What are the alternatives to investing in financial assets? Even real estate can be a sub par investment depending on timing. Due to to the extinction of pension plans, the onus is on average Americans to achieve 8 percent per annum or suffer dire consequences.
Are you saying that he made 12% FOR JUST ONE YEAR? For the annual 12% compounded, one should show 1.12^40 = 93.05097 times for his entire life of 40 years. Of course for the 20%, 1.2^40 = 1469.772 is roughly 1500 time. PS) If someone living next door has 1M, then he shows 100 times (annually 12%) for his 40 years of investment life, with cash saving of 10K 40 years ago. Of course, if he kept 20% instead of 12% for 40 years, then his asset is now 15M. How fascinating the compounding is?
http://sofew.cfr.msstate.edu/papers/Lutz06.pdf Paper that estimates 8 percent and lower returns due to "impatient" institutional investors.
There is always "some guy" that makes a killing in some market. I've been hearing about "some guy" forever. That "some guy" is rarely the average Joe by definition. So, what am I rambling about? What are the alternatives today that a Joe Retail guy can explore? Some possibilities: farming, global value investing, house flipping in undervalued markets, prostitution- either as a provider or procurer, fish farming. I remember one grumpy poster on an investment forum emphatically stating that the best investment is a job one can do in old age.
May I guess what you mean? I guess you are talking "I have a cash saving of hard-working 10K, now how can I satisfy my asset is 12K after one year of struggle in asset market?" My personal answer is "The 2K difference is too much big. If you keep the compounding of annual 20%, then you take all the wealth after 400 years (of course by your grandsons with your logic)" For summary, no one keep annual 20% compounded in the long run, I am sure.
An investment in Berkshire A 40 years ago would have returned 21% annually compounded. The S&P500 with dividends accounted for and reinvested has returned 11% annually compounded. Investing in 10-year Treasuries and reinvesting the coupons has returned roughly 7% annually compounded. 10-years are not bills, of course, but are a better proxy for risk-free "investing" than bills.
Just because a young weed grows a foot in a week doesn't mean that it will be 300 feet tall in six years. Weeds do not grow to the sky - the fallacy of extrapolation.
That's what I tried to explain to him. Caeteris paribus, if you are getting above average returns, in the long run (as your capital grows faster the the rest) you'll just get average returns. Buffet said that if he was managing less capital, he would be getting higher annual returns. It's for that reason. As your capital grows, caeteris paribus, your returns are "brought" closer to the average returns. In my original question I was obviously talking about having a small capital in comparison with the market capitalization. It's evident you can't get 20% for 400 years, even if you start with $0.01.