Why do we expect TSM to keep growing?

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willthrill81
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Re: Why do we expect TSM to keep growing?

Post by willthrill81 » Tue Sep 18, 2018 8:21 pm

Que1999 wrote:
Tue Sep 18, 2018 8:12 pm
JoMoney wrote:
Mon Sep 17, 2018 12:51 am
WanderingDoc wrote:
Mon Sep 17, 2018 12:47 am
watchnerd wrote:
Mon Sep 17, 2018 12:27 am
Thesaints wrote:
Fri Sep 14, 2018 4:45 pm


Well, it is not useless to try understand where stockholders profits come from. That is useful information, for instance, when one has to decide whether the 10% historical return rate is still a valid benchmark going forward, or not.
I thought 8% was the new benchmark?

Or is it 7%?

I get so confused by the various crystal balls....
Dave Ramsey told me it was 12%.
They could all be correct since what was initially stated was "historical return"...
12% has been the arithmetic average historical return
10% has been the geometric average historical return
7% has been the inflation adjusted geometric return
So Dave Ramsey has been right all along!?! :oops:
Uh....no.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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fortfun
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Re: Why do we expect TSM to keep growing?

Post by fortfun » Tue Sep 18, 2018 9:59 pm


Ron Scott
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Re: Why do we expect TSM to keep growing?

Post by Ron Scott » Wed Sep 19, 2018 5:58 am

The collective wisdom is that there are only two possible outcomes.

A. Nice real returns based on historical norms over the span of a retirement period
B. A horrible disaster that ruins A completely but is so remote and unpredictable, and impossible to plan for, that it’s not worth thinking about (this scenario is best used with sarcasm or in a joke, to end any threads that question A)

If you suspect there is a reasonable chance of a middle ground between A and B, lets say 0% or slightly negative real returns for a 20 year period, you haven’t studied the wiki or aren’t a logical thinker.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

ddurrett896
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Re: Why do we expect TSM to keep growing?

Post by ddurrett896 » Wed Sep 19, 2018 6:51 am

chase_logi wrote:
Wed Sep 12, 2018 4:11 pm
1. What is the first principle behind the expectation that total stock market (eg, investing in 100% VTI) will give us positive real return over the long term?

Any other thoughts or comments?
For me it’s pretty simple....companies produce a product or service. I’m confident the population will only go up, increasing the consumption of those products and services.

More consumption = more sales = stock market goes up

S_Track
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Re: Why do we expect TSM to keep growing?

Post by S_Track » Wed Sep 19, 2018 8:04 am

Phineas J. Whoopee wrote:
Thu Sep 13, 2018 12:02 am
Get a dollar in dividend, lose a dollar in share price. It's a wash, except if it causes you to owe income tax you otherwise wouldn't. It can be hard to see because of course stock prices are are still subject to all the other elements that affect them day to day.

If you own one share that's worth $100 and it pays a $1 dividend, you end up with one share worth $99 plus $1 in cash, for a total value of $100, but you may have to pay income tax. If you own one share worth $100 and it doesn't pay a dividend you end up with a total value of $100, but you don't have to pay income tax.

Stock dividends do not increase one's wealth. They don't work at all like bond interest, or like a savings account.

Curious about this, why does bond interest differ from a dividend? Tax aside, don't both types of distrubutions reduce the NAV?

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CyclingDuo
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Re: Why do we expect TSM to keep growing?

Post by CyclingDuo » Wed Sep 19, 2018 8:29 am

chase_logi wrote:
Wed Sep 12, 2018 4:11 pm
Any other thoughts or comments?
Image
https://slideplayer.com/slide/11948848/

This graphic says what the words above say...

Image
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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jharkin
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Re: Why do we expect TSM to keep growing?

Post by jharkin » Wed Sep 19, 2018 9:07 am

Phineas J. Whoopee wrote:
Wed Sep 12, 2018 8:24 pm
Stein's law: If something cannot go on forever, it will stop.

