrated in a small percentage of the market.

There's no guarantee this upward trend has to continue, but history and theory suggest that it should be typical. Certain stock markets have crashed to effectively zero before, so it doesn't have to be that way. Also, some amount of trading is necessary unless your holding period is indefinite; you can't personally buy and hold longer than you're alive. Stocks could be down for a number of decades that are relevant for your circumstances, even supposing the eventual longer-term trend is up.

delamer
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Re: Do stocks always go up long term?

Post by delamer » Mon May 15, 2017 5:31 pm

Well, one of the factors used to select companies for the S&P500 is market capitalization.

So, yes, if a firm goes out of business or the stock price declines significantly, then it is going to be dropped from the index. And a company that has become large enough to meet the criteria will replace it.

It isn't a question of dropping losers or adding winners, but making adjustments to keep the index true to its purpose.
Last edited by delamer on Mon May 15, 2017 5:36 pm, edited 2 times in total.

avalpert
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Re: Do stocks always go up long term?

Post by avalpert » Mon May 15, 2017 5:32 pm

stockpickerted wrote:How is it possible that indexes like the S&P 500 show positive gains over the long term. There have been many companies that went out of business or their stocks went down dramatically. Do the indexes drop losers and add in winners to make it appear that over the long term you cannot lose money? If you truly can't lose why doesn't everyone just buy the index and stop trading?
No, stocks do not always go up long term (either as individual stocks or even as broad indexes - see Japan).

Yes, the S&P 500 changes over time to reflect changes in the overall economy as some companies and sectors go up and some down.

software
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Re: Do stocks always go up long term?

Post by software » Mon May 15, 2017 5:33 pm

stockpickerted wrote:If you truly can't lose why doesn't everyone just buy the index and stop trading?
So, just to be clear, you can absolutely lose. Just look at the NIKKEI index over the past 35 years as an example, there is nothing saying that can't happen to the S&P 500 (though to be fair that particular situation is pretty unlikely).

However, the nice thing with investing in low cost, broad-based indexes, even if you "lose" (because of factors outside of your control) you will still be a ahead of >50% of other investors after fees. That's just the law of market averages. For every winner there is a loser, and after fees there are actually a lot more than half losers.

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Phineas J. Whoopee
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Re: Do stocks always go up long term?

Post by Phineas J. Whoopee » Mon May 15, 2017 5:48 pm


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knpstr
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Re: Do stocks always go up long term?

Post by knpstr » Mon May 15, 2017 5:51 pm

avalpert wrote:No, stocks do not always go up long term (either as individual stocks or even as broad indexes - see Japan).
Well after a large unwind it is worth mentioning that the nikkei 225 has doubled in the last 4 years.

But they had a rough 20 years.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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bengal22
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Re: Do stocks always go up long term?

Post by bengal22 » Mon May 15, 2017 5:57 pm

So far

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stockpickerted
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Re: Do stocks always go up long term?

Post by stockpickerted » Mon May 15, 2017 6:10 pm

I have studied the theory of 'Away in May' and it has proven to be sound over the years, thereby greatly increasing the returns and limiting the risk. What one does with the money for the off 6 months is immaterial but one can sleep easy doing it.

software
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Re: Do stocks always go up long term?

Post by software » Mon May 15, 2017 6:13 pm

stockpickerted wrote:I have studied the theory of 'Away in May' and it has proven to be sound over the years, thereby greatly increasing the returns and limiting the risk. What one does with the money for the off 6 months is immaterial but one can sleep easy doing it.
Not sure if srs...

If you're serious about this strategy, I recommend you read this: http://www.businessinsider.com/cost-of- ... 500-2014-3

It is about time in the market, not timing the market. Just accept market averages and move on.

selftalk
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Re: Do stocks always go up long term?

Post by selftalk » Mon May 15, 2017 6:45 pm

It certainly has since the DOW was created. Just look at a very long term chart of the Dow Jones Industrial Average and the S&P 500. However there have been drops and consolidations along the way. Our society creates new and better products and ways to enhance our lives over the years and will continue to do so. Therefore, stock companies will come and go in the index reflecting the progress of mankind. Once again BUY THE INDEX.

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patrick013
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Re: Do stocks always go up long term?

Post by patrick013 » Mon May 15, 2017 6:49 pm

The advisor's name is index replacement and he is a very powerful
advisor. He (She) can take any stock(s) out of the index that are not
performing and replace them with stocks that are performing. So it
looks like stocks are going up because you always have stocks with
steady or rising earnings in the index fund. One company I worked
for almost made it into the "index" one year which was supposed to
be good for business. :)

Do stocks always go up ? It's possible the answer is no. Overproduction
used to be a problem but nobody admitted it. Just invest in brand names
they would say. Things could become so efficient you'd have to restart
planned obsolescence to ensure future profits, or just have fewer companies
competing then.
age in bonds, buy-and-hold, 10 year business cycle

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dm200
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Re: Do stocks always go up long term?

Post by dm200 » Mon May 15, 2017 6:52 pm

Over time, so far stocks (on average) have gone up over the long term.

Will that always be the case? I believe it is likely for the US market, but there are no guarantees.

Dirghatamas
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Re: Do stocks always go up long term?

Post by Dirghatamas » Mon May 15, 2017 6:58 pm

stockpickerted wrote:How is it possible that indexes like the S&P 500 show positive gains over the long term.
I want to focus on a slightly different argument that is obviously understood by all experienced investors but should be stressed more by buy and hold people.

