# Buffett's 17 year prediction



## Pluto (Sep 12, 2013)

https://finance.yahoo.com/news/surprise-warren-buffett-turns-more-113017306.html

In 1999 he estimated a 6% annual return over the next 17 years. Turned out it was 5.9%. so much for the theory that predictions are not possible.


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## new dog (Jun 21, 2016)

He probably knew it was 5.9 percent but didn't want anyone to know he is perfect.


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## andrewf (Mar 1, 2010)

Pluto said:


> https://finance.yahoo.com/news/surprise-warren-buffett-turns-more-113017306.html
> 
> In 1999 he estimated a 6% annual return over the next 17 years. Turned out it was 5.9%. so much for the theory that predictions are not possible.


You're kidding, right?

What about all the predictions that did not pan out?


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## Pluto (Sep 12, 2013)

andrewf said:


> You're kidding, right?
> 
> What about all the predictions that did not pan out?


You didn't specify any that didn't turn out, so maybe there are none.


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## canew90 (Jul 13, 2016)

Breaking down the data would probably show that the majority of the 5.9% came from reinvested dividends.


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## mordko (Jan 23, 2016)

canew90 said:


> Breaking down the data would probably show that the majority of the 5.9% came from reinvested dividends.


Dow Jones average yield for that period was below 2.5%, so the answer to your hypothesis is "no".


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## james4beach (Nov 15, 2012)

Does anyone recall Buffett's rule of thumb for predicting forward returns?

And using that calculation, what does it now say for forward returns?


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## mordko (Jan 23, 2016)

I seem to recall it was like 4%, possibly net of inflation.


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## andrewf (Mar 1, 2010)

Pluto said:


> You didn't specify any that didn't turn out, so maybe there are none.


People predicted that Trump would not win the election. So there's a prediction that did not turn out. You're welcome.


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## Pluto (Sep 12, 2013)

andrewf said:


> People predicted that Trump would not win the election. So there's a prediction that did not turn out. You're welcome.


what does that have to do with long term stock returns?


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## GreatLaker (Mar 23, 2014)

There is an interview on Morningstar with Christine Benz and Michael Kitces where he says: 


> Kitces: So, unfortunately, the news today for Shiller P/E ratios is not good. We're not quite at extreme no-sleep levels. We are nowhere near where we were back in late 1999 or early 2000. But we are in that upper 10% to 20% range of historical values, which have traditionally been associated with much lower investment returns. If we look at real returns on average, historically, equities have done somewhere between about 6% and 7% real returns. Unfortunately, when we look at starting in high-valuation environments, the average has been closer to 2%. So, it's a pretty dramatic haircut--like 3% to 4% lower long-term real returns in stocks when we start in these high-valuation environments.
> 
> Now, it's not a zero--it's not a negative number. It doesn't mean that, therefore, you should sell out of all equities, but it means when we are trying to make decisions--when you're trying to figure out whether you are going to be on track for retirement--it suggests that you might end up needing to save a little bit more or work a little bit longer. And if you're retired and spending money, particularly in the first half of retirement, it suggests you might want to be a little bit more conservative--both in your portfolio allocation and in your spending levels--just recognizing that the next decade isn't necessarily going to be very good.


It's worth listening to the M* interview to get the full context of what he is saying:
Preparing for Lower Long-Term Returns

There's also a long (9 pages) thread discussing the same interview on Early Retirement forums:
http://www.early-retirement.org/forums/f28/kitces-preparing-for-lower-long-term-returns-80745.html


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## andrewf (Mar 1, 2010)

Pluto, to put this another way, for any eventuality, you can find someone who predicted it. It does not make the eventuality predictable. You are ignoring all the incorrect predictions. Say you have six people who guess what the roll of a die will yield, each guessing 1, 2, 3... 6. One of them will be correct. Does that mean the result of die rolls are predictable?


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## Pluto (Sep 12, 2013)

^ You are assuming investing in stocks is like rolling a dice. I don't buy your assumption.


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## Pluto (Sep 12, 2013)

james4beach said:


> Does anyone recall Buffett's rule of thumb for predicting forward returns?