That's one way to answer but what if it can't go on forever? We don't know what specific finite time less than forever it will turn out to be.

We have to play the hand we're dealt.

PJW
Actually we DO know some general timelines for when certain aspects of the global growth party are likely to end...

We have estimates of when the world supplies of various non-renewable resources will run out. I was surprised that some seemingly common things like copper are forecast to run out in my lifetime.
http://www.bbc.com/future/story/2012061 ... tock-check


We also have the various UN models for predicted future population growth - most of which have population peaking and eventually declining sometime within the next 100 years (as we run out of building space and food):
https://en.wikipedia.org/wiki/World_population


Elon better get moving on that Mars colony....

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Phineas J. Whoopee
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Re: Why do we expect TSM to keep growing?

Post by Phineas J. Whoopee » Wed Sep 19, 2018 12:40 pm

S_Track wrote:
Wed Sep 19, 2018 8:04 am
Phineas J. Whoopee wrote:
Thu Sep 13, 2018 12:02 am
...
Stock dividends do not increase one's wealth. They don't work at all like bond interest, or like a savings account.
Curious about this, why does bond interest differ from a dividend? Tax aside, don't both types of distrubutions reduce the NAV?
Hi S_Track, happy to help.

Let's compare a share of stock in a corporation to a bond issued by one. That way we're only changing one variable at a time.

When a company pays a dividend the money has to come from somewhere. It's from the corporation's bank account. Please nobody get intimidated by this accounting term: money the corporation has in the bank is an asset, and shows up on the asset side of its balance sheet. When it sends the money to shareholders and gets nothing in return (unlike, say, building a new factory), it comes directly out of the company's value.

To look at it another way, how much would you pay for a share of stock plus ten dollars? How much for the very same share of stock but without the ten dollars? A rational investor would value the latter lower than the former.

Now let's examine the same company's bonds it issued. In return for them it got money. The cash it took in goes into its bank account and shows up on the asset side of the balance sheet, and the money it owes the bondholders is a known liability, so it shows up on the liability side. They're equal, so initially there is no net change.

Let's imagine our example corporation issues simple bonds, that work like US Treasuries (bonds can have all sorts of weird terms and conditions, T&C). Maybe they're in chunks of $1000 face value, with a ten-year maturity, and pay 3%. That means every six months the company has to pay each bondholder $15, and at the end of the ten years the original $1000. All of these obligations are known in advance, to the precise dollar amount and on which precise day. The issuer has to plan its cash flows to meet its obligations.

I used the word obligations twice in the previous paragraph, and there's a reason to emphasize it when contrasting dividends with interest. The corporation has a contractual obligation to pay the interest and eventually the original principal, just like, crediting poster nisiprius for the example, it has to pay its electric bill. If it can't pay what it promised it's in default and may well end up in bankruptcy court.

Corporations have no legal obligation whatsoever to pay dividends.

With me so far?

There's one more aspect of what you asked about. Remember the bond pays interest every six months? What if the bond changes hands between payouts? The way it works is the buyer, in addition to paying the market price of the bond, pays the seller the accrued daily interest. The buyer gets it back the next time there's an interest payment. Most, but not all, bond funds mirror the bond market. If you sell Vanguard's Total Bond Market Index Fund, VBMFX, between dividends you will be credited with the pro-rata amount. There exist some bond funds, notably but not limited to Vanguard's Inflation Protected Securities Fund, VIPSX, which include pro-rata interest in their Net Asset Value, therefore NAV does drop when the dividend is paid.

Does that help? If not please say so and I'll try again.

PJW

S_Track
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Re: Why do we expect TSM to keep growing?

Post by S_Track » Wed Sep 19, 2018 5:51 pm

Phineas J. Whoopee wrote:
Wed Sep 19, 2018 12:40 pm
S_Track wrote:
Wed Sep 19, 2018 8:04 am
Phineas J. Whoopee wrote:
Thu Sep 13, 2018 12:02 am
...
Stock dividends do not increase one's wealth. They don't work at all like bond interest, or like a savings account.
Curious about this, why does bond interest differ from a dividend? Tax aside, don't both types of distrubutions reduce the NAV?
Hi S_Track, happy to help.

