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Old 06.11.2017, 16:32
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Are stock markets really that great?

I was discussing with a friend what to do with savings. It's a bit of a conundrum since by many traditional measures, everything is really expensive, be it stocks, real estate or even bonds.

He said that although stocks averaged around 10% annual return (less if inflation adjusted) he said that from 2000 to 2016, the return on the SP500 was less than 3%. He doesn't want to touch stocks as he feels they are over-priced, but he feels the same about real estate and bonds too. So he is just sitting on cash but doesn't like the idea of the money sitting idle.

What are your thoughts?
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Old 06.11.2017, 16:39
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Re: Are stock markets really that great?

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I was discussing with a friend what to do with savings. It's a bit of a conundrum since by many traditional measures, everything is really expensive, be it stocks, real estate or even bonds.

He said that although stocks averaged around 10% annual return (less if inflation adjusted) he said that from 2000 to 2016, the return on the SP500 was less than 3%. He doesn't want to touch stocks as he feels they are over-priced, but he feels the same about real estate and bonds too. So he is just sitting on cash but doesn't like the idea of the money sitting idle.

What are your thoughts?
All depends on which stock or bond. Lots of bargains still!
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Old 06.11.2017, 16:40
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Re: Are stock markets really that great?

it's very simple: you should only invest in stocks that will have a future annual return of more than 15% and avoid the others.
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Old 06.11.2017, 17:06
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Re: Are stock markets really that great?

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it's very simple: you should only invest in stocks that will have a future annual return of more than 15% and avoid the others.
list please
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Old 06.11.2017, 17:15
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Re: Are stock markets really that great?

Bitcoin! Definitely! It's had 800% growth this year already, so if your friend invests CHF 100,000 today, he'll have CHF 572,045,987.67 by next Wednesday! Definitely.
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Old 06.11.2017, 17:16
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Re: Are stock markets really that great?

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list please
I'll get back to you this time next year.
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Old 06.11.2017, 17:21
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Re: Are stock markets really that great?

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I was discussing with a friend what to do with savings. It's a bit of a conundrum since by many traditional measures, everything is really expensive, be it stocks, real estate or even bonds.

He said that although stocks averaged around 10% annual return (less if inflation adjusted) he said that from 2000 to 2016, the return on the SP500 was less than 3%. He doesn't want to touch stocks as he feels they are over-priced, but he feels the same about real estate and bonds too. So he is just sitting on cash but doesn't like the idea of the money sitting idle.

What are your thoughts?
Firstly he's basing the analysis on a fundamental error - it returned 3% on price, of course what matters is total return including dividends, which will be higher.

So call it 5% return (I'm guessing, I can't be bothered correcting his homework...) - if he could get that for cash, or say 4% for removing the equity risk premium, he should do that, but of course he can't.
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Old 06.11.2017, 17:27
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Re: Are stock markets really that great?

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I was discussing with a friend what to do with savings. It's a bit of a conundrum since by many traditional measures, everything is really expensive, be it stocks, real estate or even bonds.

He said that although stocks averaged around 10% annual return (less if inflation adjusted) he said that from 2000 to 2016, the return on the SP500 was less than 3%. He doesn't want to touch stocks as he feels they are over-priced, but he feels the same about real estate and bonds too. So he is just sitting on cash but doesn't like the idea of the money sitting idle.

What are your thoughts?
From Jan 1st 2000, until December 31st 2016, the S&P500 returned (including dividends) more than 111%, so 2.1x your money.

That's a compounding rate of 4.5%, and yeah in real money it's about half (2.2% average inflation roughly). So I'm hoping your friend is talking about annualised returns, and not total returns, because only then their number kind of makes some sense.

But, being a bit fair here, that very convenient period includes a substantial drawdown after 2000 (without the respective rally), and the 2008 which was an extreme tail event.

So all things considered, still not bad.

If you want to be kind of fair to equities as an asset class, look at the big picture. In the last 30 years the ACWI has returned close to 7.5%
In the last 20 years, it has returned 6.5%, and the average equity hedge fund about 5.2%, so ACWI's performance minus a fee to provide substantially less volatility.


Doing nothing but having exposure to all equities and getting more than 5% is not really a bad deal. If people want to make more money, they are spoiled by a rather nice 10year bull marche that's making everyone talk about stocks and dreaming double digits...
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Old 06.11.2017, 17:46
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Re: Are stock markets really that great?

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From Jan 1st 2000, until December 31st 2016, the S&P500 returned (including dividends) more than 111%, so 2.1x your money.

