Do stocks really go up over the long run?

Discussion in 'Economics' started by Pekelo, Nov 25, 2005.

  1. Pekelo


    I am undecided on the question, but I have serious doubt about the generally accepted "stocks go up over the long run".
    (Of course depends on what we call long run.)

    Most of the time for backing up this claim people quote the Dow Jones index or other indexes, but they kindly forget 2 important things:

    1. These indexes keep changing over the time, the underperforming stocks are replaced by new stocks, thus the index can not be compared by even itself 20-30 years ago. This change also helps that the index has a nice upward bias...

    2. The little thing called inflation. Once we look at the inflation adjusted charts, the picture tells a completely different tale...

    Now, I still can believe that most of the stocks have a slight upward bias, but I say it is much less than it is generally accepted and I sure would like to see some statistics/evidence on it.

    Let's say randomly picking 10 stocks in every decade and holding them for 10 other years. I mean that is investment, right? That is also the long run, right?
    I bet for every MSFT success there are 4-5 going out of business stories. Again, if somebody could point out relevant statistics on it, I would be glad to hear.

    Until the discussion picks up, here is a Dow chart for the last 100 years, including the inflation adjusted one:

    You might notice that after adjusting for inflation, the Dow was exactly at the same level in 1986 then 50 years earlier... :(
  2. Randomly?

    Errrr... no, I don't think so. That would be random stock picking, not competent investing.
  3. RZTrader


    No, although Wall Street likes to keep this myth alive.

    When they say that, they refer to indices. Never a stock in any indice ever go bankrupt. DJIA and S&P 500 are composed of blue chips which tend to recover from their losses.

    Also, blue chips may have gone up in the past; however, nothing guarantees that they will in the future.

    Think of GM, Ford, Enron, WorldCom, Nortel, ... With a change in world economic order, US blue chips will find it more difficult to post performances of the past.
  4. sorry, I should have been clearer. I am not volunteering an opinion as to whether stocks go up or down in the long run. I was just commenting on the advisability of testing your theories by picking '10 stocks at random' and watching them for 10 years. I am not a sophisticated enough investor to know exactly how W.B. makes his money; I have a few ideas, but he is an example of an investor who has made money.
  5. Pekelo


    I am open to any other suggestions. Nevertheless, picking randomly a signifficant amount of stocks are a better way to test the "stocks go up on the long run" theory than looking at highly modified indeces.

    But anyway, I think I have found the answer to my question, and that is what I suspected, stocks do go up over the long run although in a less profitable way than it is usually reported. The article explaining it:

    "Including dividends and discounting for inflation, the return over the past two centuries has averaged 7% a year."

    "Arnott and Bernstein deconstructed the 7% return. A large part of it--close to 5%--came from dividend yields; a smaller portion, 1.4%, from earnings growth."


    "...and you get a total real return not much better than 3.5%. Note, you can get a risk-free real return of 3.5% on inflation-indexed Treasurys. That's how the 5% risk premium may have vanished, at least on most S&P 500 stocks. "

    Thus according to the article, the average 7% return over the long run goes down to 3.5% if we apply stronger scrutiny....
  6. 007Arb


    Yes, stocks, as in a diversified basket of stocks definitely have gone up in the long run. I suggest you purchase the latest edition of Jeremy Siegel's Stocks for the Long Run. If that doesn't convince you, simply look at the *real* money, real time performance of some of the oldest mutual funds. For instance, had you invested $10,000 in the Pioneer Fund on March 1, 1928 and didn't invest another penny, your investment today would be worth over $90,000,000 (that's ninety million+)
  7. As has been said and long ago, in the long run stocks "fluctuate"

    Do they go up? Certainly do.

    Do they go down? Absolutely they do.

    Brilliant and penetrating question.

    You are halfway to knowing something useful.

    All you need to do now is to pick a market, study until you know it very well, find your edge, develop a plan and the discipline to trade it, and voila!

    Congratulations and Merry Christmas

  8. Pekelo


    OK, you obviously missed the point of the question, which addressed AVERAGE stocks, and not a very carefully picked and diversified basket of stocks.

    The book mentioned also doesn't address the question because it talks about GOOD stocks, obviously.

    And finally, just because there are 4-5 really old and successful mutual funds, that doesn't mean that there are no 4-5000 ones that went out of business. Mutual funds themselves don't decide the question either way anyway.

    As Steve pointed out correctly, stocks fluctuate over the long run. Since most new businesses don't live longer then 5 years, I suspected something similar for stocks. But thanks for playing...
  9. Actually, I don't see any mention of the word 'average' in your original post. In the second post you mention something about 'average return' but that wasn't a part of the 'original question'...

  10. A typical S&P 500 index fund generated annual returns of 13 percent from 1983 through 2003.
    a broad index of fortune 500 still beats passbook savings or even gold.....
    no stock picking or any work involved....
    Now if you are a hedge fund and time this with betting on the downside how much can you make or lose?
    That clearly depends on the timing and your risk management abilities...
    #10     Nov 26, 2005