The Wall Street Journal won the award for the greatest "Shock And Awe" financial headline of the day when it published a story earlier entitled "Warren Buffett Says the Dow Is Going Over One Million." The 'Oracle of Omaha' apparently made the 'bold' prediction at the 100-year anniversary celebration of Forbes magazine in which he also said that "being short America will continue to be a loser’s game." Here are the highlights from WSJ:
You heard it from Warren Buffett first: the Dow Jones Industrial Average is headed above one million.
The blue-chip stock benchmark is likely to be above that milestone in a hundred years’ time, the Berkshire Hathaway Inc. chief executive and chairman said Tuesday night.
“The Dow will be over a million and that is not a ridiculous forecast at all if you do the math,” he said.
“Being short America has been a loser’s game,” he said. “And it will continue to be a loser’s game.”
And while the title may make you want to drop everything you're doing, throw all your cash in the DOW and retire early...a bit of simple math reveals that a more appropriate title for the Wall Street Journal's "Shock And Awe" piece from early today might have been: "Warren Buffet Predicts Dow Will Massively Underperform Historical Returns Over the Next Century."
In reality, 'Dow 1,000,000' in 100 years would indicate an abysmal CAGR of just 3.9% pre-tax, or closer to just 3% post-tax returns per year (assuming tax rates don't trend toward 90% over the next 100 years).
Taking a look back, the Dow has returned 5.7% annually over the past 100 years and 9.3% annually since 1980 when the modern era of equity bubbles first started to really take off.
Finally, just to put all this in context, if the Dow were to grow at the same annualized rate of 9.3% that it has grown at since 1980, then a more reasonable 100-year price target for the Dow would be just over 140,000,000 instead of the 1,000,000 predicted by Buffett...