Compounding Power of Equities
Discussion
Storm Eunice may have been a reminder to experienced investors, about the 1987 'Great Storm' and the enormous stock market crash.
That storm and the market crash were unrelated events, but an 11% fall on 'Black Monday', followed by a 12% fall the following day, really stunned investors at this time. Those who did not sell, were rewarded by being slightly up on the calendar year. A lesson perhaps, about holding good businesses and not panicking during market crashes.
I think there was a BP part flotation at the time, where applications had been submitted at a fixed price just before the market fell. That probably put novice investors off equities for good! You might need to check that, to see whether my memory is correct.
Although 1987 was major stock market event, perhaps remarkably, it now shows as just a tiny blip on the long-term charts.
Simpo Two said:
Jon39 said:
Although 1987 was major stock market event, perhaps remarkably, it now shows as just a tiny blip on the long-term charts
Is the logarithmic scale to render compounding as a straight line?I quite like linear scales John, but the log versions are of course less dramatic.
Over such a long period, inflation obviously complicates the interpretation as well.
I started this topic just to highlight, what was a really sudden and major stock market crash at the time, whereas subsequent growth makes that dramatic piece of market history, hardly show at all on charts now.
1987 was a year of extremely strong gains until October, when all those gains were more than wiped out in just a few days. After that there was then a slight recovery, so on average, anyone who held throughout that year, had an excluding dividends gain of about 4%, if I remember correctly.
I was not brave enough then to buy more after a crash, but I learnt from it.
CoolHands said:
In reality it doesn’t matter when you buy, it’s always going up. Until one day in the future it doesn’t, I suppose.
Inflation will see it go 'up' if nothing else. But that will be treading water of course. Every performance graph should really be corrected for inflation to be meaningful - that'll sting a bit when your comfy 4%pa finds itself on a down escalator of 7%... Or, if inflation is, say, 5%, does it automatically factor itself in to performance anyway?
I think I just confused myself
The building blocks of any stock markets are fairly substantial businesses. The stock market valuation is a product of dividends that result from their profits
If inflation is zero and the business is static then the profit next year will be the same as this year
If inflation increases and the business remains static then the business will attempt to offset increased costs with increased sale prices, thus automatically offsetting the effects of inflation.
If the company is dynamic it will try to offset increased cost by improved productivity, buying out competitors etc.
All these effects tend to be reflected in increased dividends which in turn tends to inflate the stock’s valuation.
Only market sentiment tends to disrupt this effect and tends to even-out in the long term.
The greatest risk is not to have money invested in equities.
If inflation is zero and the business is static then the profit next year will be the same as this year
If inflation increases and the business remains static then the business will attempt to offset increased costs with increased sale prices, thus automatically offsetting the effects of inflation.
If the company is dynamic it will try to offset increased cost by improved productivity, buying out competitors etc.
All these effects tend to be reflected in increased dividends which in turn tends to inflate the stock’s valuation.
Only market sentiment tends to disrupt this effect and tends to even-out in the long term.
The greatest risk is not to have money invested in equities.
rdjohn said:
The greatest risk is not to have money invested in equities.
I hope you're right.As a relatively novice investor, my fear is that the market doesn't really grow over the next 20 years, meaning I'm going to have to be working for a lot longer.
I know this is unlikely, but it's still possible.
Of course, you could argue you don't want the market to grow while you are in the accumulation phase?
rdjohn said:
The building blocks of any stock markets are fairly substantial businesses. The stock market valuation is a product of dividends that result from their profits. ......
..... The greatest risk is not to have money invested in equities.
..... The greatest risk is not to have money invested in equities.
I agree with the points that you make and I do quite like the dividend system, even though it is rather strange. It does form a handy income stream.
When you think about it though, by receiving dividends we are effectively withdrawing some of our own money. After a dividend has been paid, that money has left the company and so the company becomes slightly less valuable and each shareholder's holding is diluted. Berkshire Hathaway do not pay a dividend for that very reason, the view being that if investors are serious about investing in us to make money, why do they then want some of their money back every 3 or 6 months?
Another puzzling point is investor and financial commentator psychology. During the begining of the pandemic, share prices fell dramatically. It was one of those rare opportunities to add to portfolio holdings. There was perhaps a risk that all businesses would cease to exist, but that has never happened yet.