Stockpickerted (interesting name for Bogleheads), it is NOT necessary for stocks to go "Up", or the economy to grow or companies to expand or companies to make more profit than the past (in real terms) or P/E ratios of indexes to go up over time, for you as stockholder to gain.

This IMO is why long term passive indexing works and why people say "time in market, not timing the market".

Assume we live in a stable world where there is no growth (population or economy), no increase in profits, no new companies and no new technologies. Even in such a world (which would be pretty bad) if you hold passive mutual funds for the long term, you gain the earnings each year (~5% for US and ~6-7% for International at present). These earnings come back to you either as dividends or buybacks. Both are equivalent (other than taxes), and if you reinvest them, each year you own a bigger% of the (US or World's) companies. Over the long haul, you basically end up owning a larger and larger fraction of the world's economic engine. Even if the world doesn't grow and no company grows, you end up coming out ahead because you now own a bigger chunk of a constant asset. That to me is the core of why long term investing works. The odds are heavily in your favor.

Dominic
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Re: Do stocks always go up long term?

Post by Dominic » Mon May 15, 2017 7:05 pm

No.

Returns in Japan have been flat for 30 years, even after adding dividends. It's not impossible for a long term investor to lose money in the stock market.

avalpert
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Re: Do stocks always go up long term?

Post by avalpert » Mon May 15, 2017 7:42 pm

stockpickerted wrote:I have studied the theory of 'Away in May' and it has proven to be sound over the years, thereby greatly increasing the returns and limiting the risk. What one does with the money for the off 6 months is immaterial but one can sleep easy doing it.
Please tell me this isn't a serious post.

If it is and you have studied it so well please tell me what the average return for those 6 months has been historically and start there...

ray333
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Re: Do stocks always go up long term?

Post by ray333 » Mon May 15, 2017 8:09 pm

I willl continue to place all disposable income in some sort of combo of total us/total international market ... overtime I will accumulate wealth - or the world has ended so who cares.

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Earl Lemongrab
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Re: Do stocks always go up long term?

Post by Earl Lemongrab » Tue May 16, 2017 2:32 pm

stockpickerted wrote:How is it possible that indexes like the S&P 500 show positive gains over the long term. There have been many companies that went out of business or their stocks went down dramatically. Do the indexes drop losers and add in winners to make it appear that over the long term you cannot lose money? If you truly can't lose why doesn't everyone just buy the index and stop trading?
That isn't credible because there are broad indexes that contain virtually all investable stocks in a given market. If indexes like the S&P 500 were artificially manipulated to show a false view, then they would deviate dramatically from the Total Market indexes. In general this does not happen, and in fact the S&P 500 so close to Total that many people consider them to be nearly interchangeable. The S&P committee does choose the companies in the index, but the goal is to represent the larger market, and it does a pretty good job.

You can research most of this yourself with Morningstar charts.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

CurlyDave
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Re: Do stocks always go up long term?

Post by CurlyDave » Wed May 17, 2017 1:05 am

selftalk wrote:It certainly has since the DOW was created. Just look at a very long term chart of the Dow Jones Industrial Average and the S&P 500. However there have been drops and consolidations along the way. Our society creates new and better products and ways to enhance our lives over the years and will continue to do so. Therefore, stock companies will come and go in the index reflecting the progress of mankind. Once again BUY THE INDEX.
The DOW was originally 12 components, and only one of those is still in the index.

It is less common in the DOW, but in the S&P 500 many companies leave through being acquired or merging with others, so all of the dropouts are not necessarily due to poor performance.

Vanguard Fan 1367
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Re: Do stocks always go up long term?

Post by Vanguard Fan 1367 » Wed May 17, 2017 8:12 am

I really appreciate the "investing advice inspired by Jack Bogle." I recently heard him say that we might expect returns in the 4 percent range going ahead. I also heard him talk about unsustainable borrowing. So while there is no guarantee that we will have positive returns in the future I am hoping that we will and arranging my investments to capitalize on that hope.

Valuethinker
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Re: Do stocks always go up long term?

Post by Valuethinker » Wed May 17, 2017 8:15 am

Dirghatamas wrote:
Assume we live in a stable world where there is no growth (population or economy), no increase in profits, no new companies and no new technologies. Even in such a world (which would be pretty bad) if you hold passive mutual funds for the long term, you gain the earnings each year (~5% for US and ~6-7% for International at present). These earnings come back to you either as dividends or buybacks. Both are equivalent (other than taxes), and if you reinvest them, each year you own a bigger% of the (US or World's) companies. Over the long haul, you basically end up owning a larger and larger fraction of the world's economic engine. Even if the world doesn't grow and no company grows, you end up coming out ahead because you now own a bigger chunk of a constant asset. That to me is the core of why long term investing works. The odds are heavily in your favor.
Something wrong with your model?

Why would earnings grow in the long run, for the corporate sector in aggregate, if there is no economic growth?

You could have lower real wages. But since the workers are also your consumers, in aggregate consumption would fall and therefore profits.

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Toons
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Re: Do stocks always go up long term?

Post by Toons » Wed May 17, 2017 8:36 am

Yes.
Earnings Rise
Share Prices Rise.
:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Valuethinker
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Re: Do stocks always go up long term?

