What if someone told you that there was more upside in the market from today’s levels? What if they said it could rise 4,445% from here?
There have been a lot of market forecasts in the headlines lately. Some suggest the market is going higher, others that a downturn is imminent. Perhaps none is audacious as that proffered recently by Warren Buffett. The Oracle of Omaha believes that the Dow Jones Industrial Average is going to 1 million.
There’s an old adage on Wall Street that when making forecasts, you either predict a number or a date, but not both. That way, you can never be wrong. For example, a market strategist might declare that the market is going up by 1,000 points. The market may go down by several thousand points first, but eventually the forecast will prove correct.
Warren Buffett has bucked the trend by forecasting both a metric and a date. He believes the market will rise to 1 million within 100 years. On the face of it, such a forecast sounds absurd, but the math shows that the forecast is actually quite conservative. To go from today’s level of roughly 22,000 to 1 million, the market would need to achieve an annualized return of only 3.9%. Historically, stocks have returned over twice that amount on an annualized basis.
The fact that the Dow could reach such a lofty height, even over 100 years, shows the miracle of compounding. When I first started in the investment business, a 100-point swing on any given day was a huge move. Today, 100-point moves happen routinely, and they are insignificant. A 10% gain on the market when it starts at 22,000 implies a rise of 2,200 points. However, as the market rises, a 10% gain on a base of say 100,000 implies a 10,000-point gain. So, as the market goes up in value over time, we will see larger daily, monthly, and annual point gains.
What’s more, the market tends to go up over time. There are certainly periods when this is not true, but they tend to be short lived. Short-term drops, as painful as they may seem, really become irrelevant for most of us, if we remain long-term oriented. Warren Buffett is merely reiterating that financial rewards are there for those who remain patient and ride out the market’s ups and downs.
Of course, the late economist John Maynard Keynes once quipped that “in the long run we are all dead,” but I believe along the way we might as well make some money. Warren Buffet is showing that staying invested in the
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