Dow 500,000?

Authored by Lance Roberts via,

I genuinely admire Morgan Housel. I think he is a brilliant and talented writer. However, he sent out a tweet on Friday that really struck a chord with me.

It’s an innocuous tweet, meant with the best of intentions to leave you with a sense of optimism as you headed into your weekend.

I get it. Really.

As Bob Farrell once quipped:

“Bull markets are more fun than bear markets.” 

Bull markets also “sell” financial products, services, and offerings. Wall Street makes money selling products and services to “Main Street” who makes money with higher prices. Financial media makes money as advertisers market their “wares.” Being bullish also gets views, likes, comments, and shares. Bull markets thrive when “greed” erases the memories of previous “bear market” losses.

As Gordon Gecko said:

“Greed is good.” 

The problem with being “bullish all the time” is that it is also very dangerous.

This is particularly the case in late-stage “bull markets,” where poor investment decisions, and excessive portfolio “risk,” are masked by seemingly ever-rising prices. Previously bad investment ideas, products, and strategies tend to resurface in a different form or package. Investment strategies like “buy and hold” and “dollar cost averaging” become popular even though they are absolutely guaranteed to leave you well short of your financial objectives in the future.

So, what does this have to do with Morgan’s tweet?

It has everything to do with one of my “pet peeves,” and the biggest fallacy pushed by Wall Street today – “compound returns.”

Markets Don’t Compound

Morgan states that in 30-years, if the Dow grows at just 5% annually, it will hit 500,000. However, if the Dow actually compounded returns at 5%, in the future, as Morgan suggests, it would have done so in the past and would ALREADY be at 500,000. 

But it’s not. We are just stuck here at a crappy ole’ 23,000.

There is a huge difference between compound returns and average returns. The historical return of the markets since 1900, including dividends, has averaged a much higher rate of return than just 5% annually. Therefore, the Dow should actually be much closer to 1,000,000 than just 500,000.

But it’s not.

Nope…we are just hanging out way down here at 23,000.

Why? Because crashes matter. This is particularly the case when it comes to your financial goals and investing time horizons.

Think about it this way.

If “buy and hold” investing worked the way that it is preached, then why are the financial statistics of 80% of Americans so poor?

The three biggest factors are: 

  1. Destruction of capital;
  2. Lack of savings, and;
  3. Time.

While lost capital gain be regained, the time lost “getting back to even,” cannot be. Unfortunately, we don’t live forever, and time is our ultimate enemy. This is also, after two major bear markets, the majority of “boomers” are simply unprepared financially for retirement. 

It is also the reason why we are facing a massive “pension crisis” in the not so distant future as capital destruction, low contribution rates, and over-estimation of returns has led to massive shortfalls to meet required distributions in the future.

Who wouldn’t love a world where everyone just invests some money, the markets rise 6% annually and everyone one’s a winner. 

Unfortunately, there is a vast difference between an “index” which benefits from share buybacks, substitutions, and market capitalization weighting versus a portfolio invested in actual dollars. The chart below shows the S&P 500 index (nominal since that is the way it is primarily discussed) versus the actual, inflation-adjusted value, of a $100,000 investment and compared to the 6% annual return rate promised by Wall Street.

See the problem? People 30-years ago who were hoping to retire, simply can’t. It will likely be the case for individuals today looking to retire 30-years from now.

With markets now back to the second highest level of valuations on record, forward returns over the next 10-years are going to be substantially lower than they have been over the past 10-years.

That isn’t being bearish. That is just math.

Dr. John Hussman previously wrote the most salient point on this topic.

“Put simply, most apparent ‘opportunities’ to obtain investment returns above zero in conventional assets over the coming decade are based on a misunderstanding of valuations, total returns, and historical yield relationships. At current valuations, virtually everything is priced for a decade of zero.” 

Throughout history, bull market cycles are only one-half of the “full market” cycle. This is because during every “bull market” cycle the markets, and economy, build up excesses which are “reverted” during the following “bear market.”

As Sir Issac Newton once stated:

“What goes up, must come down.” 

Looking beyond the very short-term overly optimistic view of “this time is different,” the coming unwinding of current speculative extremes will occur with the completion of the current market cycle. As I noted in this past weekend’s missive:

“Also, when we look at 20-year trailing returns, there is sufficient historical evidence to suggest total, real returns, will decline towards zero over the next 3-years from 7% annualized currently. 

(These are trailing 20-year total real returns, not forward)”

“Re-read that last sentence again and look closely at the chart above. From current valuation levels, the annualized return on stocks by the end of the current 20-year cycle will be close to 0%. A decline in the next 3-years of only 30%, the average drawdown during a recession, will achieve that goal.”

The second-half of this current cycle will begin likely sooner, rather than later. As stated, it is a function of time (length of market cycles), math (valuations) and physics (price deviations for long-term means.)

I am not bullish or bearish.

My job as a portfolio manager is simple; invest money in a manner that creates returns on a short-term basis while reducing the possibility of catastrophic losses over the long-term.

While “bulls have more fun” while markets are rising, both “bulls” and “bears” are owned by the “broken clock” syndrome during the completion of the full-market cycle.

The biggest secret in achieving long-term investment success is not necessarily being “right” during the first half of the cycle, but by not being “wrong” during the second half.