Post by Valuethinker » Wed May 17, 2017 8:38 am

Dominic wrote:No.

Returns in Japan have been flat for 30 years, even after adding dividends. It's not impossible for a long term investor to lose money in the stock market.
Consider also the major stock markets of 1900, such as:

St Petersburg
Vienna
Budapest
Cairo
Buenos Aires
Shanghai
Berlin

They did not have a good 20th century either. In fact in some of them investors lost 100% of their money and were out of the game, forever.

Valuethinker
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Re: Do stocks always go up long term?

Post by Valuethinker » Wed May 17, 2017 8:41 am

knpstr wrote:
avalpert wrote:No, stocks do not always go up long term (either as individual stocks or even as broad indexes - see Japan).
Well after a large unwind it is worth mentioning that the nikkei 225 has doubled in the last 4 years.

But they had a rough 20 years.
27 years, less the recent rally ;-). I believe the Nikkei peaked in 1990.

Also the recent doubling is in part due to currency weakness? The Japanese government and Central Bank have a deliberate, targetted, attempt to increase inflation and thus motivate domestic spending. One of the ways of achieving that has been to devalue the currency as much as possible.

Japan's torrid history is a warning about asset price bubbles. It's also a warning about what happens when mature demographics just become "old" and you have more people over 65 than under 25 (and the imbalance is getting steadily worse).

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Re: Do stocks always go up long term?

Post by knpstr » Wed May 17, 2017 9:33 am

Valuethinker wrote:
knpstr wrote:
avalpert wrote:No, stocks do not always go up long term (either as individual stocks or even as broad indexes - see Japan).
Well after a large unwind it is worth mentioning that the nikkei 225 has doubled in the last 4 years.

But they had a rough 20 years.
27 years, less the recent rally ;-). I believe the Nikkei peaked in 1990.

Also the recent doubling is in part due to currency weakness? The Japanese government and Central Bank have a deliberate, targetted, attempt to increase inflation and thus motivate domestic spending. One of the ways of achieving that has been to devalue the currency as much as possible.

Japan's torrid history is a warning about asset price bubbles. It's also a warning about what happens when mature demographics just become "old" and you have more people over 65 than under 25 (and the imbalance is getting steadily worse).
Yes, it seems their issue has a lot to do with demographics.

But their market is up since 1914. So it seems over the long-term things are up :wink:
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

wrongfunds
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Re: Do stocks always go up long term?

Post by wrongfunds » Wed May 17, 2017 9:35 am

Is somebody willing to argue that Japan's woes are primarily driven by its immigration policy or rather due to lack of it?

itstoomuch
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Re: Do stocks always go up long term?

Post by itstoomuch » Wed May 17, 2017 10:24 am

My long-term is measured in months, at most 12. It's all discretionary. :annoyed
Btw, YMMV 8-)
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JoMoney
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Re: Do stocks always go up long term?

Post by JoMoney » Wed May 17, 2017 10:27 am

wrongfunds wrote:Is somebody willing to argue that Japan's woes are primarily driven by its immigration policy or rather due to lack of it?
It seems somebody is arguing that immigration would be a fix
http://www.tokyotimes.com/immigrants-co ... opulation/
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Stryker
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Re: Do stocks always go up long term?

Post by Stryker » Wed May 17, 2017 1:54 pm

China. Fast growing economy. Annual real return on equities from 1993 to 2016 -2.9% per year. (Yeah, you read that right, minus).

--------------------------------------------------

The Economist

Stocks for the long run?

Jan 13th 2016 by Buttonwood

Equities haven't always produced positive long-term returns or beaten the risk-free rate

"Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School are the acknowledged experts on global investment returns, having compiled data covering 22 countries over more than a century. As of February 2013, the longest period of negative real returns from US equities was 16 years. But it was 19 years for global equities (and 37 for world ex-US), 22 for Britain, 51 for Japan, 55 for Germany and 66 for France. Such periods are much longer than most small investors would have the patience to wait."

Dirghatamas
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Re: Do stocks always go up long term?

Post by Dirghatamas » Wed May 17, 2017 2:58 pm

Valuethinker wrote:
Dirghatamas wrote:
Assume we live in a stable world where there is no growth (population or economy), no increase in profits, no new companies and no new technologies. Even in such a world (which would be pretty bad) if you hold passive mutual funds for the long term, you gain the earnings each year (~5% for US and ~6-7% for International at present). These earnings come back to you either as dividends or buybacks. Both are equivalent (other than taxes), and if you reinvest them, each year you own a bigger% of the (US or World's) companies. Over the long haul, you basically end up owning a larger and larger fraction of the world's economic engine. Even if the world doesn't grow and no company grows, you end up coming out ahead because you now own a bigger chunk of a constant asset. That to me is the core of why long term investing works. The odds are heavily in your favor.
Something wrong with your model?

Why would earnings grow in the long run, for the corporate sector in aggregate, if there is no economic growth?

You could have lower real wages. But since the workers are also your consumers, in aggregate consumption would fall and therefore profits.
No Valuethinker you misunderstood my model (read it again slowly :happy ). My baseline model is a stable world (this is my realistic worst case for the world going forward). Obviously it is possible to build even worse models like Nuclear war or Comet Strike or whatever but financial planning won't help with those. Given that the developing countries are still growing fast and the world population is still growing (except perhaps developed countries), I simplify it to world is stable in aggregate: no population growth, no GDP/economic growth, no new technologies, no new companies, no wage growth, no inflation....every day is Groundhog day (remember the movie). This is a very simple model to think about stock ownership.

