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Checking in on Warren Buffett's Prediction from 17 Years Ago - Views on News from Equitymaster
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The Equitymaster Research Digest

Checking in on Warren Buffett's Prediction from 17 Years Ago
Nov 25, 2016

Warren Buffett has nailed another prediction.

For context, I recommend you read his 1999 Fortune article. It's not only one of the most insightful pieces he's ever written, but in it, he also made a 17-year stock market prediction.

Using interest rates and corporate profitability as his weapons of choice, he destroyed the pervasive myth of the day - that stocks would continue to give strong double-digit returns.

Well, the 17-year period has now come to an end. And Warren Buffett has further enhanced his status the 'Oracle of Omaha'. The US stock market returns over this 17-year period were just as he predicted.

Including trading and management costs, Buffett said investors wouldn't earn much more than a so-so 5-6% from late 1999 to 2016. And from mid-November 1999 to last Friday, the annualized total returns from the Dow Industrials was 5.9%.

It can't get better than that, can it?

Buffett's prediction wasn't a number plucked out of thin air. It was drenched in irrefutable logic.

Here's what he wrote in 1999:

  • If GDP grows at 5%, and you don't have some help from interest rates, the aggregate value of equities is not going to grow a whole lot more. Yes, you can add on a bit of return from dividends. But with stocks selling where they are today, the importance of dividends to total return is way down from what it used to be.

    You cannot expect to forever realize a 12% annual increase--much less 22%--in the valuation of American business if its profitability is growing only at 5%. The inescapable fact is that the value of an asset, whatever its character, cannot over the long term grow faster than its earnings do.
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