John Norris: Warren Buffett’s long-range Dow prediction is hogwash

September 25, 2017, by John Norris

(Photo Bill Pugliano/Getty Images)

Last week, famed investor Warren Buffett boldly predicted the Dow Industrials will be over 1 million in 100 years. On its face, that would seem to be a pretty robust outlook. Dow 1 Million? Wow. If only, huh?

The problem with such seemingly outlandish statements is they are hogwash, and I mean complete and utter rubbish. So much so, I will go Buffett one step farther and predict the Dow Industrials will be in excess of – get this – 3 million come September of 2117. How do you like them apples, Warren?

But who cares, really?

First, I will be long dead by then. Further, regardless of where I might end up, I likely won’t need cash and stock certificates. Knowing my luck, they will probably use Bitcoin.

Second, it is just math. If we start with a value of 22,000, an annualized principal return of 3.9 percent will get you to 1 million in just short of 100 years. To put that return into perspective, the average principal return on the Dow has been a shade over 5.15 percent since the end of 1929. So, Buffett’s bold prediction assumes the index will return less than the historical rate over the next century.

Third, if we take the 5.15 percent number and do the math out 100 years, the Dow Industrials will be around 3,337,000 in 2117. Hey, a century is a long time, and compounding is pretty powerful stuff. To that end, a 7.50 percent annualized return will result in a number around 30 million, and 10 percent will get you Dow 300 Million!

Fourth, it isn’t a foregone conclusion the world’s financial system will look the same in 2117 as it does today. Maybe it will, but, then again, maybe it won’t. Perhaps instead of a U.S. stock exchange expressed in U.S. dollars, there will be a global one using some sort of single currency. Maybe the proletariat will rise up and crush the bourgeoisie imperialists, doing away with all stock exchanges in the process. I mean, you never know what will transpire over a century.

After all, in 1917, the Dow Jones Industrials Average included the following firms: American Beet Sugar Company, United States Rubber Company, Central Leather Company, American Can Company, American Locomotive Company, American Sugar Refining Company and Studebaker Corporation, among others.

I suppose you can say the U.S. economy has changed quite a bit over the last century. What will it look like 100 years into the future? That is anyone’s best guess.

Think about it.

What do you think someone from back in the day would think about smart phones or the Internet? McDonald’s? Nike? Heck, how do you think they would react to a Publix grocery store, let alone a Walmart? To all the cars on the roads and the apparent lack of horses? How about how massive folks are these days? And all the old people?

Life today would be almost unrecognizable to someone from 1917, just as life in 2117 would be for us. So how in the world could we possibly make legitimate predictions about the future? What’s more, why would we even care about what the level of the Dow Industrials Average will be long after most of us are dead? Great question.

My only real point is simply: Long-range predictions are normally a waste of time. However, if you are going to make them, at least get the math right.

(Read this article as previously published in the Montgomery Advertiser on September 25th, 2017)