Since owning a home is often a decades-long commitment, it is important that we include inflation in our housing analysis. Secondly Vivian made an excellent point, namely that in modern corporate finance buybacks are used to make dilution through stock option issuance. As for Vivian’s point about compensation, I agreed with her that some of the stock issuances may have been to cover management compensation (and it is impossible to tell how much since that is not publicly disclosed) but I do report the net cash yield (net of all stock issuances). HOWEVER, this does not account for the fact that many companies dilute when compensating with stock. The fact that it was less than a month after Pearl Harbor does mean that the market was artificially low.
And if a company issues enough shares to its employees to overwhelm its buybacks and cause dilution, its net cash yield will reflect it since stock issuances will exceed stock buybacks. Therefore, the most recently completed stock market cycles indicate that the long-term average stock market return has been about 5.5-6% per year, excluding dividends.
Despite all that I do have some stock in my portfolio but mainly special situations like closed-end bond funds and MLPs which are likely (I hope) to be valued on their earnings before the market recovers as a whole. For these purposes, I think year-end 1941 is clearly the start of that bull market; the stock market closed higher virtually every year for the next 20 years. My take away from this post is that inherently valuations probably don’t drive stock prices as valuation is a subjective issue, a matter of assumption and choosing values. The meetings of the stock brokers in the coffee shops soon became more organised.
Above is a chart of the 35-year total return of the DJIA (Dow Jones Industrial Average) beginning around 1900. The unrealized securities gains were less of a cushion against losses than one might have expected, since they were pro-cyclical: Japanese stock prices fell during the 1990s as bad loans proliferated. In fact, investing in solar energy compares quite well with traditional investments such as the stock market or savings account. A solar water heating system which costs $5,000 to install will save you $50 per month on your electricity bill. Historical data infers that you will only recoup about 70% of the cost of any remodelling if you sell your home.
Putting the same $5,000 in an interest earning bank account might get you $20 per month at an interest rate of 6%. It would take you 80 months to make $2,000 if the interest is compounded. The same amount invested in the stock market might easily double your investment in a few years, but then you could lose it all as well. Instead of being able to meet in the Royal Exchange, stock brokers had to make do with finding somewhere else.