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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: yard_man who wrote (145944)1/24/2002 2:43:59 PM
From: reaper  Read Replies (3) of 436258
 
I don't want to imply that I'm an expert on how this works. But it will take a number of years of anemic returns (assuming we don't have some kind of 50% crash) before LONG-TERM (read:50-100 year) returns from the stock market change in any material way. Just as the assumptions underlying pension plans shifted upward only gradually and grudgingly over the last 20 years (expected returns were about 5-6% if I remember correctly in the 1970s; see Buffett's recent article in Fortune for better numbers), they will shift down only very slowly as well. These guys are like TradeLite; they don't base their assumptions on "logic", they base them on historical observation. If I flipped a coin and it landed heads up 10 times in a row, an actuary would say it is more likely to land heads up the 11th time when any moron knows its 50-50. (I'm being a little harsh here; the point is that the actuary isn't looking at root cause but is instead presuming that root causes are embedded in historical prescedent. the actuary in my above example is implicitly assuming that my coin is mis-weighted)

What I'm talking about is that corporate pension plans, to be internally consistent and logical, HAVE TO keep a high allocation to equities in order to continue to argue they'll get 10% returns. And they have to do this. If IBM woke up tomorrow AM and reduced their pension assumption to 7% (which is where Buffett thinks it should be) they'd wipe 2 years worth of earnings off their books.

Cheers
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