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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era
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To: Freedom Fighter who wrote (486)7/9/1998 10:07:00 PM
From: Axel Gunderson  Read Replies (1) of 1722
 
the way you are calculating the implied growth rate is incorrect. At least I do it differently.

I agree that the anticipated growth rate over any "next few years" will vary with inflation and projected GDP. However, the average growth in the earnings since the start of 1970 for the S&P 500 is right around 6.4%, plus or minus 0.1%. You can do a three year, five year, or ten year growth rate for each week over that period, average those figures, and you will get around 6.4% for each. You can simply do it over the entire period and get 6.4%. So I was quite content to be lazy and use your 6.3% - especially since I was playing with how somebody who did not consider the risks might rationalize their choice of asset class.

Going by faulty memory, over the past 70 years the earnings growth rate of the S&P 500 was about 4.5%, and over the past 40? it was 5.2%. So we might, if we were inclined to be rather simpletons about it, extrapolate and guess that over our probable future investing lifetimes, the S&P 500 will increase its earnings at say 7.0% per year.

BTW, I hope that everybody realizes that this is all just low grade mental gymnastics, not a philosophical basis for investing.

Axel
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