It is hard to decide which segment of Warren Buffett’s appearance at the Forbes 100 Party was the highlight:
A) Was it his duet with Stevie Wonder? (Buffett sure can carry a tune!)
B) Was it standing on stage with a number of business moguls—Jack Welsh, Steve Wynn, Henry Kravitz, Jerry Jones, Sean Combs, Arthur Blank, Jacqueline Novogratz, Steve Case, and others—and mocking short sellers for not having a single representative on the stage?
C) Was it his prediction that the Dow Jones Industrial Average is going to be at 1,000,000 within the next 100 years?
As much as I loved Buffett and Wonder sharing a mic, my vote has to be (C): The Dow at one million! Is that possible? Not only is it possible—it is, in our view, more than likely.
Consider the 1900s. As Buffett told us in October 2008, at the height of the financial crisis, “In the 20th century, the U.S. endured two world wars…the depression, a dozen or so recessions and financial panics, oil shocks, a flu epidemic, and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” That’s greater than a 5% price return per year for 100 years. Add in dividends, and the annualized return from 1900–1999 was more than 10%.
Can the market repeat that performance between today and September 2117, a mere 36,500 days from now? It doesn’t even have to. Take out your calculator (or Excel spreadsheet if you’re more technologically advanced) and solve for r in the following equation:
1,000,000 = (1+r)^100 x 22,340
The answer is r=3.9%. Translation: Getting from today’s level of 22,340 to 1,000,000 in 100 years would require an annualized return of 3.9%. That’s a rate of return that is hardly out of the realm of possibility. It’s simple compounding. As Albert Einstein may or may not have said, “He (she) who understands it… earns it. He (she) who doesn’t… pays it.”
It reminds me of a scene in the television sitcom “30 Rock” in which Liz Lemon (played by Tina Fey) says to Jack Donaghy (Alec Baldwin): “I have gotta make money and save it. And I have to do that thing that rich people do where they turn money into more money. Can you teach me how to do that, Jack?” To which he replies: “In my sleep.”
Jack presumably channeled his inner Adam Smith and taught Liz that money makes money. The great difficulty is in getting started. How do you get started? Here are five tips:
- Invest in yourself and your education.
- Defer consumption and instant gratification. Even small expenses add up over time.
- Automate your investments. Invest new money in the market every two weeks regardless of your view of the current market environment or your desire to use the money on frivolous wants.
- Be lazy and leave your investments alone. As they say, investment portfolios are like bars of soap. The more you touch them, the smaller they get.
- Finally, and perhaps most importantly, you do not have to be safe to succeed. A $1,000 investment in government bonds in 1926 is now worth $127,000. The same investment in small-cap stocks is worth $29.6 million (Exhibit 1)!
Warren Buffett got attention with his comment about the Dow rising to 1,000,000 in 100 years. In actuality, I’d be disappointed if the market didn’t get there more quickly. Past performance is no guarantee of future results, but if the market repeats the 10% annualized return of the 1900s, it will be at 1,000,000 in less than 40 years. A 6.5% return would get the market there in 60 years. Those time frames may or may not be too aggressive. I’ll leave the “signed, sealed, and delivered” part to Stevie Wonder. Time will tell. More importantly, to quote Buffett one last time, “Being short on America has been a loser’s game.” (I’d extend that statement to cover the global financial markets.) “I predict to you, it will continue to be a loser’s game,” he continued.
With history as my guide, I suspect he’ll be proven right.
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