Let's compare a share of stock in a corporation to a bond issued by one. That way we're only changing one variable at a time.

When a company pays a dividend the money has to come from somewhere. It's from the corporation's bank account. Please nobody get intimidated by this accounting term: money the corporation has in the bank is an asset, and shows up on the asset side of its balance sheet. When it sends the money to shareholders and gets nothing in return (unlike, say, building a new factory), it comes directly out of the company's value.

To look at it another way, how much would you pay for a share of stock plus ten dollars? How much for the very same share of stock but without the ten dollars? A rational investor would value the latter lower than the former.

Now let's examine the same company's bonds it issued. In return for them it got money. The cash it took in goes into its bank account and shows up on the asset side of the balance sheet, and the money it owes the bondholders is a known liability, so it shows up on the liability side. They're equal, so initially there is no net change.

Let's imagine our example corporation issues simple bonds, that work like US Treasuries (bonds can have all sorts of weird terms and conditions, T&C). Maybe they're in chunks of $1000 face value, with a ten-year maturity, and pay 3%. That means every six months the company has to pay each bondholder $15, and at the end of the ten years the original $1000. All of these obligations are known in advance, to the precise dollar amount and on which precise day. The issuer has to plan its cash flows to meet its obligations.

I used the word obligations twice in the previous paragraph, and there's a reason to emphasize it when contrasting dividends with interest. The corporation has a contractual obligation to pay the interest and eventually the original principal, just like, crediting poster nisiprius for the example, it has to pay its electric bill. If it can't pay what it promised it's in default and may well end up in bankruptcy court.

Corporations have no legal obligation whatsoever to pay dividends.

With me so far?

There's one more aspect of what you asked about. Remember the bond pays interest every six months? What if the bond changes hands between payouts? The way it works is the buyer, in addition to paying the market price of the bond, pays the seller the accrued daily interest. The buyer gets it back the next time there's an interest payment. Most, but not all, bond funds mirror the bond market. If you sell Vanguard's Total Bond Market Index Fund, VBMFX, between dividends you will be credited with the pro-rata amount. There exist some bond funds, notably but not limited to Vanguard's Inflation Protected Securities Fund, VIPSX, which include pro-rata interest in their Net Asset Value, therefore NAV does drop when the dividend is paid.

Does that help? If not please say so and I'll try again.

PJW
Thanks for all the detail very helpful. Question, I understand how the compnay recives money when it issues a bond, but it also recieves money when it sells a share of stock although without the obligation. Is that the key? Secondly, does the NAV drop in a bond fund when it pays interests? Thanks

Thesaints
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Re: Why do we expect TSM to keep growing?

Post by Thesaints » Wed Sep 19, 2018 6:09 pm

S_Track wrote:
Wed Sep 19, 2018 5:51 pm
Secondly, does the NAV drop in a bond fund when it pays interests?
Of course it does. In fact, the drop is even closer to the disbursed interest than for stocks.

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Phineas J. Whoopee
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Re: Why do we expect TSM to keep growing?

Post by Phineas J. Whoopee » Thu Sep 20, 2018 3:32 pm

Thesaints wrote:
Wed Sep 19, 2018 6:09 pm
S_Track wrote:
Wed Sep 19, 2018 5:51 pm
Secondly, does the NAV drop in a bond fund when it pays interests?
Of course it does. In fact, the drop is even closer to the disbursed interest than for stocks.
Of course it does not, for most but not all bond funds, as I detailed in my post above.

PJW

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Phineas J. Whoopee
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Re: Why do we expect TSM to keep growing?

