Investment legend Warren Buffett suggests the Dow Jones index will return 10% per annum over the next 10 years.
Stock market legend Warren Buffett suggests the Dow Jones index will return 10% per annum over the next 10 years.
Revisit two Fortune magazine features recounting speeches given by the billionaire, one made during July 1999 and the other during July 2001, and you can roughly determine his current projection for the US market.
Alongside plenty of common sense remarks concerning GDP, stock market valuations, the importance of sustainable competitive advantages and the burden of over trading, Buffett stated the following:
"I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like -- anything like -- they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate -- repeat, aggregate -- would earn in a world of constant interest rates, 2% inflation and those ever hurtful frictional costs [of 1%], it would be 6%" (July 1999, Dow Jones: 11,194)
"I ventured [in 1999] that the American public should expect equity returns over the next decade or two (with dividends included and 2% inflation assumed) of perhaps 7%. That was a gross figure, not counting frictional costs, such as commission and fees. Net, I thought returns might be 6%... The country's economy has [since] grown and stocks are lower, which means that investors are getting more for their money. I would expect now to see long-term returns run somewhat higher, in the neighbourhood of 7% after costs. Not bad at all -- that is, unless you're still deriving your expectations from the 1990s. " (July 2001, Dow Jones: c10,444)
Assuming Buffett's has not changed his views -- and I've not read anything to say he has -- here's how the projections stack up with the Dow currently around 11,381.
1999 to 2016
A 7% return for 17 years equates to a 216% total return. Since Buffett made his original July 1999 prediction, the Dow Jones index has returned less than 3% a year including reinvested dividends (according to Bloomberg). I therefore calculate the next ten years requires a 10% annual return to catch up with Buffett's initial prediction.
2001 to 2016
When Buffett referred to a 7% net return lasting "the next decade or two" from 2001, I take it he means 8% excluding fees during the following 15 years. So, an 8% return for 15 years equates to a 217% total return.
Following Buffett's update in July 2001, the Dow Jones index has since returned less than 4% a year including reinvested dividends (according to Bloomberg). On this basis, I calculate the next ten years once again requires a 10% annual return to meet Buffett's revised projection.
So far, so good for the Buffett prediction.
Buffett was right when he said "Investors in stocks these days are expecting too much" in 1999 -- the Dow Jones index is currently at a level first achieved seven years ago! But as these big-name shares indicate, company profits have risen since 1999 yet valuations have contracted. That means investors today are getting much more value for their money. I reckon continuing earnings growth and the possibility of a favourable market re-rating underpins the prospect of Buffett's 10% per annum return for investors.
What now?
Here's what I think you should do now:
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To read more on cheap markets and Warren Buffett, click on:
"This Market Is A Buy" by Maynard Paton
"How Buffett Accumlated £22b" by Maynard Paton
"The Best Books On Buffett" by Maynard Paton
