lundi 26 juin 2017

The Intelligent Investor - Chapter 2 - How to play with number

I've just bought the book "The Intelligent Investor". In most part so far (I'm at chapter 3), I agree with his conclusion. However, at the end of chapter 2, there was a big play on the number for which I believe that we must work a bit more. To proves his point of not putting 100% of investment in stock he refers that "It took 25 years for GE( and the Dow Jones Industrial Average itself) to recover the ground lost after the 1929-1932 debacle".

While I does not have the DJIA data in front of me, I truly believe that they only takes the DJIA index alone without dividend. The S&P500 made including dividends between the start of 1929 to 1953 (25 years) a respectfully x4.36 (meaning a dollar invested 25 years ago would have provided 4.29 dollar at the end of 1953. Instead if we take the period to 1929-1956, we have x9.27 returns.

We are a far cry from "recovering the ground only. These transfers respectfully to an annual return of 6.07% (1929-1953) or 8.28% (1929-1956).

Even this is a bit unfair. If the investor truly had a 100% stock invested on 1929, I don't see why he didn't had this same perspective 10 years prior. If he had,  between 1919 and the end of 1928, he would have made x5.18. This is an incredible annual return of 17.87% over ten years. If we take into account the crash (1919 to 1953) would have made x22.57 an annual return of 9.31% over 35 years. 1919 to 953 a whooping x47.95 an annual return of 10.72% over 38 years.

I'm not saying that the crash was not great. It was. I'm however implying that only taking the peaks of the world and comparing it to the valley beside is an invalid argument. It would be like implying that stock is great because of 1933 years where the market made 54.42%! Using this false metric, a 10 years investment at 54.42% per year would have made x77.08. Please avoid anyone suggesting such high return.

A better way of saying this would be to say that, it took the S&P500 (including dividend) 5 years to recuperate  from the 1929-1932. A dollar invested in 1929 would only be worth 0.38 and the end of 1932. Note that however, a dollar invested in 1925 would be worth 1.04 in 1932. Still this wouldn't be a great result for a 7 years period, but no where as catastrophic as the prior number suggest.

We must see our investment as long term in order to avoid panic.


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