Post by Phineas J. Whoopee » Thu Sep 20, 2018 3:40 pm

S_Track wrote:
Wed Sep 19, 2018 5:51 pm
...
Thanks for all the detail very helpful. Question, I understand how the compnay recives money when it issues a bond, but it also recieves money when it sells a share of stock although without the obligation. Is that the key? Secondly, does the NAV drop in a bond fund when it pays interests? Thanks
Yes, when a corporation issues stock to the public it receives money in return, but owes none of it back.

No, as I detailed in my response you quoted, in the bond market in general, on top of which bond funds rest, interest is accounted for daily, but not in the quoted prices of the bonds. Should a bond change hands between interest payments the buyer pays the seller the accrued daily interest, in addition to the bond's market price.

Most, but not all, bond funds do the same. If you sell shares of Vanguard's Total Bond Market Index Fund, VBMFX, you will receive the net asset value plus the accrued dividend, which comes from the interest on the underlying bonds. Some bond funds don't work that way, but most do. That's why their net asset values do not drop upon payout.

PJW
Last edited by Phineas J. Whoopee on Thu Sep 20, 2018 6:59 pm, edited 2 times in total.

Thesaints
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Re: Why do we expect TSM to keep growing?

Post by Thesaints » Thu Sep 20, 2018 3:59 pm

Phineas J. Whoopee wrote:
Thu Sep 20, 2018 3:32 pm
Of course it does not, for most but not all bond funds, as I detailed in my post above.

PJW
But that's just an accounting trick. Bond funds with monthly payout set dividend payments aside, so it does not appear in the NAV but it is liquidated on a pro-rated basis when one sells mid-month.
For instance VIPSX does not follow that policy and dividends payout reflects in the price.
That does not change the substance of the fact that dividends lower a bond's price. It would be free money otherwise, by just buying the day before the ex-div and selling the day after.


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Mursili
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Re: Why do we expect TSM to keep growing?

Post by Mursili » Fri Sep 21, 2018 10:36 am

jharkin wrote:
Wed Sep 19, 2018 9:07 am
Phineas J. Whoopee wrote:
Wed Sep 12, 2018 8:24 pm
Stein's law: If something cannot go on forever, it will stop.

That's one way to answer but what if it can't go on forever? We don't know what specific finite time less than forever it will turn out to be.

We have to play the hand we're dealt.

PJW
Actually we DO know some general timelines for when certain aspects of the global growth party are likely to end...

We have estimates of when the world supplies of various non-renewable resources will run out. I was surprised that some seemingly common things like copper are forecast to run out in my lifetime.
http://www.bbc.com/future/story/2012061 ... tock-check


We also have the various UN models for predicted future population growth - most of which have population peaking and eventually declining sometime within the next 100 years (as we run out of building space and food):
https://en.wikipedia.org/wiki/World_population


Elon better get moving on that Mars colony....
Such talk has been around for a long time. Doomsaying is a big business after all. For another perspective look at the cornucopians and the Simon–Ehrlich wager. Humans will not run out of copper in my lifetime (or yours) unless the whole "becoming immortal" thing works out or AI destroys us.

Much more likely is that Elon may need to decide to use something other than copper in his designs if copper is too expensive.
When it comes to havoc, no one wreaks like me! - Dr. Heinz Doofenshmirtz

S_Track
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Re: Why do we expect TSM to keep growing?

Post by S_Track » Sat Sep 22, 2018 5:34 am

Phineas J. Whoopee wrote:
Thu Sep 20, 2018 3:40 pm
No, as I detailed in my response you quoted, in the bond market in general, on top of which bond funds rest, interest is accounted for daily, but not in the quoted prices of the bonds. Should a bond change hands between interest payments the buyer pays the seller the accrued daily interest, in addition to the bond's market price.

Most, but not all, bond funds do the same. If you sell shares of Vanguard's Total Bond Market Index Fund, VBMFX, you will receive the net asset value plus the accrued dividend, which comes from the interest on the underlying bonds. Some bond funds don't work that way, but most do. That's why their net asset values do not drop upon payout.

