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We've Run The Numbers And It's True - This Is A Failed Strategy
Submitted by Simon Black via Sovereign Man blog,
A few months ago, I needed to satisfy my curiosity.
You see, one of the things I pride myself on about Sovereign Man is that my entire team and I are extremely data-driven.
We make rational, calculated assertions typically based on publicly-available data.
When I say, for example, that the US is broke, it’s because I know how to read the balance sheet in the US government’s own GAO Financial Report (which shows that the federal government’s net position is NEGATIVE $16.9 trillion).
And this doesn’t even include long-term Social Security liabilities, whose own trustees calculate the present value of those liabilities in today’s money at over $39 TRILLION, or over $120,000 owed by every man, woman, and child in America.
Similarly, we’ve routinely stated that most Western stock markets are entirely overvalued, and that buying at these all-time highs is a loser investment strategy.
But again, I’m a numbers guy. So a few months back I ran the data.
Remember, the stock market has seen its share of bubbles and peaks. Before now, the most recent all-time high was back in October 2007 when the Dow Jones Industrial Average reached over 14,000.
If you had bought stocks back then, your return over the next 7+ years through today would be about 27%.
But when you adjust for capital gains tax (assuming a 15% rate) and inflation (assuming just 2%), the annualized return drops to a mere 2.5% per year.
If we go farther back in time to the great millennium bubble, the Dow Jones Industrial Average hit an all-time high of 11,722.98 on January 14, 2000.
Today the Dow stands at 17,800, making your gross investment return about 52%. Not bad.
But when you adjust for taxes and inflation, your average annualized return drops to a paltry 1.91%.
This hardly seems worth it, especially given the white knuckled roller coaster ride over the last 15+ years—The 2000 recession. 9/11. The housing bust. The Global Financial Crisis. Governments shutdowns and debt ceiling debacles.
But let’s be honest, it’s not like anyone buys exactly at the all-time high.
So I wanted to take another look—what happens to your real investment return if you buy near the all-time high?
The math is pretty simple.
If you had bought within 20% of 2000’s all-time high (i.e. Dow at 9,377, or roughly 1-year prior to the peak), your net rate of return, adjusted for taxes and inflation, would still only be 2.80%.
If you had bought stocks within 30% of 2000’s all-time high in October 1998, your net rate of return, adjusted for taxes and inflation, would be just 3.15%.
More recently, had you bought stocks THREE YEARS BEFORE the October 2007 all-time high, your average annualized return after inflation and taxes through today would be just 4.52%.
*Now, one caveat I’ll mention is that my calculations do not take into account dividends received, and these would certainly boost the overall return.
Having said that, I also used official government inflation numbers (which are FAR lower than reality), and a lower capital gains tax rate—15%, vs. today’s 23.4%, vs. next year’s potential 28% rate. Nor did I include any state or local tax.
So on the balance I think it’s a pretty fair tradeoff.
Regardless, the lessons are pretty clear:
1) Taxes and inflation will destroy your investment return, even if you use the government’s understated monkey numbers.
2) Buying majorly held stocks and indexes, even several YEARS before an all-time high, will destroy your investment return.
Patience is a virtue. Sometimes the hardest thing to do is to wait for the right opportunity to come along.
Unfortunately, this is an extremely difficult thing to do. If you do nothing and simply hold cash in your bank, the best you can hope for is to lose money when adjusting for taxes and inflation.
So the urgency to put your savings to work is understandable.
Just make sure you invest sensibly. Stocks are volatile, and in no way risk-free.
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COMMON CORE MATH!
Jeb is not going to be pleased with you.
There are only two losses to report, loss of capital or a loss of opportunity. If we preserve the capital there will always be another opportunity.” – Louise Yamada
Why is it when I hear Simon say his "team" I hear "Mom, get down here, we're planning something!"?
pods
I wish I could take the money the gov steals from me every year and invest it in self-sustainability technology (water purification system, solar power, etc.). But that would be bad...for them.
