Was Warren Buffet Right About The Dow Hitting One Million?

It
seemed
ridiculous.
At
the
time,
The
Dow
was
slightly
above
22,000 –
near
all-time
highs.

But
Buffett
showed
how
the
math
might
work,
pointing
out
the
Dow
was
at
81
a
century
prior.
The
climb
from
81
to
22,000-plus
was
a
nearly
280
times
return.
A
potential
rise
from
22,000
to
1
million
would
only
require
a
45
times
return.

The
prediction
captured
the
news
cycle
for
a
day
or
so
but
quickly
faded
as
more
immediate
and
pressing
stories
took
the
attention.

An
Update:
is
Buffett’s
Prediction
on
Track?

Barron’s
recently
hosted
its
annual
investing
roundtable
with
a
few
prominent
investors
to
discuss
markets,
trends,
and
general
outlooks.
The
group
was
asked
to
make
a
prediction
on
what
the
market
might
return
this
calendar
year.

Answers
were
what
you
might
expect.
“Up
5%.”
“Down
5%.”
“Positive
mid-single
digits.”

Nothing
that
stopped
you
in
your
tracks.
Then
Mario
Gabelli,
chief
executive
of
Gabelli
Asset
Management,
piped
up:

“The
Dow
will
be
the
equivalent
of
1
million
in
40
years,
and
it
was
under
1,000
40
years
ago.
So,
invest
long
term.”

One
million
in
40
years?
Today,
the
Dow
sits
just
shy
of
39,000.

In
Morgan
Housel’s
new
book Same
as
Ever he
makes
an
interesting
point
about
how
easy
it
is
to
discount
the
progress
that
is
achievable.
He
uses
the
example:
if
someone
were
to
say,
“what
are
the
odds
the
average
person
will
be
twice
as
rich
50
years
from
now?”
it
sounds
too
ambitious.

But
if
that
same
person
asked
“what
are
the
odds
we
can
achieve
1.4%
average
annual
growth
for
the
next
50
years?”
it
sounds
more
reasonable.
Maybe
even
too
modest.
But
those
two
sentences
are,
of
course,
the
same.

To
hit
one
million,
The
Dow
would
need
to
return
8.8%
annually
between
now
and
2064.
If
you
look
at
capital
market
assumptions,
an
8.8%
annual
return
for
US
stocks
is
well
above
any
long-term
forecast.

But
if
you
look
at
the
previous
40
years
of
US
stock
returns,
it’s
slightly
below
what
investors
actually
experienced.
Over
the
past
40
years,
US
large-cap
stocks
returned
more
than
10%
annually,
according
to
Morningstar
data.

In
short,
the
Dow
reaching
1
million
in
40
years
is
in
the
realm
of
possibility,
even
if
it
is
unlikely.

Compounding
is
also
relevant
here.
Most
of
us
are
not
very
good
at
understanding
exponential
function
or,
in
simpler
terms,
rapid
and
continuous
growth.

Specific
to
compounding,
one
fact
that
usually
flies
under
the
radar:
most
of
compounding’s
magic
doesn’t
happen
until
the
end.
The
early
years
of
compounding
have
a
“yawn
factor”
built
in.
For
example,
under
Gabelli’s
assumption,
the
path
to
Dow
one
million
likely
wouldn’t
be
what
you
expect.

If
the
Dow
was
to
hit
one
million
over
the
next
40
years,
it
would
take
32
years
before
it
even
reached
500,000.
It
would
eclipse
one
million
just
eight
years
later. 

Dow
Jones
(Assuming
8.8%
Annual
Growth
Rate)

The
simple
takeaway?
If
you’re
investing
for
decades,
the
biggest
gains
in
absolute
dollars
happen
during
the
last
couple
of
years
of
the
investing
period.

For
most
financial
advisers,
the
minutia
of
the
day
is
where
many
conversations
with
clients
reside.

“Can
the
‘Magnificent
Seven‘
hold
up?”
“Should
I
derisk
as
the
market
moves
to
new
all-time
highs?”
“Will
the
election
bring
volatility?”

Each
question
could
be
debated
for
hours.
The
easiest
response
would
be
“the
future
is
uncertain –
always
be
ready
for
bumps
and
bruises”.
But
that’s
intellectually
dissatisfying.

So,
as
the
debate
and
the
markets
wax
and
wane,
remember
there
is
always
slow
and
subtle
progress
that
isn’t
visible.
And
pay
heed
to
the
fact
that
a
lot
more
might
be
achievable
than
we
often
realise.

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