The Most Important Thing to Know About the Stock Market History vs. Last 9 Yrs
**Forward from Jas @ The New Forum**
Note: I am using S&P 500 as the proxy for the stock market because the data
is not available for the total market. S&P 500 companies represent 75-80% of
the total. Please forward this, or post on any discussion board, generously.
Thank you.
There seems to be a very tight relationship between the total earnings (and
NOT the earnings per share) of the S&P 500 companies and the US GDP,
long-term; they are approx. 3% of the GDP in each of the last four decades,
when averaged over the ten-year period. From year to year there are great
variations, but long-term the relationship has held.
There are many investments that would compound, by reinvesting income,
long-term, with the GDP, or at a slightly higher rate. For example, real
estate and high quality corporate bonds. Therefore, the only way an
investment in the stock market is superior, long-term, is IF your share (or
% ownership) of the S&P 500 companies keeps growing over time by an amount
that is significant, e.g., 2-3% a year, either by reinvest of income, i.e.,
the dividends, or companies buy-back of shares, thus increasing your shares
in them, in lieu of dividends.
Now, let us look at what did happen historically and how that jives with the
last nine years.
UNTIL THE END OF 1993, AN INVESTOR’S SHARE (FRACTION OR PERCENTAGE
OWNERSHIP) OF THE S&P 500 COMPANIES, PURCHASED AT ANY TIME, KEPT INCREASING
COMPARED TO THE INITIAL SHARE, WHEN DIVIDENDS WERE REINVESTED, I.E., THE
INVESTOR WAS OWNING MORE AND MORE OF THE S&P 500 COMPANIES, OR THE ECONOMY,
AS TIME WENT BY, COMPARED WITH THE INITIAL OWNERSHIP. THIS MEANS THAT THE
INVESTOR WAS COMPOUNDING HIS OR HER SHARE OF THE COMPANIES AT THE RATE
GREATER THAN THE GDP.
HOW MUCH WAS THE GAIN IN SHARE OF S&P 500 COMPANIES FROM 1963 TO 1993 (FOR
WHICH I HAVE THE ANNUAL DATA)? 94.3%, OR 2.17% ANNUALLY! THIS IS LOWER THAN
THE HISTORICAL AVERAGE OF APPROX. 3.5%, BUT STILL SIGNIFICANT TO MAKE STOCKS
SUPERIOR INVESTMENT UP TO 1993.
IN EACH OF THE YEARS 1994, 1995 AND 1996, THE INVESTOR’S SHARE OF THE S&P
500 COMPANIES REMAINED EXACTLY THE SAME, OR GREW AT 0%.
**** FROM 1997 TO 2001, THE INVESTOR’S SHARE OF THE S&P 500 COMPANIES
DECLINED BY 11%. **** THAT MEANS THAT AT THE END OF 2001, THE INVESTOR OWNED
ONLY 89% OF THE SHARE OF THE S&P 500 COMPANIES THAT HE OR SHE PURCHASED AT
THE BEGINNING OF 1997 EVEN AFTER REINVESTING DIVIDENDS.
This means that it was a very bad idea to remain invested in stocks after
1996 and down right stupid to buy more, dollar-cost-averaging or no
dollar-cost-averaging. There is no reason to buy a net depreciating asset!
IMPORTANT CONCLUDING REMARKS:
One share of S&P 500 companies represents lower and lower fraction over time
due to dilution resulting from the addition of new companies and companies
issuing additional shares for acquisitions or other purposes (stock option,
of late). The dilution rate for the past 40 years has been 1.89% annually.
Historical average is something like 1.5%. Of course, this takes into
account the shares bought back by companies, i.e., it is net dilution. Only
way to counter this dilution is either by dividends that are higher than the
dilution rate or that companies buy back shares as they pay less and less of
earnings in dividends. S&P 500 companies, as a group, DID NOT buy back
shares from the higher retained earnings and nor did they increased the
**real earning** by reinvestment. So, where did that money, which was not
paid in dividends, go? 90%+ went into the pockets of the management (and a
small number of employees) and Wall Street! SO, IF YOU DON’T WANT THE
DIVIDENDS, THE MONEY WILL BE STOLEN, AS WAS THE CASE IN PRACTICE. WOULD YOU
RATHER PAY 30-50% IN TAXES OR HAVE 90%+ OF IT STOLEN? WE ARE ONLY TALKING
ABOUT WHAT HAPPENS IN PRACTICE AND NOT THE THEORY THAT THE MONEY DOES NOT
HAVE TO BE STOLEN.
I challenge anyone to refute the above.
Jas
PS: Those professionals who have advised their clients to be invested in
stocks for the past five years should be ashamed of themselves for their
lack of understanding of the stock market and why the stock market was a
good investment in the past and it had ceased to be so in 1997. |