In my model, earnings DO NOT grow: nothing grows. That does not mean stock ownership is pointless. In this world, because everything is stable, earnings are also stable (no growth), along with P/E. So, if you buy diversified stocks and simply hold them for life, your assets grow every year from the stable earnings which are reinvested (using dividends or buybacks). Basically, the market cap of the world stocks DOES NOT go up over time but because of reinvested earnings, you end up owning a larger and larger fraction of the world's economic engine over the long haul.

The world doesn't grow but you own larger and larger fractions of it over time!

BTW the above is not just abstract, it is why I am so convinced about stocks for the long run and why I have managed to hold a 100% world stock portfolio for now 25 years without selling anything. To me the gains from reinvested earnings over the long run is a very powerful concept. I don't invest based on speculations about P/E or valuations or growth prospects.

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Re: Do stocks always go up long term?

Post by understandingJH » Wed May 17, 2017 3:20 pm

Dirghatamas wrote:
Valuethinker wrote:
Dirghatamas wrote:
Assume we live in a stable world where there is no growth (population or economy), no increase in profits, no new companies and no new technologies. Even in such a world (which would be pretty bad) if you hold passive mutual funds for the long term, you gain the earnings each year (~5% for US and ~6-7% for International at present). These earnings come back to you either as dividends or buybacks. Both are equivalent (other than taxes), and if you reinvest them, each year you own a bigger% of the (US or World's) companies. Over the long haul, you basically end up owning a larger and larger fraction of the world's economic engine. Even if the world doesn't grow and no company grows, you end up coming out ahead because you now own a bigger chunk of a constant asset. That to me is the core of why long term investing works. The odds are heavily in your favor.
Something wrong with your model?

Why would earnings grow in the long run, for the corporate sector in aggregate, if there is no economic growth?

You could have lower real wages. But since the workers are also your consumers, in aggregate consumption would fall and therefore profits.
No Valuethinker you misunderstood my model (read it again slowly :happy ). My baseline model is a stable world (this is my realistic worst case for the world going forward). Obviously it is possible to build even worse models like Nuclear war or Comet Strike or whatever but financial planning won't help with those. Given that the developing countries are still growing fast and the world population is still growing (except perhaps developed countries), I simplify it to world is stable in aggregate: no population growth, no GDP/economic growth, no new technologies, no new companies, no wage growth, no inflation....every day is Groundhog day (remember the movie). This is a very simple model to think about stock ownership.

In my model, earnings DO NOT grow: nothing grows. That does not mean stock ownership is pointless. In this world, because everything is stable, earnings are also stable (no growth), along with P/E. So, if you buy diversified stocks and simply hold them for life, your assets grow every year from the stable earnings which are reinvested (using dividends or buybacks). Basically, the market cap of the world stocks DOES NOT go up over time but because of reinvested earnings, you end up owning a larger and larger fraction of the world's economic engine over the long haul.

The world doesn't grow but you own larger and larger fractions of it over time!

BTW the above is not just abstract, it is why I am so convinced about stocks for the long run and why I have managed to hold a 100% world stock portfolio for now 25 years without selling anything. To me the gains from reinvested earnings over the long run is a very powerful concept. I don't invest based on speculations about P/E or valuations or growth prospects.
Who is going to sell you their shares when you try to reinvest? People in retirement? There should be less people in retirement than those working under this model. If the pie stays the same, everybody's slice can't just simply grow overtime. Otherwise the size of the pie would have to grow too. That said, I'm happy for anyone to point out any flaws with my counter argument, as I see a stable economy as a better alternative to unsustainable growth or decline.

Dirghatamas
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Re: Do stocks always go up long term?

Post by Dirghatamas » Wed May 17, 2017 3:42 pm

understandingJH wrote:
The world doesn't grow but you own larger and larger fractions of it over time!

Who is going to sell you their shares when you try to reinvest? People in retirement? There should be less people in retirement than those working under this model. If the pie stays the same, everybody's slice can't just simply grow overtime. Otherwise the size of the pie would have to grow too.
Right. The situation you describe is discussed in rather long and boring detail by Piketty in "Capital in the 21st Century". He has gone over returns in Europe as well as North America for several hundred years (way before stocks). His main conclusion is r>g or returns on capital tend to be greater than rate of economic growth, with a few exceptions like wars/revolutions. For many of the countries/epoch considered, there was very little growth. In those cases, the capital was in farms/land/orchards/housing etc. They are not much different from stocks.

Current owners grow old/retire and/or not frugal enough so they need to sell shares to live. The young set provide labor and don't have enough assets to live on capital. As such, if you are the one with more assets and/or more frugal, you start accumulating more and more. Piketty is against this because it leads to inequality but for purposes of this form (investing) he agrees that over the long run, the investor/capitalist ends up winning.

You are correct in that the pie doesn't grow over time. My slice grows over time :happy Obviously it is even better if there is growth and the pie itself grows but there have been hundreds of years without much growth in history that have still led to very positive outcomes for buy and hold (of land, orchards, farms, houses, mines...stocks).

Entire generations of English gentlemen lived on rent from land without significant growth necessary.

Valuethinker
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Re: Do stocks always go up long term?

