Four Ways to Value the Stock Market – Ludwig von Mises Institute …

Four Ways to Value the Stock Market – Ludwig von Mises Institute …

In fact, although it is commonly stated that stocks never lose money over a long enough period, these periods might be longer lived than we are. Don’t forget that our Grandfather that bought stocks in 1929 was not clearly out of the red until 1989. That’s right – if he really did buy and hold his shares, he would have still been losing money (in real terms) in 1988, 59 years after his initial investment!

So maybe stocks aren’t such a surefire bet in the long-run, but they are still better than doing nothing. After all, a measly 2% inflation-adjusted return is still better than holding cash. Since the dollar lost 95% of its purchasing power over the past century, someone who just held all his savings as wads of cash under the mattress would have lost about 3% a year on average (the average rate of inflation).

The problem seems to be not so much in guessing how the financial product will perform over the investor’s lifetime, but in how the monetary unit’s value will perform. To illustrate this, let’s look at an alternative monetary unit – an ounce of gold.

Figure 3 illustrates how many ounces of gold it would take to buy a theoretical unit of the Dow. This figure ebbs and flows with regard to stock valuation and the price of gold. In many ways it looks similar to figure 2, the inflation-adjusted Dow, but with two critical differences.

The first difference is that the long-term average annual return is now a measly 1%. Today it costs about 10 ounces of gold to buy the Dow, while in 1913 it took a little under 4. Stocks have outperformed gold over the past century, but not by much.

The second difference is much more important to most investors. This is because most investors don’t have a 100-year time horizon. Over shorter investment periods the Dow has performed horribly compared to gold. If your grandfather sold his gold to buy stocks in 1929, he would still be underwater on the deal. Nor is this poor stock market performance relative to gold a product of cherry picking a peak year in the stock market. If you sold gold and bought stocks during a total of 35 of the past 100 years, you would be losing money today. Flipping a coin to determine whether you buy stocks or gold in any given year would hardly give you a better rate of return.

This article is from: 

Four Ways to Value the Stock Market – Ludwig von Mises Institute …

See which stocks are being affected by Social Media

Share this post