It is done by assessing value. If you start investing at a high valuation, your return is lower going forward. If you start with a low valuation, your return is comparatively higher going forward. 

http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm

That's his famous 1999 article. 

http://www.gurufocus.com/stock-market-valuations.php

Look at the chart on upper right.


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## Userkare (Nov 17, 2014)

It's easy, really. Invest in a company by buying a controlling interest. If it doesn't yield 6%, liquidate it and move on to the next acquisition.


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## andrewf (Mar 1, 2010)

Pluto said:


> ^ You are assuming investing in stocks is like rolling a dice. I don't buy your assumption.


It's a matter of degree. Both are random processes.


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## Franky Jr (Oct 5, 2009)

mordko said:


> Dow Jones average yield for that period was below 2.5%, so the answer to your hypothesis is "no".


I'll buzz in. I found a DJI backtest website and from Jan 1999 to Jan 2016 it shows a return of 5.78% with dividend reinvestment or 3.33% if you did not reinvest dividends.
I ran these numbers through compound interest spreadsheet and if you do not reinvest your dividends you get a 32% reduction in portfolio value. So in this case 2/3 of your portfolio come from the index 1/3 from dividend reinvestment.

If you stretch this 17 year period to 34 years. ( with same figures ) it magnifies, just like an MER. After 34 years less than half of your return is from the index and over 50% is from dividend reinvestment. Or you could say without dividend reinvestment you will take more than a 50% haircut on what you could have had ( just like MER ).

Those who understand it reap it, those who don't pay it.


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## Pluto (Sep 12, 2013)

andrewf said:


> It's a matter of degree. Both are random processes.


You are assuming it is a random process. I don't buy the assumption.


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## andrewf (Mar 1, 2010)

Alright, if it not random, one should be able to provide a mathematical model that explains 100% of stock returns, with no unexplained variation. Otherwise, it is a random process.


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## milo (May 31, 2016)

andrewf said:


> Alright, if it not random, one should be able to provide a mathematical model that explains 100% of stock returns, with no unexplained variation. Otherwise, it is a random process.


There is a difference between random and unpredictable. We can't predict what the weather will be on a specific day next year, but that doesn't mean it that the weather is random. We can make predictions of what it is likely to be, however.


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## andrewf (Mar 1, 2010)

Something can be random and predictable, to an extent. In fact, most phenomena can be described this way.

My quibble with OP is that one prediction being accurate is an anecdote, and not evidence that stock market returns are entirely predictable. I respect Buffet and he has good judgment, but I think he would agree with me and disagree with Pluto on this.


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## Pluto (Sep 12, 2013)

andrewf said:


> Alright, if it not random, one should be able to provide a mathematical model that explains 100% of stock returns, with no unexplained variation. Otherwise, it is a random process.


The model, which uses arithmetic, is stock prices are a function of earnings. And value is a function of earnings and earnings growth. 
so, for example, if stock xyz, 20 years or so ago, is fairly valued, and its earnings growth rate was 10% for 20 years, and it was fairly valued at the end of the 20 years, the stock price would have grow at the same (10%) rate as the earnings. 

Your theory that the xyz stock price growth, a 10% rate, same as the earnings, is just random, bears no relation to reality.


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## andrewf (Mar 1, 2010)

I think you are just misunderstanding what random means.


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## londoncalling (Sep 17, 2011)

milo said:


> There is a difference between random and unpredictable. We can't predict what the weather will be on a specific day next year, but that doesn't mean it that the weather is random. We can make predictions of what it is likely to be, however.


+1 I have watched a meteorologist give the 5 day forecast. Meteorologists, like stock analysts being wrong has little impact on their world. However, I do know most summers are warmer than winters. I tend to think long range. I also try to buy during a blizzard downpour or drought.

Cheers


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## Pluto (Sep 12, 2013)

andrewf said:


> I think you are just misunderstanding what random means.


Nice try.


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## Pluto (Sep 12, 2013)

londoncalling said:


> +1 I have watched a meteorologist give the 5 day forecast. Meteorologists, like stock analysts being wrong has little impact on their world. However, I do know most summers are warmer than winters. I tend to think long range. I also try to buy during a blizzard downpour or drought.
> 
> Cheers


I won't Clash with that.


