3SOF

Good morning

Today I've made a transcript about long term returns on stock investments from one of my books:

«I've been looking for information on how to insert the bull and bear market cycles into an overall long term investment in specific stocks. In one of my books I found 4 pages that help us put things into perspective and perhaps be more relaxed about our long term investments.

The book is "Contrarian Investment Strategies - The Next Generation", by David Dreman, pages 279-282:

«An Investment for All Seasons

Who hasn't heard of this old saw? If the Algonquian Indians had invested the $24 they received from the Dutch in 1626 in payment for Manhattan Island at 6%, they would have $55 billion today? Or marveled at the sagacity of collectors who in the 1870's paid what seems almost pocket change today - a thousand or two - for Impressionist paintings, now worth $3 million or $4 million? Awesome, or so it seems until you look at the returns of stocks over long periods.

What is astonishing is that returns on equities surpass just about any other investment. And you don't need the penetrating eye of the collector who can spot the genius of Degas or a Monet and weed out the hundreds of popular and pricey artists of the day destined for obscurity.

This chapter will demonstrate just how well equities have performed over time. I'm not speaking of discovering a Microsoft in the 1980s or an IBM a few decades earlier. I'm talking of the returns the stock averages have provided over the years. This is before the sizable extra returns that contrarians strategies add. Equally important to the investor, as I will make clear, is the crucial but little known fact that stocks are not a risky investment, if you hold them for a number of years. In fact, they are one of the safest investments for putting money away for your retirement or your children's education.

Finally, we will see that stocks also keep their value better than almost any other investment through hyperinflation and most other crises. We will also look into using this little appreciated but well-documented information to build a portfolio for your individual needs.

Stock Returns Over Time

When I wrote Contrarian Investment Strategy in 1980, stocks were more out of favor then they had been in 15 years. As we saw in chapter 11, collectibles, diamonds, precious metals, and bonds burnt up the track in the previous eight years, while stocks lagged badly. If you had asked investors back then for the last place they wanted to put new money for their retirement, most would have said common stocks.

If these investors had had this chapter in front of them at the time, I think many of them would have changed their decisions instantaneously. Figure 13-1, from Jeremy J. Siegel's first-rate book, Stocks for the Long Run, provides the rates of return from 1802 to 1996 for stocks, bonds, Treasury bills, gold and the dollar after adjusting for inflation. As the chart indicates, the best way to make your money grow over a long period of time is to invest in the stocks of good companies.

The figures are staggering. A dollar invested in stocks over the life of the study became $512,232 (including reinvested dividends) - and this after inflation. Before inflation, it became $6,770,887.



Bonds and Treasury bills (all interest reinvested) are not even in the same league. A dollar invested in bonds in 1802 increased to 721 dollars at the end of 1996, after inflation, while one invested in T-bills increased to 262 dollars. Gold, one of the hottest investments in the late 1970s, barely keeps up with inflation; a dollar here only rose by 12 cents in 195 years. And look at the dollar itself. By 1996 the poor greenback had lost 92% of the purchasing power it had in 1802.

Let's put stock returns under the microscope. Sure the returns are enormous, but don't the historians say that most of the increase came in the late nineteenth century, with the great railroad boom and the rapid industrialization of the country; or even earlier when stocks of canal companies were the rapidly expanding blue chips of the day? They do, but most historians aren't statisticians. The question is whether the returns are heavily weighted in one or two periods. Table 13-1, again based on Siegel's numbers (and the Dreman Foundation's after 1945), demonstrates that they are not.



The table shows the return of stocks, along with Treasury bills, long government bonds, and gold, adjusted for inflation over time.

The collectors of Monets or Degas in the 1870's, although they made a killing, made only a fraction of the amount on an inflation-adjusted basis. In fact, I went back to the 1870's and calculated these returns, which came to 6% annualy, only 73% of the amount they would have made investing in stocks over the same period. The returns we should focus on are the inflation adjusted ones, because they represent the increase in the purchasing power from an investment over time.

From 1802 to 1996 our long-lived investor increased his capital by 7% annualy, after adjusting for inflation, but before taxes. Now glance at the three major subperiods of the study: 1802-1870, 1871-1925, and 1926-1996. The rate of return in all these periods is remarkably similar, 7%, 6.6%, and 7.2%. Those born more recently than 1802 might say, "This is ancient history. How have stocks done since World War II?"

The postwar return, at 7.5% after inflation, is actually a little better than the 6.8% annually over the previous 143 years. Breaking down the postwar returns further, the real returns (column 1) are positive for stocks in all three postwar periods. Even in the 1963-1979 period, the worst period for stocks in the past 50 years, you still would have increased your real purchasing power by about 1 1/2% a year, while almost tripling it in nominal dollars.

What about the investor who bought stocks at the top of the market in 1929, and then watched in horror as they lost 90% of their value by 1932? Surely this is the exception to the rule. Nope. It took time - 15 years - but the investor buying stocks near the market high in August of 1929 came out slightly ahead after inflation. She had retained her entire purchasing power in the worst period for stocks in American history.

