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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: valueminded who wrote (61793)	6/9/1999 12:16:00 PM
From: eWhartHog	Respond to of 132070

<<Sorry, but I meant if you waited after the 1st year, you are behind in stocks ... as the bonds are at 1070 and stocks at 1030, so how long do you have to wait for it to catch up. Answera ~ 30years... Which is why (beginning today) I assign a <5% probability that stocks will outperform bonds over the next 30 years.>> Chris, I think you have miscalculated. You assumed profits would increase 10% annually and the P/E would be constant (at least not increasing). This implies stocks will appreciate 10% yearly. Thus after one year the stock portfolio would be worth 110% of the initial value, or 1100. By your initial assumption, this is independent of the P/E. The result would be the same for a P/E of 3, 33, or 333. Implicitly, the rate of return on equity varies to keep P/E constant. Under the assumption of 10% profit growth and constant P/E versus 7% constant bond yield, stocks will outperform bonds over all time periods. I pointed out earlier that this assumption would mean S&P 500 profits would exceed US GDP in about 63 years if the economy grows at 4%, so 10% profit growth is unrealistic for the long term in the absence of inflation. If significant inflation does return, I expect both stocks and bonds will perform poorly, and the long-suffering shorts will prosper. Regards, John