One example was British American Tobacco. It has been a wonderful investment for decades and even during more recent times with total market revenue in decline, efficiencies, upward pricing and 'loyal' customers have continuously kept profits moving upwards. In March 2020 the share price was down to about £25, with a huge dividend yield and a P/E of about 8. It was so obviously cheap, but it was not being talked about then, because the market mood was doom and gloom. Towards the end of 2021, the share price started to rise strongly and at £33, many analysts and commentators were suggesting it was now a good buy. Would you rather pay £25 and have a gain of 32% in 24 months, or do you want to buy when the business is being promoted at £33? Strange how people get excited after they notice a share price rising sharply. In a supermarket, shoppers might stop buying a product when the price rises, but in the stock market, too many share buyers, both amateur and the professionals (using other people's money) appear to often do it the other way round.
Edited by Jon39 on Sunday 27th February 22:37
RDMcG said:
Have been in equities for decades. The markets do what they do-and when there is a sharp correction such as 2008, I do not even call my broker. As long as he can be a little better than the market in either direction I am happy.
Oh yes, the 2008 financial crash. A really worrying time for investors.
The market decline actually began in about October 2007, when Northern Rock said they were unable to find replacement financing for their debt repayment. Remember those famous photos, showing queues of people outside NR branches, wanting to withdraw their money?
My preference for big non-cyclical businesses produced good results at that time. If you can beat the market during major downturns, it really helps overall performance. Negative numbers of course, but when the upturn eventually comes, you are already well in the lead.
These three charts give an insight into that rocky period. The market decline (red line) started in September/October 2007 and continued going down until March 2009. An enormous percentage total decline. As usual after such events, the stock market recovery was very sudden and rapid, once again emphasising the stay invested philosophy.
Purely for simplicity to measure performance, I start my own fund, dividend total and FTSE All-Share, at zero percent every 1st January.
Edited by Jon39 on Monday 28th February 17:55
Jon39 said:
One example was British American Tobacco. It has been a wonderful investment for decades and even during more recent times with total market revenue in decline, efficiencies, upward pricing and 'loyal' customers have continuously kept profits moving upwards. In March 2020 the share price was down to about £25, with a huge dividend yield and a P/E of about 8. It was so obviously cheap, but it was not being talked about then, because the market mood was doom and gloom. Towards the end of 2021, the share price started to rise strongly and at £33, many analysts and commentators were suggesting it was now a good buy. Would you rather pay £25 and have a gain of 32% in 24 months, or do you want to buy when the business is being promoted at £33? Strange how people get excited after they notice a share price rising sharply. In a supermarket, shoppers might stop buying a product when the price rises, but in the stock market, too many share buyers, both amateur and the professionals (using other people's money) appear to often do it the other way round.
I have a decent chunk of my net worth in shares, and get very excited when the market falls. The stock market falls that happened in 2020 due to Covid were brilliant. I was buying loads. Now that those same shares have soared, I'm frustrated - no reason to buy right now. Just need to wait for the next dramatic fall to go buying again. The only people that get excited by big price increases are either speculators (not true investors) or those whose time has come to cash in their investments and start spending their money in retirement.
As Warren Buffett says, when others are fearful be greedy, and when others are greedy be fearful.
Jon39 said:
Oh yes, the 2008 financial crash. A really worrying time for investors.
The market decline actually began in about October 2007, when Northern Rock said they were unable to find replacement financing for their debt repayment. Remember those famous photos, showing queues of people outside NR branches, wanting to withdraw their money?
My preference for big non-cyclical businesses produced good results at that time. If you can beat the market during major downturns, it really helps overall performance. Negative numbers of course, but when the upturn eventually comes, you are already well in the lead.
These three charts give an insight into that rocky period. The market decline (red line) started in September/October 2007 and continued going down until March 2009. An enormous percentage total decline. As usual after such events, the stock market recovery was very sudden and rapid, once again emphasising the stay invested philosophy.
Purely for simplicity to measure performance, I start my own fund, dividend total and FTSE All-Share, at zero percent every 1st January.
Edited by Jon39 on Monday 28th February 17:55
And then we had big-bang in 1986 to make sure that it could not happen again, but then Black Monday October 1987 happened.
“ Experts” always are looking to make a fast-buck in the short-term.
Holding a very broad range of equities for the very long-term is the no-brainer.
Jon39 said:
I agree with the points that you make and I do quite like the dividend system, even though it is rather strange. It does form a handy income stream.
When you think about it though, by receiving dividends we are effectively withdrawing some of our own money. After a dividend has been paid, that money has left the company and so the company becomes slightly less valuable and each shareholder's holding is diluted.
Edited by Jon39 on Sunday 27th February 22:37
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