No civics in the common core
this "market"is not investments but pile of I-muppets on margins waiting for morre
There is a damned good reason I got out of the markets in 2012 and people keep telling about all the money I could of made but I've never been greedy and I never play three card Monty. The people who think they can scrape a few pennies more out of the market will reap what they have sown,
Fuck Jeb...and his whole fucking lineage....
Go ahead, that is legal now. Be sure to wear protection.
As for me, no thanks.
Stupid article. The great travesty is that we all have to operate (buying a home, operating a business etc...) under the umbrella of a broke system. Hopefully you can get out of the way when the hammer really drops.
Go long on heirloom seeds, chickens, and saving seeds from your smoke.
I don't even need to mention silver and lead do I?
I've given this some additional thought since I last mentioned I don't see salt on a lot of prepper's lists.
I want to add the following... baker's yeast. (or the equipment/instructions to make it from scratch)
goldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilvergoldsilver.
Someone kick him....he's stuck!
I agree.
It was a little too much just to make a point.
(...but he did forget "investing" in LEAD)
:-)
I've run the numbers and based on my analysis of publicly available data, I have discovered that you're going to die. To make matters worse, I have determined, again by an exhaustive analysis of all available data, that you can't take any of it with you.
Final takeaway- 0.0% total net return on ALL of your endeavors, energy, wit, and willpower.
Ecclesiastes Numnutumus, at your service.
If he ran the calculation taking dividends into account he would see that the returns are much higher, e.g. just look at the compounded returns on the SPX by buying and holding the SPY ETF...
http://www.nasdaq.com/symbol/spy/dividend-history
3-5% FDIC CD far better for sleeping at night. David Stockman said recently S&P GAAP reported earnings p/e is 140, if I remember correctly. SOLD TO YOU !
Yeah but you gotta lend to those POS'. Which is the problem I have with CDs or government bonds.
Investment timing advice from ZH
Pleeeeeze
When there's blood in the streets... all you need to know.
Disciplined traders can make sigificant money.
Those who buy near market lows can make significant money.
Everyone else just has a seat at the table, wondering who the patsy is.
Stawks, a great public fleecing mechanism.
And in you were in mutual funds for the last 15 years throw another 12-18% in management fees.
yes , can't believe that monster was overlooked in the analysis.
Let's use only mathematics, no politics, to show how federal borrowing fails MATHEMATICALLY:
We'll do it in 3 steps
1. Identify how GDP growth translates into tax revenue using a standard metric of tax revenue per unit of GDP.
2. Use the current deficit to identify the new GDP NOW required to generate the tax revenue to pay back the current debt if we stop borrowing now.
3. Spread the new GDP into an avg growth rate required to pay back the debt over 1 generation, 20 years.
Our current tax rate is around 15% of GDP. Let's figure the payback GDP growth (not growth rate!!!) to pay back the money borrowed to create jobs, OK? If we borrow a trillion, we need growth to yield a trillion in new tax revenue to pay it back, right? That means the GDP would have to grow $1 trillion /0.15 = $6.66 trillion in growth to yield a $1 trillion in debt repayment.
The reciprocal of the tax rate per GDP yields the new, *minimum* new GDP required to pay back the debt created by the government.
We will now consider how this is amortized across a period of years. Let's figure the new GDP required to pay back the current debt with 5 perfect "best case" assumptions:
1. All the new tax revenue goes to deficit.
2. The current marginal tax rate of 15% of GDP stays in effect.
3. We stop borrowing now.
4. assume 0 % interest.
5. 0% inflation
(When engineers have a problem that is too crazy to control all the inputs, we assume all the inputs are controlled to "best case" and then see if the problem can even be solved at all.)
If the economy gets healthy, interest rates will go up and greatly exacerbate payback burden. LIkewise, taxes must rise, that will make it worse. We probably won't stop borrowing this year. And interest rates can't get down to 0%, at least not for long.
