Please see my previous post New Highs in the Dow Part I – Indifference and Inevitability
The Dow is going to 36,000.
“What?” you say. “How could you make that prediction? How could you embrace the kind of crazy-headline-grabbing assertion that made fools of earlier market prognosticators? How dare you!”
“You’re just shilling like all those other stock market bulls!”
Now wait a minute. How dare I?
Say hello to my little friend, “Compound Interest.” 
Remember the formula to convert today’s present value (PV) into tomorrow’s future value (FV), through an assumed annual return (Y) and a number of compounding years (N)?
FV = PV * (1+Y)N
If the Dow is roughly 14,000 today, it’s only a matter of time and an assumed annual return before we hit Dow 36,000. Or 21,000. Or 57,000.
I mean, seriously folks. Plug in an annual return and a time horizon, and I’ll tell you when we’re hitting that Dow target.
6% annual return, 14 years? Boom! Dow 21,000!
2% annual return, 6 years? Boom! Dow 15,700!
12% annual return, 17 years? Boom! Dow 96,000!
I mean, ultimately, who knows, and who cares?
But here’s what I do know:
- The aggregation of companies that make up broad equity indices will offer a positive return on invested capital. Hundreds of thousands of smart workers (or in the case of the S&P500 or Russell 2000 – millions of smart workers) go to work every day to help generate a positive return on equity capital invested in Dow Jones Industrial companies. To bet against a positive return on a broad portfolio of equities – in the long run – is to put your money on low probability outcomes.
- In the long run, broad equity indices will afford a higher return than risk-less assets like bonds. If you need to build wealth in the long run, you probably cannot afford to be in bonds, as I previously wrote here.
Please see my previous post, New Highs in the Dow Part I – Indifference and Inevitability
 Like these poor fools with their 1999 best seller: Dow 36,000: The New Strategy For Profiting From the Coming Rise in the Stock Market. And no, I haven’t read it and probably won’t, as again, it came out in 1999. Which made them look foolish. And yet also perhaps wise, as long as they allowed for a long enough time horizon.
 You’re supposed to imagine me saying all this with Al Pacino’s Cuban accent in Scarface.
 Admittedly, this last scenario isn’t likely. But if we get 10% annual inflation, a 12% return on stocks seems reasonable. And yes the returns will be largely nominal, with a huge reduction in purchasing power. But, hey! 96,000 Baby!
 Of course we should be empirical skeptics, cognizant of black swans in any particular scenario. Species-ending meteors do impact the Earth, periodically. So allocate 5% of your portfolio to Taleb’s Universa or whatever. But with 95% of your long-term investment capital, just try to do the simple, boring, thing. Trust me and embrace the sophistication that exists beyond complexity.
 In the short run (< 3 years), and possibly the medium run (5-10 years) risk-less assets beat stocks – occasionally. Not in the long run.
Post read (3574) times.