No. of Recommendations: 5
I have posted this quote from Warren Buffett often on the BRK board. It is from his 1999 Sun Valley address, which was dismissed by some, but proved prophetic in a few years. He points out a worst case scenario, from 1964 through 1981, when the DOW, while paying dividends, had no appreciation over a 17 year span. We have had a long period of over-sized appreciation in stock prices, and that will have to at least level out at some time.
"You cannot expect to forever realize a 12% annual increase...in the valuation of American business if its profitability is growing only at 5%. The inescapable fact is that the value of an asset, whatever its character, cannot over the long term grow faster than its earnings do.
Now, maybe you'd like to argue a different case. Fair enough. But give me your assumptions. If you think the American public is going to make 12% a year in stocks, I think you have to say, for example, "Well, that's because I expect GDP to grow at 10% a year, dividends to add two percentage points to returns, and interest rates to stay at a constant level." Or you've got to rearrange these key variables in some other manner. The Tinker Bell approach--clap if you believe--just won't cut it."
