If you are tired of the endless chatter in the media questioning the wisdom of buying-and-holding stocks and comparisons to the Great Depression, you might find the following passage in the Introduction of The Intelligent Investor to be of interest:
There are no sure and easy paths to riches on Wall Street or anywhere else. It may be well to point up what we have said by a bit of financial history — especially since there is more than one moral to be drawn from it. In the climactic year 1929 John J. Raskob, a most important figure nationally as well as on Wall Street, extolled the blessings of capitalism in an article in the Ladies’ Home Journal, entitled “Everybody Ought to Be Rich.” His thesis was that savings of only $15 per month invested in good common stocks — with dividends reinvested — would produce an estate of $80,000 in twenty years against total contributions of only $3,600. If the General Motors tycoon was right, this was indeed a simple road to riches. How nearly right was he? Our rough calculation — based on assumed investment in the 30 stocks making up the Dow Jones Industrial Average (DJIA) — indicates that if Raskob’s prescription has been followed during 1929-48, the investor’s holdings at the beginning of 1949 would have been worth about $8,500. This is a far cry from the great man’s promise of $80,000, and it shows how little reliance can be placed on such optimistic forecasts and assurances. But, as an aside, we should remark that the return actually realized by the 20-year operation would have been better than 8% compounded annually — and this is despite the fact that the investor would have begun his purchases with the DJIA at 300 and ended with a valuation based on the 1948 closing level of 177. This record may be regarded as a persuasive argument for the principle of regular monthly purchases of strong common stocks through thick and thin — a program known as “dollar cost averaging.”
I ran the same study for rolling 10- and 20-year periods starting in 1970 using the total real (i.e. inflation-adjusted) returns of the TSX Composite, S&P 500 and MSCI EAFE indexes in Canadian dollars and some of the results might surprise you. Details will posted next week.
