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No personal attack intended.
However, while some things such as a view of a market, etc., fall in the
category of being an opinion, some things fall in the category of being
either true or untrue. And the rate of return of the DJIA over 102 years is
one of those. There is a rate of return that is "true" and all others are
"untrue" (leaving aside for the moment this issue of inflation)
You see, by your analysis, let's say I buy a stock today for $100 and sell
it five years from now for $200, I make $100 over 5 years or $20 per year.
$20 divided by $200 is 10 percent for a 10 percent annual rate of return.
But that's clearly not the return I earned which is why I made the crack
about being glad you didn't work at my bank (which I admit by email
etiquette probably should have been accompanied by a <g>)
Look at it another way. If you invested $28 in 1896 at a guaranteed 1%
annual rate of return (say buying a bond), you'd have a grand total in 1998
of about $75 even if you compound it once per year (a 28 cent return the
first year, a 28.8 cent return the second year, etc). If I put it in the
stock market I'd have over $9000. So clearly a return of 1% is a severe
underestimate of the return (which I believe someone calculated at 5.9%. I
didn't do the calculation but it sounds right)
NOW...as to the issue of adjusting the return for inflation, that's
something else entirely. THAT falls into the venue of opinion...where
people can disagree. Clearly the prices of some things are much higher than
they were in 1896. But some things such as technology, travel, routine
medicine, etc. are much cheaper in real terms now than in 1896. In fact
some products are infinitely cheaper now simply because they didn't exist
at all in 1896.
But in my view (once again in the realm of opinion), I use a holistic view
of the situation by asking myself a question....Would I rather have $9000
with the prices and the availability of goods being what it is now...or
would I rather have $75 with the prices and the availability of goods being
the same as that of 1896.
I personally would take the $9000...mainly because I wouldn't want to give
up such things as cable TV and these interesting email discussions...but I
recognize there are people who would give up all the technology and take
the $75 with the ability to buy a half acre in the San Francisco area for
$10. (Interestingly, that's what my lot was originally conveyed for back in
1901!)
>Maybe you've got some of those things that are 100 times cheaper for sale,
>let us know.<G>
>
>Sorry I don't get the personal attack? If I offended you somehow I
>apologize and promise not to calculate your interest.
>
>Brent
>
>----------
>> From: Richard <rjb@xxxxxxxxxxxxxxxxxxx>
>> To: realtraders@xxxxxxxxxxxxxx
>> Subject: Re: FYI the Dow in 1896 hit a low of 28.
>> Date: Friday, September 11, 1998 12:09 AM
>>
>> I suppose you can stick with your math, but I'm damned glad you're not
>> calculating the interest I earn on my money market account!
>>
>> As far as inflation, some things are 100 times CHEAPER now. So things
>equal out.
>>
>> >I'll stick with my math. There are many ways to look at something.
>> >
>> >The power of compounding would seem great until you adjust for inflation
>> >which I have no figures for but a head of beef sold for 2 to 3 dollars
>in
>> >the movies. Some things are probably 100 times as expensive especially
>real
>> >estate. So divide 9500 by 100 you get 95. If this voodoo math is right
>we
>> >are only about 3.3 times as high as the all time low.
>> >
>> >Brent
>> >> If you take a level of 28, 102 years ago, and compare it to the high,
>you
>> >end
>> >> up with an annualized return of 5.86%, even though the total growth is
>> >> 33,410%, or 328% per year. Shows you the power of compounding.
>> >>
>> >> Regards,
>> >> A.J.
>> >>
>> >>
>>
>>
>>
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