My research showed that over extended periods of time, stock returns not only dominate the returns on fixed-income assets, but they do so with lower risk when inflation is taken into account. (Location 50)
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But when I investigated the market in depth, I found that overvaluation infected only one sector—technology; the rest of the stocks were not unreasonably priced relative to their earnings. (Location 71)
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If investors had avoided technology stocks during the bubble, their portfolios would have held up very well during the bear market. (Location 84)
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Similarly, much of Warren Buffett’s success was also attributable to holding good stocks over long periods of time. (Location 90)
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bought a group of large capitalization stocks and held on to them for many decades. (Location 92)
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These results confirmed my feeling that investors overprice new stocks, many of which are in high technology industries, and ignore firms in less exciting industries that often provide investors superior returns. (Location 102)
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Rapid economic growth of the developing countries, if sustained, will have a significantly positive impact on the aging economies, mitigating the negative consequences of the age wave. (Location 123)
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Irrational fluctuations in the market, instead of being a source of alarm, give investors the opportunity to do even better than the buy-and-hold returns available on indexed securities. (Location 134)
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The future for investors is bright. Our world today stands at the brink of the greatest burst of invention, discovery, and economic growth ever known. (Location 146)
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The growth trap seduces investors into overpaying for the very firms and industries that drive innovation and spearhead economic expansion. This relentless pursuit of growth—through (Location 153)
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buying hot stocks, seeking exciting new technologies, or investing in the fastest-growing countries—dooms investors to poor returns. In fact, history shows that many of the best-performing investments are instead found in shrinking industries and in slower-growing countries. (Location 154)
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history shows that many of the best-performing investments are instead found in shrinking industries and in slower-growing countries. (Location 155)
Investors who are alert to the growth trap and learn the principles of successful (Location 157)
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a result, we set our investment strategies toward acquiring these ground-breaking firms that vanquished the older technologies, naturally assuming our fortunes will increase as these firms profit. (Location 175)
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There’s one simple reason: in their enthusiasm to embrace the new, investors invariably pay too high a price for a piece of the action. (Location 185)
IBM did very well, but investors expected it to do very well, and its stock price was consistently high. (Location 244)
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Surprisingly, despite all our knowledge of what has transpired in the second half of the twentieth century, identifying the firms that have provided investors with the best returns is not an easy task. (Location 255)
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the cutting edge of the technological revolution. In fact, these four firms produce almost the identical goods that they turned out a half century ago. (Location 271)
None of these top-returning stocks operated in a growth industry or at the cutting edge of the technological revolution. In (Location 271)
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Coca-Cola prides itself on producing its flagship drink with the same ingredients it used more than 100 years (Location 274)
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Each of these firms has a management that focused on what they do well and concentrated on bringing a superior product into new markets. (Location 276)
The more data I analyzed, the more I realized that my findings were not isolated observations but in fact representative of much deeper forces that prevail over far longer periods and over a much wider range of stocks. (Location 280)
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I dissected the entire history of Standard & Poor’s famous S&P 500 Index, an index containing the largest firms headquartered in the United States and comprising more than 80 percent of the market value of all U.S. stocks. (Location 282)
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Dividends matter a lot. Reinvesting dividends is the critical factor giving the edge to most winning stocks in the long run. (Location 292)
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The long-run performance of initial public offerings is dreadful, even if you are lucky enough to get the stock at the offering price. (Location 299)
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Nevertheless, investors must be very mindful of the growth trap: the fastest-growing countries, just like the fastest-growing industries and firms, will not necessarily provide the best return. (Location 335)
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The material contained in The Future for Investors is a natural extension of my last book, Stocks for the Long Run. (Location 339)
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Furthermore, the best long-term stocks will not fall clearly into a “value” or “growth” category. (Location 345)
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But over the last two years I have conducted significant and extensive research that has changed my thinking on this matter. (Location 383)
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But something about Foster and Kaplan’s results deeply disturbed me. If the original “old” companies in the S&P 500 Index did so much worse than the overall index, then the newly added companies must have done much better. (Location 398)
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But over time these portfolios evolve differently depending on the assumptions we make about what investors would do when some of the original firms merge with other firms or distribute spin-offs. (Location 437)
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stocks was simply too high to generate good returns. (Location 468)
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But IBM could not beat the oil company’s return to its investors. IBM’s share price was consistently too high to overcome the gains made by reinvesting the oil company’s dividends. (Location 471)
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Holding a substantial position in an S&P 500 Index fund at the time, I was quite distressed with the surge in Yahoo!’s price. It was clear to me that Yahoo! would drag down the future returns of the index and that this would not be the last time such an incident occurred. (Location 496)
