Saturday, December 6, 2008

You never get even over the long run

I want to comment on the stock market as it is a financial instrument. Shiller has adjusted this data in a good way I believe. I did a huge study on this data and what I figured out was that inflation from 1926 to 2003 was a compound 3%, that the beginning dividend rate in 1926 was 4.8% and if you bought stocks on that date in the form of the SPX or its equivalent, you would have made 4.8% plus 3% inflation plus about another 1% in real terms. If you take the dividend yield out of the data for 1/26, you get .61/12.65 or 4.822%. The CPI adjusted price for 1/26 is 157.72. The last data on this was for 6/08 where dividends were 28.71. If you adjusted the 6/08 data to a 4.822% dividend, the price would be 595.38, which is a factor of 3.77 over a period of 82 years. This demonstrates a real growth factor of about 1.5%(this would be accurate at 89 years).

Here is the rub of this data though. There are a couple of factors here, what was the price at the peak of the last debt bubble and the 10 year average trailing PE. The factor for 1/26 was 11.34 and the factor for 6/08 was 22.39. This is a rough factor of 2 and if you divide 1341.25 by 2, you get about 670, in the region of the 595 that I mentioned. If you move back to 1929, you get a trailing PE/10 of 32.56. Though much more expensive than 6/08, the 1929 PE paled compared to 43.22 at the peak of the SPX in 3/00. But, at the summer 07 peak the rate hit 27.40, not quite there, but in the region of 1929. This factor peaked in the 1960's, a sweetspot of all time economy in the US at 24.06 and going forward dropped to 6.64 in August 1982. It also dropped to 5.57 in June 1932. This supports real values in the 25% range of the top, maybe lower.

The other factor is if you look at dividend growth between 9/24 and 9/29, you get a growth from .55 to .94, a factor of 1.709 times. This is a little over 11% compound. Dividends peaked between June and December of 1930, another time when corporations failed to conserve capital in time. If you take the same time frame, 10/02 to 10/07, dividends went from 15.88 to 27.22 for a factor of 1.714, almost identical to 1929. There was one difference in the fact that the dividend rate actually went up in 2002-2007 where as it went down in 1929. The other difference was the nature of the credit system. The bubble that pushed stocks higher in the 2002-2007 period was much bigger.

There is one more point. The price in 1929, adjusted for CPI, is 403.79. The dividend yield for 9/29 was 3.003%. If you took the 10/07 peak and adjusted it to a 3.003% dividend, you would get 27.22/.03003 or 906.36. The CPI factor for 10/07 in this demonstration is 1.0681772898 to give a price of 968.15. The factor for peak to peak is 2.39766 for a period of 78 years. This is about 1.15% real growth in price(1.011 divided 78 times into this factor reduces it to 1.0214, meaning it is within .1%). If you took this 79 year period, you would find stocks returned 3% plus 1.1% plus inflation.

Let me say that again: If you took this 79 year period, you would find stocks returned 3% plus 1.1% plus inflation. Do you know what 4.1% over inflation is? It is damn short of what staying in a corporate bond fund would return you. It is about 7%, but this is if you hold from peak to peak. If you take the price of the SPX for November 1985, you get 404.39. What is this? It is when you got back to even for the second time for owning the SPX from the 1929 peak. The first time was 11/58.

People think stocks change form, but buying a basket of stocks is not that much different than buying a basket of bonds. Your yield to maturity is what you get when you buy. There isn't some kind of magic that comes in over night like the tooth fairy and give you a bonus for you losses. These are solid facts about something that mirrors the SPX.

Why my fixation on dividends? Because that is all a stock every pays its holder passively. If a stock is acquired by another company or the company buys back stock to reduce the float, it never pays a dime of dividends, the holder eventually ends up with zero. The return on a stock is its dividend rate plus its growth rate. Thus if you hold the SPX as a stock, which for the great unwashed is the only way to hold stocks (there is too much money for everyone to be buying the few prime stocks or for that matter, move into dividend stocks), you can't do any better long run than what long run is. Markets that pay low dividends as this one has for most of the last 20 years (current dividends are declining and not high and the worst time to hold stocks is when dividends are declining as the growth rate is negative and stocks have to adjust their prices to take into account the declining payout). My point is you get your long run at the price you buy and there are only deep bears and bubbles that present opportunities to buy or sell. I venture a regular non bubble, non bear market is probably in the SPX 500 range or lower.

1 comment:

Dorcas' Daddy said...

just wanted to say that i really enjoy your blog--and you add analysis to the oracle of doom too!(HT)-keep it up!