Post by Valuethinker » Wed May 17, 2017 4:59 pm

Dirghatamas wrote:
In my model, earnings DO NOT grow: nothing grows. That does not mean stock ownership is pointless. In this world, because everything is stable, earnings are also stable (no growth), along with P/E. So, if you buy diversified stocks and simply hold them for life, your assets grow every year from the stable earnings which are reinvested (using dividends or buybacks). Basically, the market cap of the world stocks DOES NOT go up over time but because of reinvested earnings, you end up owning a larger and larger fraction of the world's economic engine over the long haul.
OK the world has 100 capital, and 10 profits. You own 2 of the profits, say, and 20 of the capital.

You reinvest that 2-- ie you consume nothing (a good trick, mind). But since capital doesn't grow, that only offsets depreciation?

Ie you now own 22 capital, but depreciation means that 22 of capital is only 20. You are where you started?*
The world doesn't grow but you own larger and larger fractions of it over time!

BTW the above is not just abstract, it is why I am so convinced about stocks for the long run and why I have managed to hold a 100% world stock portfolio for now 25 years without selling anything. To me the gains from reinvested earnings over the long run is a very powerful concept. I don't invest based on speculations about P/E or valuations or growth prospects.
I think the problem is the marginal product of reinvested capital falls over time. Hence you get the dot com bust.

The basic problem is that you can't rely on stocks doing well on a 25 year subperiod. The historical record (Mandelbrot) says that financial assets (prices of) are a *lot* more volatile than conventional Gaussian distribution assumptions would have suggested-- in fact equity returns are fractal.

Stocks are extremely volatile. That's why they've paid such great returns in the long run-- it's a reward for a really exceptional level of risk.

* there is of course an asset where this is not true. Land-- which is finite in supply and depreciates very little (if managed correctly). Cue David Ricardo-- this was the core of his analysis of rent. However in practice the returns from land have not been that great. It appears that changing technology undercuts the Ricardian analysis-- agricultural productivity has risen, and the advantages of location have diminished due to better transportation and communication.

Structures like houses and offices of course have a high rate of depreciation and obsolescence.

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Re: Do stocks always go up long term?

Post by Valuethinker » Wed May 17, 2017 5:02 pm

knpstr wrote:
Valuethinker wrote:
knpstr wrote:
avalpert wrote:No, stocks do not always go up long term (either as individual stocks or even as broad indexes - see Japan).
Well after a large unwind it is worth mentioning that the nikkei 225 has doubled in the last 4 years.

But they had a rough 20 years.
27 years, less the recent rally ;-). I believe the Nikkei peaked in 1990.

Also the recent doubling is in part due to currency weakness? The Japanese government and Central Bank have a deliberate, targetted, attempt to increase inflation and thus motivate domestic spending. One of the ways of achieving that has been to devalue the currency as much as possible.

Japan's torrid history is a warning about asset price bubbles. It's also a warning about what happens when mature demographics just become "old" and you have more people over 65 than under 25 (and the imbalance is getting steadily worse).
Yes, it seems their issue has a lot to do with demographics.

But their market is up since 1914. So it seems over the long-term things are up :wink:
;-). If you go from basically an emerging economy in 1914 (most of the big Japanese warships in the 1904-05 Russo-Japanese war were built by British shipbuilders) to the world's 3rd largest economy and one of its most advanced societies, one would *hope* that equities paid a positive return ;-).

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Re: Do stocks always go up long term?

Post by Valuethinker » Wed May 17, 2017 5:11 pm

wrongfunds wrote:Is somebody willing to argue that Japan's woes are primarily driven by its immigration policy or rather due to lack of it?
That's not what caused the bubble, and the bust. That was about overvalued assets. It just makes everything harder to recover from.

But since about the turn of the century, Japan has had an enormous headwind of a shrinking workforce. Since about the late 1960s, Japan has had just about the lowest birth rate in the developed world (I think Spain and Italy may actually be lower, as well as some parts of the former USSR).

Immigration could help that, but the scale of immigration to offset that would be too huge for just about any country to undertake. And it's not a permanent solution-- those young immigrants would in turn get old.

Yes in other words Japan should grab 1 million Syrian refugees whilst they are going (thinking of a population that has some level of education and is desperate to find a new home). The long term economic benefits to Japan would be very great.

Japan is a microcosm of where we will all be in c. 20-30 years time, and the whole planet in c. 50, assuming other things continue as they are. There's little or no evidence a country can reverse a falling birth rate*, although the French and the Swedes have probably gone about as far as you can go in that direction-- measures like universal daycare specifically targetted at raising birth rates.

Some sub communities in the USA and Israel, for example, have much higher birth rates. Think Utah. But that's about religious fervour, and that's not something it's easy to manufacture.

In fact Japan has led the world in adapting to a much older population. Japanese people often don't "retire" in the way we do in the West at 65, they keep working, and there is great reverence and respect for the aged. Advanced technology is being used to help people maintain independent and useful lives.

* the Baby Boom is I think the only really big reversal of birth rates in a developed world. However the factors were almost unique: families avoided having children because of the Great Depression, then war, and the soldiers returned to a world both where their wives left the workforce (hard to imagine that happening again) and standards of living were much higher than had been expected before or during the war. And the Baby Boom was really only a handful of countries: Canada, USA, Australia, New Zealand primarily.

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knpstr
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Re: Do stocks always go up long term?