But, with these best case assumptions, let's spread the GDP out into a growth rate.
We currently owe $15 trillion in debt that is ON THE BOOKS. (There is actually 5X more than that but the government can keep crooked books).
15/0.15 = $100 trillion in new GDP.
Now let's spread this over 20 years, using a constant growth rate formula.
I used Excel to spread $100 trillion of growth over 20 years, I assumed a constant growth $ per year, this starts out at 3.5% and trails downward to 2.1% in the last year.
That averages to 2.7% growth per year for 20 years straight !!! If you look up our past history you can see that is about as good as average as we can hope for, check out the 1960-1980 period where we didn't deficit spend, so the GDP wasn't so bloated with artificial deficit spending. Assumption 3 above, which mandates the debt stop now, will cause at least a 9% immediate drop in GDP in the first year, so averaging 2.7% a year is not going to produce payback revenue, it will need to be a bit higher.
So under 2.7% GDP growth per year and the 5 outlandish "best case" assumptions, we can see the debt is not payable.
"We currently owe $15 trillion in debt..."
You need to update your 'cut-&-paste' article.
The current debt level is $18,125,876,697,430.99
http://www.treasurydirect.gov/NP/debt/current
[PS: I did not down-arrow you]
Good work, thanks. But... the Debt was never supposed to be payable, you poor Middle-Class fools (with manipulable Middle-class values) :-(
As someone posted this weekend... When you have a compounding monetary system, but a linear income system, the math will not work for more than some decades. After that, the non-linear (debt) part swamps the linear (income) part.
Or, as the banker know as 'Self-enslavement' posted on Sat, 02/07/2015 - 23:09 | 5757523
"Let's say I have some sand I can loan you with interest. But I won't accept the interest payments (sand) from any other source than mine, because all other sand is counterfeit under my laws. Only my sand will be acceptable as interest payment. Which means you will have to borrow even more of my sand, in order to pay me back the interest (in sand) you don't have to be a genius to figure out that basically it means you will never be able to get out of debt, unless of course, you forfeit something of value of yours in exchange for my sand.
Which is my intention all along - to steal your land, resources, your labor, your flesh and all your assets. Oh, and to pay me rent. And taxes.
I laugh at your willingness to obey me, to conform and to raise your children to become cops and soldiers, because they will kill you to protect me.
Are you starting to get it yet?"
Way ahead of you, bro. Read Atlas Shouts.
http://www.amazon.com/Atlas-Shouts-Modern-Patriot-Action/dp/1458217566/r...
Atlas - Good post. I agree the debt in its current form is unpayable. So it will be restructured. When it does expect pain for a couple years as investors take haircuts. It is why I hedge to have some seed corn to maintain a decent quality of life during and investment for after. It isn't easy...
Thanks, RD.
a brilliant exposition of the obvious.
Seriously, what is the takeaway here? That no matter what you do, someone is going to steal your money? That we should abandon all hope in this inner circle of hell? According to this article, I can invest in the stock market and get screwed. OK, fine. There is a problem mentioned, and no solution. Should I just go put myself out of my misery right now? This is an example of the new ZH- total crap. Reading this article is like investing in the stock market- a total con job, and a waste of time.
If you think these numbers suck, wait until the day when the merchant laughs when you pull out your FRNs for purchase of food.
That day is coming with as much certainty as having diarrhea from Taco Bell.
pods
If Simon Black is rational, he is not like most of the human race. He is also probably not like most at ZH.
This article is completely and utterly worthless. Not a fucking thing reported that everyone hasn't known for years. - just sheer fucking empty-headedness from Simon. Seriously Simon, you have a "team" coming up with this shit? Nothing wrong with being sovereign, but you sure as fuck aint a man.
The best investment has always been, and always will be, people.