"But", someone might say, "buying bonds or T-Bills at the same time would have put cautious investors miles ahead, particularly with the deflation of the early thirties". Again no. Had an investor purchased bonds at the top of the 1929 market, he would have lost a staggering 86% of his capital in real terms in the same 30-year period, while buying T-bills would have cost him over 92%. Sharp market drops in 1921, 1973/1974, 1987, and 1990 all had similar outcomes. Rather than  getting killed, equity investors who didn't panic were big winners over time.

Over nearly two centuries, stocks have returned 7% after inflation. Put another way, this means you double your real capital in stocks every 10 years and 6 months. After 21 years your real capital increases fourfold, after 42 years - not an impossible time for people in their twenties or even early thirties - it increases 16 times.»

Now, my personal food for thought on the subject is: And what if instead of 7% a year as a long term return, through a very precise and hard work stock picking process, one gets a 30% average annual return on his capital?

Think about it.»

I believe this helps the ones interested in viewing stocks with a more relaxed and long term oriented strategy.

From the latest poll I made a video on TSL but I can't share it here, at least not for now, I'm sorry. As for the other two OTCBB traded stocks, I don't feel like studying OTCBB traded stocks, the odds are against us in that market, when it concerns to long term investing.

If you have suggestions for today's poll, please write them on this thread (you can copy/paste them from other threads). The poll will start at about 5 PM and will run until 2 AM.

I won't have time to make short term comments on them before the poll, also because I don't appreciate making short term comments, or short analysis with incomplete information. I'd rather study less stocks, but study them quite well.

Thank you for your contributions, keep in touch

Hi David,

I'd like to get your take on:

SFE
SLP
CTCH

Thanks and have a great day,

Ken

David, could you take a look at CECE, some time ago you said you liked it, last thursday they reported earnings and there was a big gap down! What's your take on it now? Tia!
I bought some at 14.61$

http://biz.yahoo.com/prnews/070322/clth327.html?.v=2

David look at these great stock

ROCM
PRXI
SPAR
MAG

hi, Divad, are you still holding ETLT? Thanks.

PFSW is still on the move (a former 3SoF pick that had pulled back for awhile)

Also maybe keep an eye on OTD, it may be getting ready for a major run.  This is a bio-diesel company and rumors are flying about it, including possible takeover.

David, I'm interested in your thoughts on EGR.  It's having a great run.

David, look at

UTEK
ADAT

Thanks

Quote from: york1111 on March 26, 2007, 09:57:31 AM
hi, Divad, are you still holding ETLT? Thanks.

No, but I still feel it has sound long term fundamentals. There's just the risk of it being a Chinese OTCBB traded stock, and so the public information might not be completely accurate, but from what is known publicly, I think it should double.

VLO is where its at. Look at the price of gas. The Fast Money guys will keep pumping the refiners with gas prices this high. I'm buying calls. If you look at the chart there is a golden cross and I know how Dave likes those  

Quote from: prodigykid6 on March 26, 2007, 10:32:37 AM
VLO is where its at. Look at the price of gas. The Fast Money guys will keep pumping the refiners with gas prices this high. I'm buying calls. If you look at the chart there is a golden cross and I know how Dave likes those  

I agree VLO is strong pick... gas is going to go to +$4 this summer if hurricane season is very strong, driving season is strong, middle east tensions increase.

DLSL.ob... the profitable little solar company is on fire.

Quote from: prodigykid6 on March 26, 2007, 10:32:37 AM
VLO is where its at. Look at the price of gas. The Fast Money guys will keep pumping the refiners with gas prices this high. I'm buying calls. If you look at the chart there is a golden cross and I know how Dave likes those 

Calls? Be careful Kid ... what's your point with options, increase potential returns (I don't think so over the long term) at the expense of much higher risk?

You're very young, you have the chance of learning the game in a way that you'll be very rich in the future, as time is probably the most important factor.

Good luck

I know we were talking about 10 baggers the other day and found this recent article by Motley Fool. Kind of interesting.

A 10-Bagger Over Lunch

Quote from: David Randolph on March 26, 2007, 10:50:47 AM

Quote from: prodigykid6 on March 26, 2007, 10:32:37 AM
VLO is where its at. Look at the price of gas. The Fast Money guys will keep pumping the refiners with gas prices this high. I'm buying calls. If you look at the chart there is a golden cross and I know how Dave likes those 

Calls? Be careful Kid ... what's your point with options, increase potential returns (I don't think so over the long term) at the expense of much higher risk?

You're very young, you have the chance of learning the game in a way that you'll be very rich in the future, as time is probably the most important factor.

Good luck

Your right. I stay away from the risky options that are far out of the money and buy the options that are already in the money. The only reason I do it is because I think I'm 100% right and to get leverage. I could be wrong but I doubt it on this one. Eric Bolling will keep on pumping the refiners and there numbers will blow away the street.