Post by knpstr » Wed May 17, 2017 5:44 pm

Valuethinker wrote:
knpstr wrote:
Valuethinker wrote:
knpstr wrote:
avalpert wrote:No, stocks do not always go up long term (either as individual stocks or even as broad indexes - see Japan).
Well after a large unwind it is worth mentioning that the nikkei 225 has doubled in the last 4 years.

But they had a rough 20 years.
27 years, less the recent rally ;-). I believe the Nikkei peaked in 1990.

Also the recent doubling is in part due to currency weakness? The Japanese government and Central Bank have a deliberate, targetted, attempt to increase inflation and thus motivate domestic spending. One of the ways of achieving that has been to devalue the currency as much as possible.

Japan's torrid history is a warning about asset price bubbles. It's also a warning about what happens when mature demographics just become "old" and you have more people over 65 than under 25 (and the imbalance is getting steadily worse).
Yes, it seems their issue has a lot to do with demographics.

But their market is up since 1914. So it seems over the long-term things are up :wink:
;-). If you go from basically an emerging economy in 1914 (most of the big Japanese warships in the 1904-05 Russo-Japanese war were built by British shipbuilders) to the world's 3rd largest economy and one of its most advanced societies, one would *hope* that equities paid a positive return ;-).
Exactly.
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Re: Do stocks always go up long term?

Post by Dirghatamas » Wed May 17, 2017 10:40 pm

Valuethinker wrote:[
OK the world has 100 capital, and 10 profits. You own 2 of the profits, say, and 20 of the capital.

You reinvest that 2-- ie you consume nothing (a good trick, mind). But since capital doesn't grow, that only offsets depreciation?

Ie you now own 22 capital, but depreciation means that 22 of capital is only 20. You are where you started?*
We are talking past each other. Valuethinker, have you read Piketty's book "Capital in the 21st Century"? Instead of abstract discussion, he has reams upon reams of actual returns over hundreds of years and uses all that to make the compelling case that r>g or returns on capital have exceeded rate of growth. In other words, even with 0 growth, there has been very positive return on capital.

To return to the toy example above, depreciation and taxes are simply a part of doing business. "Earnings" in my toy model are after taxes and depreciation. When I reinvest 2, the total capital doesn't increase but I own a higher % of the total.

Here is a simple example of a farm or a rental house. Let's say you start by owning 10% of a farm or a house. The house/farm is worth $1 million so you paid 100K to get a 10% ownership. In this society, the output of the farm and the rent paid is constant. Each year let's say after paying for running the farm, paying the property business, paying taxes and paying for depreciation/painting the house, upkeep of farm equipment..whatever, there is 10% profit = 100K dollars.

That 10% profit is given to all owners as dividends. Because you own 10%, you got 10%*100K = 10K dollars. The other owners are less frugal and spend all this money on living. You on the other hand offer your 10K earnings to the least frugal part owner and buy a bigger % of the farm/house by buying a % of their ownership (that is pretty much what stock buybacks or reinvested dividends do: there has to be someone else who is willing to sell at that price for whatever reason).

So, you started with 10% ownership. Next year you now own 10% + 10k/1M = 11% of the house/farm. Next year you now own 12.1%, next year 13.31%..14.64%...16.1%..17.7%..19.48%..21.43%..23.6%

The total assets (market price of house/farm) are not increasing. Each year you own a bigger fraction as in the above example and is the reason you make money. Piketty goes over such data (mostly from Europe but also from North America) in excruciating detail and his conclusion is that absent wars/revolutions, capital returns have basically exceeded rate of growth. It is intuitively obvious to me that this result should be true.

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Re: Do stocks always go up long term?

Post by understandingJH » Thu May 18, 2017 10:07 am

Dirghatamas wrote: Piketty goes over such data (mostly from Europe but also from North America) in excruciating detail and his conclusion is that absent wars/revolutions, capital returns have basically exceeded rate of growth. It is intuitively obvious to me that this result should be true.
I think revolution is the key concern here from the intrinsic inequality that will arise form such a model. In the words of Frederick Engels on April 30, 1891 in London:
"On the one hand, immeasurable wealth and a superfluidity of products with which the buyers cannot cope. On the other hand, the great mass of society proletarianized, transformed into wage-labourers, and thereby disabled from appropriating to themselves that superfluidity of products. The splitting up of society into a small class, immoderately rich, and a large class of wage-labourers devoid of all property, brings it about that this society smothers in its own superfluidity, while the great majority of its members are scarcely, or not at all, protected from extreme want.

This condition becomes every day more absurd and more unnecessary. It must be gotten rid of; it can be gotten rid of."

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Re: Do stocks always go up long term?

Post by MathWizard » Thu May 18, 2017 12:00 pm

I assume that you mean that there is a positive total return:
dividends + stock appreciation (counting splits, buybacks, etc.)

Then of course, they must, otherwise nobody would every buy them.

You are buying a piece of a business. Would you buy a piece of a business if you
assumed it would lose money?

Of course, some business will lose money, but in aggregate, they will make money.
This will either be returned to the owners of the business (shareholders) through
dividends, or the value of the company will rise by that amount, so you would expect
the share price to go up.

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Re: Do stocks always go up long term?

