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FIN 101: Long Term Returns Stock Market and Real Estate

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8

September 05, 2008 – Comments (13) | RELATED TICKERS: SRS , SKF , UDN

Gettin´ robbed
Gettin´ stoned
Gettin´ beat up
Broken boned
Gettin´ had
Gettin´ took
I tell you folks
It´s harder than it looks

It´s a long way to the top if you wanna rock ´n´ roll

 
It´s a long way to the top if you wanna rock ´n´ roll

AC/DC

There is some wisdom from AC/DC. AC/DC knows it is a long way to the top. Many Americans do not appreciate how long it takes to build wealth or to become a successful investor. Many people have delusional ideas about the expected returns on their stock and real estate portfolios. Warren Buffett recently wagered $300k no hedge fund could outperform an index fund over a ten year period. Buffett was announcing to the World, Hedge Funds are not worth their fees, all 4000+ hedge funds SUX! He is called the Oracle for a reason. 

Most people you hear talking about gambling, stocks or real estate or gambling talk about winning. It make them feel smart, they want to be on TV, the story sells better, and attracts new money trying to win. People like to feel good, winning makes people feel good.

The fact MOST people loose at casinos, the odds are against players in all games and it is usually just a matter of time for any casino GAMBLER donates his money to the Casino. Las Vegas is built on losers, people keep showing up to play and the game keeps going. I recall the average rate of return per bet is MINUS -1 to -8% depending on the game. Most gamblers sitting at the table have their strategy, but cannot tell you the Rate of Return per bet aka “investment” 

What is the average rate of Return for Real Estate or for Stocks?

If you do not know, it is my recommendation; you do not buy individual stocks. Just buy index funds and focus on your career and business. Warren Buffett recommends the same.

MAD MONEY, FAST MONEY, NAR, INFOMERCIALS, CNBC constantly call you to invest/gamble in Real Estate or stocks without telling you the expected Rate of Return. I would guess most stock and real estate buyers and fools do not know the average rate of return for either.

WSJ, By E.S. BROWNING wrote Lost Decade for Stocks on March 26, 2008, which provides some good data:

“The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds….

Over the past nine years, the S&P 500 is the worst-performing of nine different investment vehicles tracked by Morningstar, including commodities, real-estate investment trusts, gold and foreign stocks. Big U.S. stocks were outrun even by Treasury bonds, which historically perform much less well than stocks. Adjusted for inflation, Treasurys are up 4.7% a year over the past nine years, and up 5.8% a year since the March 2000 stock peak. An index of commodities has shown about twice the annual gains of bonds, as have real-estate investment trusts.

Historically, stocks rise about two years out of every three, for an average gain of 7% a year when controlled for inflation, according to Prof. Siegel. Stocks have shown gains for almost every 10-year period since 1925 -- 98.6% of the time, according to Ned Davis Research.

The Dow Jones Industrial Average, which had fewer technology stocks than the S&P 500 and suffered less in the bear market from 2000 to 2002, has held up better, but not a lot better. It has risen less than 1% a year since January 2000.

The Big Picture has Prof Shiller talking about real estate WATCH THE VIDEO:

Shiller: House Price Decline Could Be Worse than Depression Posted by Barry Ritholtz Sept 05, 08

Shiller's main points:

“home prices in 1990 corrected for inflation are the same as they were in 1890”

“housing is a manufactured good they depreciate, if they do go up in price, they will make more of them”

“most people think they will appreciate in value [they are wrong]”

“• Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.

• There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).

• The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.”

WATCH THE 6 minute video here:

U.S. House Price Decline Could Be Worse than Great Depression, Economist Shiller Says
Henry Blodget
Yahoo Tech Ticker, Sep 04, 2008 01:36pm EDT
http://finance.yahoo.com/tech-ticker/article/53094/U.S.-House-Price-Decline-Could-Be-Worse-th

13 Comments – Post Your Own

#1) On September 05, 2008 at 6:10 PM, DemonDoug (50.94) wrote:

homebuilders and banks are still screwed.  thanks for playing.