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For example, in 2004 there were approximately 11 billion shares of Microsoft stock outstanding. (Location 508)
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For a long-term investor, dividends become the primary source of investor return. (Location 516)
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What do these findings mean for investors? Should one just buy a portfolio of stocks such as the S&P 500 and hold it forever? The short answer is no. As we will learn in subsequent chapters, there are opportunities for investors to do even better than the returns on the portfolios of original S&P 500 firms reported here. (Location 570)
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But in the capital markets, bad news for the firm often is transformed into good news for investors. (Location 613)
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As long as the firm survives and continues to be very profitable, paying out a good fraction of its earnings in the form of dividends, investors will continue to do extraordinarily well. (Location 615)
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The superb returns in Philip Morris illustrate an extremely important principle of investing: what counts is not just the growth rate of earnings but the growth of earnings relative to the market’s expectation. (Location 619)
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What is true about all these firms is that their success came through developing strong brands not only in the United States but all over the world. (Location 682)
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It is noteworthy that there were only six health care companies in the original S&P 500 that survive to today in their original corporate form, and all six made it onto the list of best performers. (Location 685)
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The first step is to understand a concept called the basic principle of investor return, or BPIR. (Location 714)
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If investors expected firm A to grow at 15 percent over the next decade while firm B was only expected to grow at 1 percent per year, you should buy firm B, not firm A. (Location 718)
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The long-term return on a stock depends not on the actual growth of its earnings, but on the difference between its actual earnings growth and the growth that investors expected. (Location 722)
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Investors will receive a superior return only when earnings grow at a rate higher than expected, no matter whether that growth rate is high or low. (Location 724)
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To find the corporate El Dorados and earn superior returns, your ultimate goal is to find stocks whose growth will be high relative to expectations. (Location 728)
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Expectations are so important that without even knowing how fast a firm’s earnings actually grow, the data confirm that investors are too optimistic about fast-growing companies and too pessimistic about slow-growing companies. (Location 731)
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I then sorted these firms by P/E ratios into five groups, or quintiles, and computed the returns of each group over the next twelve months.6 (Location 736)
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Interestingly, most of the corporate El Dorados listed in Table 3.1 do not come from the lowest-P/E stocks. (Location 747)
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But the average valuation of these firms, measured by the price-to-earnings ratio, was only slightly above the average stock in the index. (Location 750)
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One of the biggest advocates of searching for growth stocks at reasonable prices is Peter Lynch, the legendary stock picker for Fidelity’s Magellan Fund from 1977 through 1990. (Location 767)
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Their secret: above-average earnings growth for a long period needs only a small growth advantage to do fabulously in the long run. (Location 781)
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Persistence of good earnings growth is better than transience of superb growth. (Location 782)
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The corporate El Dorados had earnings growth expectations that were only slightly above the market average, but they delivered considerably faster earnings growth, especially when viewed over a forty-six-year period. (Location 784)
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None of these firms had an average P/E ratio above 27, and virtually all paid consistent and rising dividends, with a dividend yield near the market average. (Location 785)
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The overwhelming number of these firms have developed high-quality, branded consumer products that have been marketed successfully not only in the United States but around the world. (Location 788)
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This research suggests that investors should be willing to pay twenty or thirty times earnings for these corporate El Dorados. (Location 821)
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The best-performing firms for investors have been those with strong brand names in the consumer staples and pharmaceutical industries. (Location 824)
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The majority of best-performing firms have had (1) slightly higher-than-average P/E ratios, (2) average dividend yields, but (3) much higher-than-average long-term earnings (Location 830)
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Our current sector classification system was reformulated in 1999 when Standard & Poor’s joined Morgan Stanley to create the Global Industrial Classification Standard, or GICS. (Location 860)
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These data confirm my basic thesis: the underperformance of new firms is not confined to one industry, such as technology, but extends to the entire market. (Location 869)
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One clear indication of a bubble is the rapidity of the price rise. Although there are occasions when sharp increases in the price of individual stocks are justified, this has never been true of market sectors. (Location 895)
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Unfortunately, these analysts violated a fundamental rule of investing: never buy stocks, especially large-cap stocks, selling at “hefty P-E premiums to the general market,” particularly for the long run. (Location 915)
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The financial sector experienced mediocre returns, despite the rapid expansion of its share, because much of its growth has come from the addition of new firms to the index. (Location 945)
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Further fueling growth in market share was the addition of brokerage houses and investment banks. (Location 952)
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The health care sector, like the financial sector, has steadily increased its share over the past half century. (Location 958)