Post by PNW1 » Thu May 18, 2017 4:18 pm

understandingJH wrote:
Dirghatamas wrote: Piketty goes over such data (mostly from Europe but also from North America) in excruciating detail and his conclusion is that absent wars/revolutions, capital returns have basically exceeded rate of growth. It is intuitively obvious to me that this result should be true.
I think revolution is the key concern here from the intrinsic inequality that will arise form such a model. In the words of Frederick Engels on April 30, 1891 in London:
"On the one hand, immeasurable wealth and a superfluidity of products with which the buyers cannot cope. On the other hand, the great mass of society proletarianized, transformed into wage-labourers, and thereby disabled from appropriating to themselves that superfluidity of products. The splitting up of society into a small class, immoderately rich, and a large class of wage-labourers devoid of all property, brings it about that this society smothers in its own superfluidity, while the great majority of its members are scarcely, or not at all, protected from extreme want.

This condition becomes every day more absurd and more unnecessary. It must be gotten rid of; it can be gotten rid of."
This is my main takeaway from Piketty's work. We are living within that model, and we should be aware of it. Nobody should want to live in a world that preserves aristocratic wealth. Even in the unlikely event that you are born or claw your way into the aristocracy, you're living in an inherently unstable society that will eventually succumb to revolution. Unfortunately for us, market-driven societies tend toward that, while non-market-driven societies tend toward stagnation and less efficient allocation of capital. You can escape this trap by living in a market-driven society that also makes attempts to level the playing field. How can the playing field be leveled? Historically it has been leveled during periods of extreme growth where {growth and potential return from labor} > {return on capital}. It has sometimes been leveled by confiscating most of the inherited wealth in a society. Frequently this confiscation is accomplished by revolutions or as a side effect of devastating wars. I'd prefer to avoid those.

Piketty suggests another way of living in a market-driven society that doesn't march toward revolution every few generations. Pass and enforce laws that slowly erode aristocratic wealth through wealth taxes (not mere income taxes) that are imposed on the extremely wealthy. In the long run this would of course benefit much of society, especially the already wealthy, because it would reduce the incidence of revolution. It would likely also more efficiently allocate capitol. It's a win for almost all members of society. Strangely, governments don't seem to be rushing to investigate or implement such a policy. :?

As an aside, I thought the Piketty book was riveting.

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Re: Do stocks always go up long term?

Post by grayparrot » Thu May 18, 2017 6:08 pm

avalpert wrote: No, stocks do not always go up long term (either as individual stocks or even as broad indexes - see Japan).

Yes, the S&P 500 changes over time to reflect changes in the overall economy as some companies and sectors go up and some down.
I have a different take on this: stocks DO always go up "long term". However, based on starting valuations, "long" can mean very different things. I am pretty confident that the 100 year stock returns in Japan are positive. If you buy at a time when average valuations are like 1989 Japan, then you may need to hold for the looooong term to get a positive return. On the other hand, I don't think that anybody can point out many/any periods where an investment made at US 2008-2009 price/CAPE type ratios failed to produce meaningfully positive returns over subsequent 10-15 years.

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Re: Do stocks always go up long term?

Post by avalpert » Thu May 18, 2017 7:28 pm

grayparrot wrote:
avalpert wrote: No, stocks do not always go up long term (either as individual stocks or even as broad indexes - see Japan).

Yes, the S&P 500 changes over time to reflect changes in the overall economy as some companies and sectors go up and some down.
I have a different take on this: stocks DO always go up "long term". However, based on starting valuations, "long" can mean very different things. I am pretty confident that the 100 year stock returns in Japan are positive. If you buy at a time when average valuations are like 1989 Japan, then you may need to hold for the looooong term to get a positive return. On the other hand, I don't think that anybody can point out many/any periods where an investment made at US 2008-2009 price/CAPE type ratios failed to produce meaningfully positive returns over subsequent 10-15 years.
It may be the case that 100 year stock returns in Japan are positive - and it may remain true 100 years from now but the same cannot be said for Russian shareholders from 100 years ago (at least 100 years ago March). So, again, stocks do not always go up long term - there are no guarantees at all.

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Re: Do stocks always go up long term?

Post by Snowjob » Fri May 19, 2017 6:33 am

no, but the world is gambling that they will. if they don't, we are all largely screwed, and you better be able to adapt

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Re: Do stocks always go up long term?

Post by Valuethinker » Fri May 19, 2017 6:58 am

Dirghatamas wrote:
Valuethinker wrote:[
OK the world has 100 capital, and 10 profits. You own 2 of the profits, say, and 20 of the capital.

You reinvest that 2-- ie you consume nothing (a good trick, mind). But since capital doesn't grow, that only offsets depreciation?

Ie you now own 22 capital, but depreciation means that 22 of capital is only 20. You are where you started?*
We are talking past each other. Valuethinker, have you read Piketty's book "Capital in the 21st Century"? Instead of abstract discussion, he has reams upon reams of actual returns over hundreds of years and uses all that to make the compelling case that r>g or returns on capital have exceeded rate of growth. In other words, even with 0 growth, there has been very positive return on capital.

To return to the toy example above, depreciation and taxes are simply a part of doing business. "Earnings" in my toy model are after taxes and depreciation. When I reinvest 2, the total capital doesn't increase but I own a higher % of the total.

Here is a simple example of a farm or a rental house. Let's say you start by owning 10% of a farm or a house. The house/farm is worth $1 million so you paid 100K to get a 10% ownership. In this society, the output of the farm and the rent paid is constant. Each year let's say after paying for running the farm, paying the property business, paying taxes and paying for depreciation/painting the house, upkeep of farm equipment..whatever, there is 10% profit = 100K dollars.