"I then saw in this reaper – a vague figure struggling like a devil in the full heat of the day to reach the end of his toil – I then saw the image of death in it, in this sense that humanity would be the wheat being reaped." -Vincent van Gogh
"The best investment has and always will be people"
Go long Soylent green
Only thing I've learned with stocks- if it does not pay a dividend DON'T BUY IT and if it pays a dividend but does it by issuing bonds that cost more than the cash it brings in quarterly, DON'T BUY IT. So this strategy basically removes almost every equity so what is a muppet to do? Simple. Invest in yourself and only yourself... or nail guns as the use of them is going to expand exponentially the next few years.
And that point was only marginally covered in this article, and even then only by an *.
Nothing is risk free.
"A few months ago, I needed to satisfy my curiosity." -Simon
I had an insatiable curiosity at one time. That Curiosity is now turning 18. ;-)
The risk to save money is too great. Assets are the last bastion of hope.
Pfffff!
This kind of articles don't help anyone to get better performance than those exposed here. Basically, it is said: if you had done differently you would have been better off. So what? What is your own record as a portfolio manager? Tell us when we have to buy and sell and we will see after a long period of time if your method has given better results than others.
I follow ZH advice to the letter.
I BTFD and I BTFATH.
So far, I have not been disappointed.
Yet.
I call this strategy "Dances with Muppets".
Stop! Just stop...
Money does NOT have to be "put to work" by most people. For them, it is a means to an end, not an end in and of itself. For most people, the old notion of saving and earning a small interest rate over time is more than enough.
It's when that guy suddenly has to keep up with a hyper-inflated economy that money is suddenly required to go out and get a job.
Just like his wife had to in the 70's...when THAT didn't cut it, he had to put those credit cards "to work", then it was the home equity that had to hit the "job market" searching for yield somewhere, anywhere...
On the contrary, I think it's time for money to take a long overdue vacation, put it's feet up, and sip Corona's on the beach.
Agree. And I'll go one further...
Selling to society at large the idea of "making money off money" is essentially bringing everyone into the ponzi scheme that is compound interest, e.g. usury. Lending out money to make money. We are all supposed to be behaving like mini-financiers, with our hedge funds, IRAs, 401ks, all that good stuff.
You and I might view usury through a modern western lens, according to which, its just an inevitable, natural function of the money system. Cue the slick MBA holder with the explanation of the time value of money. In fact, usury or lending at interest has been controversial in human societies for hundreds of years. It was disallowed many places during medieval times in Europe and is still not legal, generally, in the Islamic world. One reason is that it tended to result in most of the problems we see today, with everybody becoming enslaved to an elite financier class.
Making money off money gives money its own slow-burning gravitational pull; its fundamentally a centralizing force that causes accumulation of money at the top of the system. With ZIRP-like policies, discouraging saving, they essentially are asking us all to become financiers and speculators. Everybody with some cash in the bank is supposed to become a mini Warren Buffet in his free time.
If Michael Hudson's/Steve Keen's/Richard Vague's analyses are true, we are in a cyclical debt-crisis where the most important number of all of them is the ratio of Private Debt to GDP. We're at the end of a 60 or 70 year cycle, where debt accumulation has reached the point where it chokes money velocity and private investment. The average person's participation in the economy is now limited by their debt burdens. Put another way the claims on wealth by society's oligarchs have gotten so great that they are actually impeding the day to day functioning of our economy. Turns out 1% of people owning 85% of the world is not an efficient distribution of wealth, but rather massively inefficient. It has broken the "flow" from which the word currency derives.
The last point I want to make is that we don't actually have hyperinflation. Bacon costs $11; that might be inflation, but its not hyperinflation. We have massive asset overvaluation/inflation particularly in housing / real estate, education and auto loans. These three things have one thing in common: people don't buy them with their own money, but with the bank's money. People take out loans to buy these things. The things that people use bank money to buy have all gotten more expensive. Housing prices don't reflect "what its realistically worth to me given my current salary" but instead "how big a loan will the bank grant me to pay for this?".