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## andrewf (Mar 1, 2010)

Pluto said:


> Nice try.


If you make a statistical model, and that model does not perfectly explain all variation in the result by the model paramaters, one or more random variables are used to account for the unexplained variation. I don't know what to do other than send you to the wikipedia page on statistics. You have acknowledged that stock returns are not perfectly predictable (otherwise tell me the exact value of the S&P500 on Jan 5th of next year, I would very much like to make a huge amount of money). Therefore there is some randomness in stock returns.


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## Pluto (Sep 12, 2013)

andrewf said:


> If you make a statistical model, and that model does not perfectly explain all variation in the result by the model paramaters, one or more random variables are used to account for the unexplained variation. I don't know what to do other than send you to the wikipedia page on statistics. You have acknowledged that stock returns are not perfectly predictable (otherwise tell me the exact value of the S&P500 on Jan 5th of next year, I would very much like to make a huge amount of money). Therefore there is some randomness in stock returns.


1. I doubt you are going to make a huge amount of money with your random theory. 
2. If you look at a long term price chart, and the corresponding earnings chart there is a clear relationship between price and earnings. The price is a function of earnings. 
3. Given that, if there is randomness at the heart of this, it must be that earnings are random. But are revenues and net earnings random? Is your phone bill randomly different from month to month? Is your heating bill randomly different from month to month? Are car prices randomly different from month to month? Is a box of Cheerios' randomly priced from month to month? Companies make choices about what to charge for their product or service. They make choices about how to control costs, or not. these things are not random. 
4. So it doesn't matter what Wikipedia says about statistics. Your obsession with randomness helps me understand why many people don't make money with stocks. If you set this superficial idea about randomness aside, and ask, "what is value?", you will do much better.


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## andrewf (Mar 1, 2010)

^Alright, facts be damned, you believe what you want.


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## TomB19 (Sep 24, 2015)

If markets are random, we are all morons.

Andrew, I suspect you are using the term random to describe what is essentially noise in a signal which consists of philosophical, emotional, intellectual, and inside knowledge based monetary decisions. The noise component can be considered somewhat random.

Markets may not always be predictable, but they are not random. I'm confident your point of view is very similar, although your nomenclature may vary.


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## Shadow (Aug 31, 2016)

Well recently Buffett also bought into airline stocks. I think this is going to change the game for almost many profiles. Also Buffett gave up his Walmart stocks, an indication that the future is glum for WMT stock.


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## andrewf (Mar 1, 2010)

TomB19 said:


> If markets are random, we are all morons.
> 
> Andrew, I suspect you are using the term random to describe what is essentially noise in a signal which consists of philosophical, emotional, intellectual, and inside knowledge based monetary decisions. The noise component can be considered somewhat random.
> 
> Markets may not always be predictable, but they are not random. I'm confident your point of view is very similar, although your nomenclature may vary.


Yup, though it is accurate to describe that as random, just like weather is random, but is somewhat predictable in the short term.

I see long term stock returns kind of like making climate predictions. Hard to make day to day predictions because it is mostly noise. Longer term, you can make predictions with narrower confidence intervals.


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## dotnet_nerd (Jul 1, 2009)

andrewf said:


> I think you are just misunderstanding what random means.


There is no such thing as a random event. Take a coin toss for example. The outcome (heads vs. tails) is determined the moment the coin leaves your thumb. It's rotational speed, vertical speed, trajectory angle, coefficient of elasticity of the table it lands on etc. will cause it to land one way and one way only.

What we call "random" is an event where the *difficulty* in predicting the outcome becomes arbitrarily large.


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## andrewf (Mar 1, 2010)

dotnet_nerd said:


> There is no such thing as a random event. Take a coin toss for example. The outcome (heads vs. tails) is determined the moment the coin leaves your thumb. It's rotational speed, vertical speed, trajectory angle, coefficient of elasticity of the table it lands on etc. will cause it to land one way and one way only.
> 
> What we call "random" is an event where the *difficulty* in predicting the outcome becomes arbitrarily large.


This is a metaphysical question. Is the universe completely deterministic? Do you accept that you have no free will?

Also, I pointed this out already when I wrote about how statistical models use random variables to represent the statistical noise that cannot be explained within the model.


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