That 10% profit is given to all owners as dividends. Because you own 10%, you got 10%*100K = 10K dollars. The other owners are less frugal and spend all this money on living. You on the other hand offer your 10K earnings to the least frugal part owner and buy a bigger % of the farm/house by buying a % of their ownership (that is pretty much what stock buybacks or reinvested dividends do: there has to be someone else who is willing to sell at that price for whatever reason).

So, you started with 10% ownership. Next year you now own 10% + 10k/1M = 11% of the house/farm. Next year you now own 12.1%, next year 13.31%..14.64%...16.1%..17.7%..19.48%..21.43%..23.6%

The total assets (market price of house/farm) are not increasing. Each year you own a bigger fraction as in the above example and is the reason you make money. Piketty goes over such data (mostly from Europe but also from North America) in excruciating detail and his conclusion is that absent wars/revolutions, capital returns have basically exceeded rate of growth. It is intuitively obvious to me that this result should be true.
Thank you. I understand your model now.

Piketty was high on my list of "books that I would buy and then not read". Like Thinking Fast & Slow, which actually did find its way onto my bookshelf. Too many books like that ;-).

I think at the heart of it is how fast capital depreciates. I would say fairly fast.

It is also true that wealth begets wealth.

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Re: Do stocks always go up long term?

Post by Earl Lemongrab » Fri May 19, 2017 10:11 am

avalpert wrote:It may be the case that 100 year stock returns in Japan are positive - and it may remain true 100 years from now but the same cannot be said for Russian shareholders from 100 years ago (at least 100 years ago March). So, again, stocks do not always go up long term - there are no guarantees at all.
How did Imperial Russian bond holders do? You can't really count those kind of events into a rational evaluation of investing. I mean, we could have nuclear war or an asteroid strike too.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

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Re: Do stocks always go up long term?

Post by sid hartha » Fri May 19, 2017 10:33 am

On a long enough timeline it will go to 0.

Dirghatamas
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Re: Do stocks always go up long term?

Post by Dirghatamas » Fri May 19, 2017 12:43 pm

Valuethinker wrote: Thank you. I understand your model now.
Piketty was high on my list of "books that I would buy and then not read". Like Thinking Fast & Slow, which actually did find its way onto my bookshelf. Too many books like that ;-).
Hah! I own a hardback copy of Thinking Fast & Slow and while I have skimmed through all of it, I haven't ( :( ) had the patience to actually read it page by page fully. Piketty's book is different in that there are two distinct parts. The first part is data showing r>g. That part is why I keep it on my bookshelf as reference. The second part is about social policy: Piketty after showing r > g, believes inequality is a bad thing so he spends much of the book about how to "Solve" the problem, mostly with some rather Utopian views of creating worldwide taxes. I have no interest in his politics (he is a socialist from France, who would have guessed :wink: ) or solutions, but the first part of the books is well researched.

It is fairly similar to say the Dimson/Marsh Credit Suisse Yearbook stuff on Stock returns across the globe for the past 100 years, except it covers a longer time frame and more varied assets than stocks (capital). It is a worthy piece of research (as long as one ignores the second part of the book and the author's obvious political bias towards socialism).

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Re: Do stocks always go up long term?

Post by PNW1 » Fri May 19, 2017 1:26 pm

Dirghatamas wrote:
Valuethinker wrote: Thank you. I understand your model now.
Piketty was high on my list of "books that I would buy and then not read". Like Thinking Fast & Slow, which actually did find its way onto my bookshelf. Too many books like that ;-).
Hah! I own a hardback copy of Thinking Fast & Slow and while I have skimmed through all of it, I haven't ( :( ) had the patience to actually read it page by page fully. Piketty's book is different in that there are two distinct parts. The first part is data showing r>g. That part is why I keep it on my bookshelf as reference. The second part is about social policy: Piketty after showing r > g, believes inequality is a bad thing so he spends much of the book about how to "Solve" the problem, mostly with some rather Utopian views of creating worldwide taxes. I have no interest in his politics (he is a socialist from France, who would have guessed :wink: ) or solutions, but the first part of the books is well researched.

It is fairly similar to say the Dimson/Marsh Credit Suisse Yearbook stuff on Stock returns across the globe for the past 100 years, except it covers a longer time frame and more varied assets than stocks (capital). It is a worthy piece of research (as long as one ignores the second part of the book and the author's obvious political bias towards socialism).
Crazily enough, I just finished reading Kahneman's Thinking Fast and Slow about a week ago. A coworker had been suggesting that I read it for the better part of a year, and I finally gave in. The book wasn't life changing, but some of the passages were eye-opening and I'm certainly glad to have read it. Even the parts where he suggests "When you read ABC you probably conclude XYZ" when I absolutely don't were interesting, because apparently based on data most people do jump to conclusions in the way that he illustrates. If the two of you can find time to read through your copies I think you'll find some worthwhile, or at least interesting, information.

As to Piketty's book, I think the second part where he says "Extreme inequality is socially undesirable and we should try to do something about it" isn't of zero value. I don't feel that his suggestions, which admittedly are unlikely to be acted upon, are an attempt to argue for equality of outcome; rather, they are an attempt to create a capitalist system with long-term stability and viability. I guess we can agree to disagree on the necessity or value of that. :happy

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