The general downturn in the real economy post-1994 (my own gut feeling, don't have any numbers on hand) has been papered over with loose credit and propaganda. The price of housing hasn't been allowed to fall -- but in modern America, there is no way that any house should sell for $350k, unless its some kind of mini Disneyland resort. Housing prices for 60% of houses price out 95% of consumers -- and lest that lead to devaluation of housing, the banks are invited in to make up the difference. Banks keep houses/mortgages on their books as the ultimate collateral investment, the 'real deal' they are hedging their bets with in the event of their financial instruments going up in smoke. ZHers stack physical metals, banks stack mortgages and claims on houses.
We are choked out at four points: housing, education, medical treatment, and the cost of automobiles. These are great choke points because these are things everybody needs. I think they are all 50% to 200% above people's actual ability to pay in modern America. The banks have the sweet deal of filling in the difference to prop up these houses, and we can work our whole lives to pay back what they have graciously lent us.
Yes, they force us all to be financiers, this is the part that really frosts me! I have NO desire to spend my time perusing financial documents, calculating rates of return, etc. I have other interests, other priorities. I have chosen NOT to have my entire life center around money.
But they steal my time anyway, by FORCING me to waste my time worrying over this shit. Time that belongs to ME, that I'll never get back. If I don't, they just steal it with their 'death by a thousand cuts' fee schedules.
That's why I've reduced my banking to the current month's needs, and keep my savings OUT of the system, in forms they can't 'tap'. And why I'll never be part of the payroll system again. If they want something from me, they can come and try to get it, I'll not allow them to 'bleed' it out of my various accounts with their fees, and inflations.
Put your straw in MY milkshake, huh? Well, I'm pinching that sucker off...let's see what you get now.
Advice for USA serfs:
If you ever manage to save any money, buy a gold or silver coin with it and keep it under your mattress like the Chinese are doing.
If anyone from Wall Street calls, recognize this as the enemy who wants to pilfer, skim, steal and loot every cent you have ever saved.
I got a call from the bank I use (out of neccessity) the other day with a special offer:
"Mr_________ if you act now and open a new savings account and deposit at least $25K we will guarantee you a 1% interest rate"
Of course it's a failed strategy. It's meant to be a failed strategy. Or do you people realy still believe that it all was by accident? That the top banksters can't do the math? 'Order out of chaos' remember. What's next? WOIII and a lot of viruses. Start the math on that and read your chaos theory books again.
Kiev forces fire ballistic missiles into E. Ukraine – US media http://rt.com/news/176484-cnn-ballistic-missiles-ukraine/
"When I say, for example, that the US is broke, it’s because I know how to read the balance sheet in the US government’s own GAO Financial Report (which shows that the federal government’s net position is NEGATIVE $16.9 trillion)."
Really? So the value of the vast land holdings and other tangible, real assets held by the USG are included in this number? Of course they aren't. Why does Tyler give you space here? I know. You're a fear monger and so is Tyler.
Been outwest? Most of those vast land holdings are worthless.
I literally lost brain cells reading this assinine script. I could almost make out the mouthbreathing used to fuel the madness of his keystrokes. If all of your wealth came at you AT ONCE, and literally at the WORST TIME in the last 2 decades to invest, he actually is right. However, most people's wealth is in their cash flow and will invest periodically, over time. Run that analysis, "numbers" man.
Very few of us are actually Scrooge McDuck's with a silo of wealth that we will move on and off the board at momentous times in history.
Couldn't agree more..but Im waiting for the study that shows how much an investor would have made/lost following ZeroHedge advice. Does this exist?
"$39 TRILLION, or over $120,000 owed by every man, woman, and child in America."
Does this include illegals? just wonderin. Maybe if we let enough in, we can pay that sucka down in no time.
;)