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#2) On September 05, 2008 at 6:12 PM, abitare (90.30) wrote:

homebuilders and banks are still screwed

Yep, hense my short GGP and long SKF 

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#3) On September 05, 2008 at 6:19 PM, abitare (90.30) wrote:

Aligned here: 

Hope in a bear market is almost never rewarded. The bottom is unlikely to be in until hope is crushed and despair sets in. In the meantime I expect to see many auto dealers go bust.

Overcapacity is rampant, especially in light of a rapidly deteriorating jobs picture. Price rollbacks have just begun. Those rollbacks are going to spread to other sectors as well as the battle for consumer discretionary spending heats up. Why buy a house or a car or a boat today when all three will be cheaper tomorrow?

http://globaleconomicanalysis.blogspot.com/ 

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#4) On September 05, 2008 at 6:51 PM, DemonDoug (50.94) wrote:

Yup!  Mish is an idiot when it comes to completely being clueless about global money supply and inflation, but he is spot-on when it comes to the equity markets and individual companies.

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#5) On September 05, 2008 at 7:28 PM, AnomaLee (28.73) wrote:

"Warren Buffett recently wagered $300k no hedge fund could outperform an index fund over a ten year period. Buffett was announcing to the World, Hedge Funds are not worth their fees, all 4000+ hedge funds SUX!"

Correction* but that wasn't the wager...

The wager between Protege and Buffet is whether a low cost index fund that tracks the market will beat a selected group 5 hedge funds 

Source: http://money.cnn.com/2008/06/04/news/newsmakers/buffett_bet.fortune/ (Link here)

Protégé has placed its bet on five funds of hedge funds - specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses.

On the other side, Buffett, who has long argued that the fees that such "helpers" as hedge funds and funds of funds command are onerous and to be avoided has bet that the returns from a low-cost S&P 500 index fund sold by Vanguard will beat the results delivered by the five funds that Protégé has selected.

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#6) On September 05, 2008 at 7:46 PM, AnomaLee (28.73) wrote:

"Historically, stocks rise about two years out of every three, for an average gain of 7% a year when controlled for inflation, according to Prof. Siegel."

I read Stocks for the Long Haul and afterwards I couldn't believe I finished it. Economist are about as wise as pyschics in terms of understanding social "science".

At least psychics are trained to be are able to read the characteristics of individual people and make general statements that are fairly accurate.

I would love to wager with Dr. Siegal that in the year 2020 the Nasdaq will still be below it's 2000 peak of 5,100, and the eventual real return for stocks since 1990 will be less than 1% and closer to nill....

As a young investor I think I started investing at one of the worst periods in U.S. history. But, I still find no reason to sell all your investments... 

It's easy to win when the house is giving chips away (or chip makers), but the odds are always stacked in favor of the house and eventually you have to learn how to play the game.

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#7) On September 05, 2008 at 7:59 PM, abitare (90.30) wrote:

AnomaLee,

Good reply. It is symantics, but I think Buffet made the bet and Protégé picked it up.

IMO, young people should be investing in themselves, not the stock market. There are things here to learn, and it is better then playing Warcraft.

Millionaires and billionaires got there by starting and running their own business. That should be your primary investment with your first $30k.

Wall Street is complex and a net negative return over 10+ years. Young people need to be able to work for cash or for thier own business.

Read Millionaire Mind if you have not.  

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#8) On September 05, 2008 at 8:13 PM, abitare (90.30) wrote:

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#9) On September 05, 2008 at 9:28 PM, Tastylunch (29.36) wrote:

You forgot to mention what a fabulous investment the lottery is. The return potential of powerball and mega millions is wonderful! Did you know there are winners everyday in some casinos?!!

;-)

On a serious note, I was not overly impressed by Millionaire Mind . He does advocate some good behaviours but makes the crucial mistake of assuming correlation=causation.

I think it was PDFbiotech who wrote a good review of it here on CAPS...