That's a compounding rate of 4.5%, and yeah in real money it's about half (2.2% average inflation roughly). So I'm hoping your friend is talking about annualised returns, and not total returns, because only then their number kind of makes some sense.
For a CHF investor the total return got annihilated by the USD drop, it's little better than flat in CHF terms (just a quick in-my-head calculation, the calculator may say 1-2% annualised performance).

However, the USD was at a long-term top against the CHF around the millenium, it was the very worst time to buy. A couple years earlier or later the calculation looks significantly different.
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Old 06.11.2017, 18:14
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Re: Are stock markets really that great?



That is very right Urs, but to be honest, if you don't hedge something then that means that as an investor you're taking a position on it.

So either you have an informed view on its outlook (so godspeed), or you're taking exposure that you don't really want. And taking unwanted exposure is a major no-no; at least for me.

So what I'm trying to say here is, if you can't hedge effects that you don't want on an asset, then don't touch the asset.
Either hedge the currencies and enjoy "pure" exposures (plus/minus interest rate differentials), or just play your respective reference currency only.
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Old 06.11.2017, 19:32
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Re: Are stock markets really that great?

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I was discussing with a friend what to do with savings. It's a bit of a conundrum since by many traditional measures, everything is really expensive, be it stocks, real estate or even bonds.

He said that although stocks averaged around 10% annual return (less if inflation adjusted) he said that from 2000 to 2016, the return on the SP500 was less than 3%. He doesn't want to touch stocks as he feels they are over-priced, but he feels the same about real estate and bonds too. So he is just sitting on cash but doesn't like the idea of the money sitting idle.

What are your thoughts?
My own musings are that I think that there is some real money to be made in the bigger tech stocks. There are many in e-commerce etc that have already exploded and will continue to grow, and some that will explode over the coming years. To add to that the big AI players should also see significant gains as that industry is going to be absolutely massive in the next decade.

I am not saying it's all easy money or that things won't go sour at some point but if you have larger chunks of money to put on these companies I think the returns will be worth it.

I am a stocks newbie but I have been researching the tech industry all my life and I wish I had a time machine and a million dollars for all the times I thought "this company is going to change the world".
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Old 06.11.2017, 19:58
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Re: Are stock markets really that great?

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I was discussing with a friend what to do with savings. It's a bit of a conundrum since by many traditional measures, everything is really expensive, be it stocks, real estate or even bonds.

He said that although stocks averaged around 10% annual return (less if inflation adjusted) he said that from 2000 to 2016, the return on the SP500 was less than 3%. He doesn't want to touch stocks as he feels they are over-priced, but he feels the same about real estate and bonds too. So he is just sitting on cash but doesn't like the idea of the money sitting idle.

What are your thoughts?
For US investor it seems that stock market has produced nice returns over the years. For CHF investor not so much. That said nobody know what it will happen in the future.
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Old 06.11.2017, 20:28
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Re: Are stock markets really that great?

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it's very simple: you should only invest in stocks that will have a future annual return of more than 15% and avoid the others.
Ya don't pay any attention to whether the stock is over value or not, whether is is drowning in debt nor how it actually managed to generate that 15%, sure what could possibly go wrong!
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Old 06.11.2017, 22:05
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Re: Are stock markets really that great?

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Firstly he's basing the analysis on a fundamental error - it returned 3% on price, of course what matters is total return including dividends, which will be higher.
100'000 USD invested on 3 Januar 2000 in S&P 500 would today be worth 247'700 USD (source: put SPY here). This means 147.7% total return or 5.2% compound annual growth rate (CAGR).

In these years, the average annual USD inflation was 2.2%. This means 3% real USD returns. Where's the fundamental error?

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For US investor it seems that stock market has produced nice returns over the years. For CHF investor not so much. That said nobody know what it will happen in the future.
In CHF, the CAGR would be 2.55%, adjusted for inflation 2.1%.This 3.0% vs 2.1% real return is not such a huge difference, both are rather disappointing. But most importantly, both returns are exactly the same in nominal terms.

I wonder where the missing 0.9% went. Somehow the exchange rates and inflation rates are not in sync. Anyone can explain this?
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Old 06.11.2017, 22:20
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Re: Are stock markets really that great?

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100'000 USD invested on 3 Januar 2000 in S&P 500 would today be worth 247'700 USD (source: put SPY here). This means 147.7% total return or 5.2% compound annual growth rate (CAGR).

In these years, the average annual USD inflation was 2.2%. This means 3% real USD returns. Where's the fundamental error?