It’s okay to be “always be bullish” with your attitude, just not with your money.


tangent Mon, 10/23/2017 - 11:48 Permalink

Has it not been a proven mathematic fact markets cannot grow faster than GDP over long term? And the new structure of American quasi-socialism (or fascism light you could say) with Obama placing the captstone ensures that our GDP will not be growing faster than 3%. Or more likely, 1.5% to 2.5% and shrinking, due an increasing debt load and increasing government spending. For a time in 2008 we were at the same government spending level as Greece. So, move to Greece and that will be the United States in the future. Dow 500,000 for today's children's lifetimes if the US mirrors the capitalist policies of Hong Kong. Thats the one way that could happen... if the US converts to capitalism, the only method of growing 5% over the long term.

Consuelo Mon, 10/23/2017 - 11:49 Permalink

  Hey, at least the old bat is gardening - or so it looks.   Um, now the backdrop of reality might look slightly different, but-but-but  ----- she's 'happy'...

Azannoth Mon, 10/23/2017 - 12:10 Permalink

That's exactly what I thought about 8years ago when I 1st started buying stocks - what do I have to lose, in the worst case scenario I will make 5% a year - right, Right, RIGHT!!! Well wrong, somehow I lost 80% of my money this way despite the "Market" being up idk (?)25% since I got in.

Atomizer Mon, 10/23/2017 - 12:46 Permalink

You can go to Lowe's or Home depot to buy wheelbarrows. Carry cash and phones with bitcoin currency. /LOLIf you don't want to goto brick and morter stores. Call in, you can handle transaction. We have a 4 bedroom house. Afro-American people in a pinch. Husband owned a trucking company. They fucking destroyed the house.Wild niggers punching holes in walls, breaking bathroom vanities.You try to help niggers at $2400 month. They have no respect. It wasn't the parents, the orangutan kids   That's why I hate Cleveland, OH . They are disrespectful niggers, you try to help them.. they destroy your property. We settled out of court. 

Atomizer Mon, 10/23/2017 - 12:32 Permalink

BTW, that house is in Strongsville, OH. Made a mistake in helping this awful nigger family. 15,000k in damages. Strongsville is a 95% white neighborhood.  Know you understand why I drop the nigger word. 

Palladin Mon, 10/23/2017 - 13:30 Permalink

The DOW is at 23,300 because Wall Street has captured the MSM, the Analysts and most "investors" are too stupid to do simple math. Here's a little test you can do yourself.Go here and copy the table and paste it into Excel. total up all the prices and you should get 3,390 and then if you divide that sum by 30 you get an average of 113, yet the DOW is shown as trading at 23,300. How is that possible? Easy when you condider that Wall Street doesn't use 30 as a divisor to calculate the average of 30 stocks, rather it uses a divisor of 0.14523396877348 and since it is less than 1 it becomes a multiplier. So then magically an average of 113 becomes (3,390 / 0.14523396877348) = 23,345. And nobody thinks this is a bit weird? That the "average" is off by a factor of 200?  Wall Street will say, oh it's Price Weighted Average. Well there is no such thing. An average is @sum/@count. Try to calculate a batting average using this nonsense. And to make matters worse, the idiot that wrote this piece doesn't even understand that the components of the DOW have changed over time, and even if the "average" were calculated as a real mathematical average, it would make no sense to compare it over time because almost none of the companies in the DOW today, were in the DOW 10 years ago, let alone 20 or 30 years ago.Here's a complete list of the changes.…But you know what? Nobody gives a shit....BTFD .

tuetenueggel Mon, 10/23/2017 - 13:31 Permalink

Living in Germav´ny, that experience our grandparents already made zwice:A single cigarette was to be bought for arround  (25 Billion ) Marks in the later twenties and the later 40, both after wars.So its not the DOW to become more valuable, its the greenback losing almost 99,9 $ of its intrinsic value.USA ist great again.

idontcare Mon, 10/23/2017 - 13:52 Permalink

The only thing Housel isn't taking into account is the abolition of "markets" which could be a possibility within the lifetime of most Millenials.

European American Mon, 10/23/2017 - 13:56 Permalink

"The biggest secret in achieving long-term investment success is being a Satanic Pedophile ZIonist Jew, because the SPZ Tribe is THE player that does ALL the manipulating and controlling of ALL the markets."

mosfet Mon, 10/23/2017 - 14:09 Permalink

Why not.  Venezuala's IBVC hit 613,000 due to massive money printing (at least until they 'revalued' it by removing 3 zeros off the index).  BoJ has put the Nikkei on the same trajectory and the Yen has begun showing all the signs of a hyperinflationary breakout.  ECB and Fed will be no different.  The only 'tool' in their toolbox is to print to prop up everything.  Guaranteed to send markets, crypto and commodities ever higher in the long run and the currency into the abyss.

hannah Mon, 10/23/2017 - 15:02 Permalink

does it matter if you 'win or lose' when the fiat bubble finally crashes. this will end this round of fiat money in the world. all the electons on lcd showing you are rich will be turned off. all the fiat held in your mattress will be unless you buy a shit ton of ammo booze drugs or medicine...YOU ARE NOT GOING TO HAVE ANY WEALTH WHEN THE LIGHTS GO OUT.....hahahahahahahahahaha