Good post as usual Ares (still feels weird to call you that)

 

 

 

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#10) On September 06, 2008 at 1:03 AM, wrote:

Ares---or anyone else--

I'm ready to concede to your experience.

Is there a particular index fund you'd recommend then?  Obviously this is over my head. Large cap? small cap? us? world?  Would it make more sense to diversify and own multiple index funds?

I just don't want to pay a 5% load fee to lose money. 

My caps score sucks, I'm prolly in last place.  It's prolly more dumb luck than anything else that my real life portfolio is only down 5% year to date.  

I've heard your multiple warnings to get of this water, there are sharks with a heck of a lot of more money than I have.

I'm still going to buy my own stocks, but I will heed your warnings and maybe just play with 20 to 25% of my overall portfolio.  

Buffet is prolly right.  Terra Industries is worth $44/ share to me.  So I wont sell.  Potash is worth $150/ share to me.  So I don't feel like selling.  But I'd like an anchor to help me withstand the Agriculture devaluation happening right now.

 

Thx all for your insights.  Ive learned alot these last 2 months.

 

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#11) On September 06, 2008 at 11:26 AM, EverydayInvestor (< 20) wrote:

Ares and AnomaLee - you are both horribly, horribly wrong. Incredibly wrong.

First, I should point out that the Nasdaq is not a proxy for the stock market. Buying QQQQ is speculation. Those who bought the market (a mix of VEU and VTI works well) have had a tough 10 years, but they are still up. And the 10 years prior to that was incredible.

Stocks have a positive real return because of the growth of the economy. The reason their return has been so high in the past is because people like you get frightened out of them because of the ups and downs and think the game is rigged. The smart money is betting that over the next two decades we should expect real returns of maybe 2% to 4% per year in stocks. This is not great but will still beat bonds, cash, commodities (including gold), real estate, and hedge funds (as a class).

As to the idea that the rich are rich because of their own businesses, that is true. But that ignores all the people who went bankrupt starting their own businesses. I have two failed businesses already at the age of 27 (although my investment in each was small). If you want to get rich, start your own business, but the odds are against your success. Rather than being a key to getting rich, starting your own business is the key to increasing the volatility of your future wealth -- it will make you either richer or poorer.

The key to a comfortable life and retirement is working at a decent-paying job and saving/investing a large percentage of your earnings. Those of us who are young and put a whole lot of money into broad index funds (for ETFs I like VEU and VTI) the market will ensure a good return over time.

Another thing to consider is that, unlike running a business, investing in index funds requires little time or though. Running a business, on the other hand, is primarily a job.

 

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#12) On September 06, 2008 at 11:27 AM, EverydayInvestor (< 20) wrote:

I should mention that you are right about real estate -- the reason people thinks it goes up in value is they compare median home prices, while failing to consider that the median home is much bigger and nicer now than it used to be. A house is a place to live, not an investment.

Rental real estate is only good to the extent that it has a high capitalization rate.

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#13) On September 06, 2008 at 8:44 PM, abitare (90.30) wrote:

EverydayInvestor,

You are arguing with no less then the Wall Street Journal complete with factual graghs and references (Ref Lost Decade). 

http://blogs.wsj.com/marketbeat/2008/07/03/lost-decade/ 

"The smart money is betting that over the next two decades we should expect real returns of maybe 2% to 4% per year in stocks. This is not great but will still beat bonds, cash, commodities (including gold), real estate, and hedge funds (as a class). "

I have no idea what you are talking about here. READ THE ARTICLE find the faults or provide some references to support your theory.

I put $500 in a Vanguard index fund in 1999. It is still at $400-500 almost 10 years later.

The Millionaire Mind has the statistics. 80% of all milionaire got there from their own business. Less then 15-16% give credit to the stock market for their wealth.  

Most business fail and the US stock market has a net return of 0% over ten years, NOT SUBTRACTING inflation.

We stand by for your numbers to disprove the WSJ.  

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