PJW
Does this get more complicated with a balanced fund since here you have equities and bonds? I beleive the nav does change with a balanced fund when a dividend distribution is made. Is that just from the equity side? thanks

Ignacious
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Re: Why do we expect TSM to keep growing?

Post by Ignacious » Sat Sep 22, 2018 6:31 am

The other factor that continues to TSM growth is population growth. If a company has 100 customers to sell widgets to this year and 110 customers next year, they will experience revenue growth without any productivity improvements.

It's not clear to me what is the breakdown in TSM growth due to population growth versus productivity improvements. However, population growth most certainly has a hard cap (though this is also difficult to predict).

Therefore, a future cap in population growth may have significantly adverse effects on TSM growth. I think this is actually the more likely of the two factors to reduce overall growth.

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Re: Why do we expect TSM to keep growing?

Post by Phineas J. Whoopee » Sat Sep 22, 2018 12:34 pm

S_Track wrote:
Sat Sep 22, 2018 5:34 am
...
Does this get more complicated with a balanced fund since here you have equities and bonds? I beleive the nav does change with a balanced fund when a dividend distribution is made. Is that just from the equity side? thanks
I believe the answer must be yes, but we've gone beyond my specific knowledge so take my belief with a grain of salt.

PJW

qwerty3020
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Re: Why do we expect TSM to keep growing?

Post by qwerty3020 » Sat Sep 22, 2018 1:18 pm

I don't expect the stock market to continue to grow indefinitely and frankly it is absurd that most people do. In fact I don't spend much time on the Bogleheads forum anymore because topics like global warming, oil dependency, national debt and others are treated as inherently political and as such are verboten.

kagantx
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Re: Why do we expect TSM to keep growing?

Post by kagantx » Mon Sep 24, 2018 11:43 am

I personally think that the answer is time. Each day workers and executives go into work and produce value for the company. The total value the company receives is more than their salary (otherwise the workers wouldn't be hired in the first place). Thus, each day of work represents a transformation from the time of workers into the money of stock holders. Because time is a renewable resource, the growth a company (and by extension, the whole economy) can experience is unlimited.

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Re: Why do we expect TSM to keep growing?

Post by Turbo29 » Mon Sep 24, 2018 11:50 am

jharkin wrote:
Wed Sep 19, 2018 9:07 am


Actually we DO know some general timelines for when certain aspects of the global growth party are likely to end...

We have estimates of when the world supplies of various non-renewable resources will run out. I was surprised that some seemingly common things like copper are forecast to run out in my lifetime.
http://www.bbc.com/future/story/2012061 ... tock-check


We also have the various UN models for predicted future population growth - most of which have population peaking and eventually declining sometime within the next 100 years (as we run out of building space and food):
https://en.wikipedia.org/wiki/World_population


Elon better get moving on that Mars colony....
And what good will the Mars colony be when the sun exhausts its hydrogen, swells to a red giant, and then burns out?

I think I'll go to 100% bonds before that happens.

3funder
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Re: Why do we expect TSM to keep growing?

Post by 3funder » Tue Sep 25, 2018 6:28 am

willthrill81 wrote:
Wed Sep 12, 2018 4:30 pm
David Jay wrote:
Wed Sep 12, 2018 4:25 pm
TSM invests in real companies with real earnings. The leadership of these companies will continue to deliver goods and services in new and innovative ways, increasing the value of the companies.

If you don't believe that business case, I don't know what to buy. Government bonds won't work because the government will default if the economy permanently collapses. CDs are guaranteed by that same government.
:thumbsup

Those with grave doubts about the long-term viability of capitalism don't have many options left, maybe direct real estate and precious metals I suppose.
To me, this is the most compelling argument. There will be surely be corrections and crashes, but without capitalism, we're left with few options for growing our wealth.

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Re: Why do we expect TSM to keep growing?

Post by selters » Tue Sep 25, 2018 6:58 am

Does TSM have to grow for investors to make money? As long as dividends and buybacks continue, you as an investor can own a growing slice of the no longer growing TSM pie if you reinvest your dividends.

