Stock Market Returns vs. GDP

On 31 July of this year, I had the following exchange with a colleague at work. 

Michael:

Over the long run, how can stock market returns be higher than overall GDP growth?

If they did differ, then either:

  • Total company earnings as a % of total GDP would grow     unsustainably, eventually reaching 100%

Or

  • Price / Earnings ratios would increase indefinitely

What do I have wrong here?

Michael's Portfolio Manager Friend: 

You don’t have it wrong. I’ve been trying to understand what’s going on as well.

As best as I’ve concluded:

TSX has returned 9.2% per annum NOMINAL since the 1930s I think. Breaking that down:

Probably 3% ish from inflation, so 6% real return.

Of that real return, maybe 3-4% is from GDP (post-war boom years and all that).

The other 2-3% is from a combination of higher valuation levels (more mutual funds, more focus on this area – Ben Graham’s advice no longer applies anymore – can’t find stuff that cheap) and % of public company earnings increasing as a share of GDP (less cottage industries, etc.)

So going forward, it sounds like it’s gonna be brutal for the markets:

GDP real of 2% and trending down as demographics catch up

Inflation of 2% but either way you don’t care what it is b/c it adds no real value for an investor

Valuations no longer climbing, and probably % of public company as a % of total GDP is flatlining.

Michael: 

Exactly!  So if we think that the trend away from cottage industries towards public companies has run its course, and that valuation levels are not going any higher, then we have to hope that real GDP grows at a fast clip.  Or invest in places where that is the case.

One opportunity is in the fact that not every country in the world is developed yet.  So until that happens (say over the next 50-100 years) we still have scope for publicly traded investment opportunities returning higher than domestic GDP growth.

Over that timescale though, I think the economics of the Singularity will dominate, and GDP growth will approach infinity for those positioned to benefit from it.  (the rest will become charity cases)

 

Artificial Comedians

When AIs come onto the scene, they will replace our comedians, our on-air personalities, our actors and actresses.  we will love them because they are so smart and so funny and witty, and they will make the rest of us, actual humans, seem like humourless dolts.

Perhaps humans will use those personalities in their virtual assistants.  So all day long, as we wear our Google Glass, we can be accompanied by wisecracking assistants to make our day more enjoyable.  I can't wait.

Bob Sacomano

Technical analysis, trying to glean patterns from the buying and selling activity of many different agents with various motivations, is kind of like trying to get useful information about the distribution of appearances of mentions of unseen character "Bob Sacomano" on Seinfeld, who is mentioned perhaps a dozen times throughout the run of the show.

By which I mean, the pattern is not there for any good reason; they just decided to use Bob Sacomano whenever it was funny or appropriate.  Looking at the past distribution of "Bob Sacomano" would not help you to predict the next time they will use that character.

Ten Thousand Days Alive!

Today is my ten thousandth day alive.  I'd like to thank my parents for making this day possible. Our culture doesn't celebrate this day but I wanted to start - after all, celebrating birthdays is equally arbitrary. I think this will be a very lucky day, and I wish you all the best!

Michael "Myriad" Currie