In CHF, the CAGR would be 2.55%, adjusted for inflation 2.1%.This 3.0% vs 2.1% real return is not such a huge difference, both are rather disappointing. But most importantly, both returns are exactly the same in nominal terms.

I wonder where the missing 0.9% went. Somehow the exchange rates and inflation rates are not in sync. Anyone can explain this?
Are you adjusting for CHF inflation (that is inflation in CH)? Obviously inflation in the US could be different than in CH.

Honestly, I don't really see what is the point of looking at historical figures over certain time periods especially in the time period we are in.
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Old 06.11.2017, 22:31
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Re: Are stock markets really that great?

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Are you adjusting for CHF inflation (that is inflation in CH)? Obviously inflation in the US could be different than in CH.
I wrote, 2.55% nominal CHF return, 2.1% real. The inflation was 0.45%. Either the USD inflation was actually higher than reported, or CHF is overvalued. Am I right that the exchange rates and inflation should be correlated?

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Honestly, I don't really see what is the point of looking at historical figures over certain time periods especially in the time period we are in.
What's the point? The point is to test the theoretical assumptions against real world numbers. You can't treat them as forecast for the future, but can't just ignore them. Otherwise how will you prove that stocks are the best thing to invest in? Only with such comparisons. I also don't see what's so special about our time period.
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Old 06.11.2017, 22:39
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Re: Are stock markets really that great?

Who says that stocks is the best thing to invest in? A stock is a popular asset class but there are many others. Different investors invest in different products.
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Old 06.11.2017, 23:32
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Re: Are stock markets really that great?

Stocks are worth investing in, just however go for a simple and cheap index tracker rather than worrying about looking for the best investment funds. Ten years ago, the main man Warren Buffett made a half a million dollar bet against a leading hedge fund manager that the S&P 500 index would outperform a selection of hedge funds. He won easily. I think it may even have been an open bet so that any hedge fund manager could have stepped forward to claim the prize however no one did.

Like with all investments, just don't put all you eggs in one basket. The stock markets are no different. Always diversify.

Billionaire Warren Buffett could win $2 million thanks to a bet he made 10 years ago
After winning bet against hedge funds, Warren Buffett says he'd wager again on index funds
How You Can Win Warren Buffett's Bet
Buffett's Bet with the Hedge Funds: And the Winner Is
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Old 07.11.2017, 00:15
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Re: Are stock markets really that great?

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That is very right Urs, but to be honest, if you don't hedge something then that means that as an investor you're taking a position on it.
Obviously.

You're reading things into my post that aren't there. I'm not judging or rendering an opinion, I'm simply stating facts to point out that one needs take currency fluctuations (which are caused by other factors) into account when investing abroad. Or, as you point out, bear the cost of hedging them.

With that said, to me hedging makes limited sense because both stocks and currencies are the tails that are wagged by the dog called economy. Being bullish on stocks in general usually should mean being at least non-negative on the currency. And we're talking about 15-20 years ago, I don't think the typical (Swiss) retail investor was even aware what hedging means, let alone had access to cost-efficient instruments.
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I wrote, 2.55% nominal CHF return, 2.1% real. The inflation was 0.45%. Either the USD inflation was actually higher than reported, or CHF is overvalued. Am I right that the exchange rates and inflation should be correlated?
In the very long term. Your relying on a particular start date requires fair pricing at that moment. Go back or forward a couple years and your results are significantly different, this usually points to some imbalance(spike or trough) (playing with start and stop dates should look more like a plateau than a spike if results are to be reliable). One should probably compare to something like the 5yr rolling average.

I like to think that the 'net bubble caused huge influx of capital into the US, which not only helped push up stock prices but also created significant (additional) demand for USD, which in turn was instrumental in the USD's spike against all major currencies from 1995-2000 or thereabouts (except in part against the JPY). This spikeup got retraced in the following few years the until stocks hit their bottom.

Last edited by Urs Max; 07.11.2017 at 00:36.
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Old 07.11.2017, 09:52
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Re: Are stock markets really that great?

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100'000 USD invested on 3 Januar 2000 in S&P 500 would today be worth 247'700 USD (source: put SPY here). This means 147.7% total return or 5.2% compound annual growth rate (CAGR).

In these years, the average annual USD inflation was 2.2%. This means 3% real USD returns. Where's the fundamental error?
He also said "less if inflation adjusted" - strongly implying the numbers were not adjusted for inflation.

Also 3% is not < 3%, so even after adjustment the statement is wrong.

The more fundamental error is not providing numbers for the non-equity options - basically he's saying "3% isn't very good compared to, uh actually I don't have a number". Not a very good decision process...
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