Video: Interview with Pawn Shop Owner turned Politico

Taking a break from commenting on Wall Street, the Dow’s highs and personal finance topics, I recorded a show yesterday with San Antonio, TX-based smart commentary site, Plaza de Armas.

A friend and fellow small finance business owner Shirley Gonzales announced her candidacy for San Antonio City Council, District 5.  Shirley had previously introduced me to her Pawn Shop on a podcast, and explained the frustrations of trying to make something nice in her neighborhood.

On the video:

0:00 to 5:15 – Plaza de Armas Host Elaine Wolff and I speak about Gonzales’ candidacy.

5:45 to 12:25 – I share a coffee with Gonzales.  She speaks about her vision for her district, zoning frustrations, and the most important day of her life, which had happened 2 days before.

13:15 – 17:50 Wolff, Plaza de Armas contributor Jade Esteban Estrada and I talk about the revitilization of downtown San Antonio, and I explain the most important real estate ‘Buy’ signal ever.

New Highs in the Dow Part II – What Will Happen in the Future?

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!”[1]

“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.” [2]

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![3]

I mean, ultimately, who knows, and who cares?

But here’s what I do know:

1. 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.[4]
2. In the long run[5], 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

[1] 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.

[2] You’re supposed to imagine me saying all this with Al Pacino’s Cuban accent in Scarface.

[3] 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!

[4] 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.

[5] 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.