Does a brewery have to produce more and more beer every year for its owners to make a profit? It can spend a million dollars on ingredients, a million dollars on operations and maintenance and sell the beer for three million dollars. That's still a one million dollar profit every year.

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Re: Why do we expect TSM to keep growing?

Post by jharkin » Tue Sep 25, 2018 10:37 am

Mursili wrote:
Fri Sep 21, 2018 10:36 am
Such talk has been around for a long time. Doomsaying is a big business after all. For another perspective look at the cornucopians and the Simon–Ehrlich wager. Humans will not run out of copper in my lifetime (or yours) unless the whole "becoming immortal" thing works out or AI destroys us.

Much more likely is that Elon may need to decide to use something other than copper in his designs if copper is too expensive.
I am aware it has. Peak oil talk was big about 10 years ago before fracking exploded economically viable reserves.

However , saying "its been said before" doesn't change the fact that many of these resources are finite and at some point we will have to find substitutions. Population growth is already slowing. Lots of talk about lower long term growth rates going forward.

It may be that "nobody knows nuthin" but that doesn't mean its not worth discussing.

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Mursili
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Re: Why do we expect TSM to keep growing?

Post by Mursili » Wed Sep 26, 2018 9:48 am

jharkin wrote:
Tue Sep 25, 2018 10:37 am
However , saying "its been said before" doesn't change the fact that many of these resources are finite and at some point we will have to find substitutions. Population growth is already slowing. Lots of talk about lower long term growth rates going forward.

It may be that "nobody knows nuthin" but that doesn't mean its not worth discussing.
I agree that we should not say "nobody knows nuthin". As an engineer that does not sit right with me.

My point is that we are making substitutions today as people invent new ways to accomplish things in the constraints of the moment. The market provides the mechanism for this.

This is not to say that resources are not finite and that standards of living are always going to get better. I am just optimistic that one of my descendants will find a way to economically mine our landfills or some other solution. Hopefully that descendant will not be living in squalor on the landfill, but rather using some industrial process that provides employment and improves the life of others while making them a profit.
When it comes to havoc, no one wreaks like me! - Dr. Heinz Doofenshmirtz

Caduceus
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Re: Why do we expect TSM to keep growing?

Post by Caduceus » Thu Sep 27, 2018 5:11 am

The total stock market is just an aggregation of all the companies in that portfolio. So it's easier to answer your question if you think about it this way: Why does any particular company increase in value?

A company increases its value to shareholder if it makes a profit and if it allocates those profits efficiently. So you expect TSM to keep growing if, in aggregate, you expect the constituent companies to make profits and to allocate those profits efficiently.

Capital gains isn't the only form of shareholder return, so there's no particular reason that a company's stock price has to increase. A firm can (1) issue dividends, (2) buy back its own shares, or (3) retain its earnings. If it issues dividends that is equal to or exceeds its earnings, you might get a positive return without seeing a positive capital gain. If a company bought back its own shares at some stupid price, you might expect to see capital losses in spite of net profitability. And so on.

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burt
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Re: Why do we expect TSM to keep growing?

Post by burt » Thu Sep 27, 2018 6:09 am

Phineas J. Whoopee wrote:
Wed Sep 12, 2018 8:24 pm
Stein's law: If something cannot go on forever, it will stop.

That's one way to answer but what if it can't go on forever? We don't know what specific finite time less than forever it will turn out to be.

We have to play the hand we're dealt.

PJW
In a finite world, forever growth seems impossible.

burt

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Re: Why do we expect TSM to keep growing?

Post by FireProof » Thu Sep 27, 2018 7:23 am

TSM will always appreciate long-term as long as companies have POSITIVE earnings (whether through dividends, buybacks or increased book value).

It's true that HIGH returns at these valuations also require earnings GROWTH - this is not guaranteed. In a world of growing markets and populations, this has happened... in the past. In a future world of stagnant populations and environmental degradation, its harder to guarantee (we would be relying purely on technological growth and capital accumulation).

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