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Both the consumer staples and consumer discretionary sectors target the consumer, but that is where the similarity between these sectors ends. The firms in the discretionary sector have gone through much turmoil while the staples sector has nurtured the best tried-and-true companies. (Location 971)
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In Chapter 2 I explained why market value does not necessarily correlate with investor returns. This chapter shows that it holds true for the returns to market sectors as well as individual firms. Figure (Location 1076)
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you are a short-term trader, that is the right question to ask, since returns and market values are highly correlated in the short run. But if you are a long-term investor, chasing hot sectors will lead to very cold returns. (Location 1102)
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Bubbles last much longer than anyone expects, defying the skeptics and boosting the believers. Once the bubble starts expanding, no one knows when it will pop. (Location 1131)
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Bubbles usually form after long periods of financial prosperity. (Location 1136)
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Investor excitement centered on the belief that the Internet would change the way the world did business. (Location 1140)
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I used to think it would take many years before investors’ appetites for such speculation returned. But recent evidence suggests otherwise. (Location 1158)
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One of the cardinal rules in investing is to never fall in love with your stocks. (Location 1205)
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Another sign of a bubble is the enormous valuations placed on little-known companies. On February 11, 2000, I saw a headline scrolling on my Bloomberg Terminal, “Cisco May Be Headed for $1 Trillion Market Value.” (Location 1229)
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I noted that the valuations of these big-cap tech stocks had increased dramatically in just the last five months, (Location 1290)
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Being feted by the news media and investors as a “guru” of the market was a very uncomfortable position for me. (Location 1304)
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The bubble in technology stocks could have lasted another month or another year. (Location 1305)
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I stated that although the tech stocks had declined markedly over the previous year, the earnings growth forecasts for three to five years out were hardly changed. (Location 1314)
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If analysts can be off by nearly 25 percent in forecasting earnings of a quarter that has just ended, what confidence can investors have in their prediction for the coming year—or, for that matter, for the next three to five years? (Location 1323)
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After all these warnings, many assumed that I had made a killing shorting those Internet and technology stocks. (Location 1328)
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As every investor who has studied the market knows, taking a short position in a stock exposes you to unlimited losses, while the maximum gain is the value of the shares sold. (Location 1331)
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The gains for buyers of stock are unlimited, while the maximum loss is the amount invested. (Location 1333)
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Covering the short position, which involves buying back the borrowed stock, provides more buying pressure on the shares that are already being forced higher by momentum investors who long ago jumped on the bandwagon. (Location 1341)
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It is often said that bubbles peak when all the bears have thrown in the towel and covered their short position. (Location 1343)
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These include wide and increasing media coverage, extraordinarily high valuations based on concepts and names instead of earnings or even revenues, and an unwavering belief that the world has fundamentally changed (Location 1347)
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Remember, valuations always matter, bubble or no bubble. (Location 1350)
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Not only are the returns of the IPO portfolios poor, but the risk of these IPO portfolios is higher than that of a diversified portfolio of small stocks. (Location 1429)
if the old consistently outperforms the new, how does the new get created in the first place? The answer is simple. The new firms are enormously profitable to entrepreneurs, venture capitalists, and investment bankers, but not to the investors who buy them. (Location 1464)
Investors and analysts alike who believed that productivity increases would lead to higher profits ignored a classic principle in economics called the fallacy of composition. (Location 1715)
but every individual and firm, by definition, cannot. (Location 1717)
proposal because he understood the fallacy of composition. Buffett knew that these improvements were available to all textiles companies and that the benefits would ultimately flow to his customers in cheaper prices, not to Berkshire in higher profits. (Location 1728)
Industries spent approximately $3 billion on capital expenditures to modernize its plants and equipment and improve its productivity in the twenty years following Buffett’s purchase of Berkshire. (Location 1740)
There is strong evidence that firms with the highest level of capital expenditures suffer the worst performance across the entire stock market. (Location 1744)
Since 1984, the energy sector has had fairly high expenditure ratios and overall good returns. (Location 1778)
Historical economic data indicate that the fruits of technological change, no matter how great, have ultimately benefited consumers, not the owners of firms. (Location 1781)
Instead of boosting earnings, the Internet levels the playing field and increases the ability of consumers to find the best prices. (Location 1822)
To many, technology seems to be the key to success. The ability to produce goods more efficiently seems like the answer to sagging profits. But this is not the case. (Location 1825)
Capital is the source of productivity, but it must be applied in moderation. Too much capital spells the death of profits and the destruction of value. (Location 1835)
Southwest’s triumph is marked by intense management focus on lowering costs and maintaining a competitive edge. In its 1995 annual report, the airline revealed its “six secrets of success.” Number one on its list was “Stick to what you’re good (Location 1866)
But Sam Walton finally found the competitive advantage that he used to unseat Cunningham with devastating effectiveness. (Location 1928)
Wal-Mart, like Southwest, initially succeeded by focusing on the small regional markets it serves. (Location 1938)
At Nucor, executives received no more extra benefits than the factory workers. In fact, the exact opposite was true: executives had fewer benefits. (Location 1977)
rather, they are often in industries that are stagnant or in decline. (Location 2000)
that find and pursue efficiencies and develop competitive niches that enable them to reach commanding positions no matter what industry they are (Location 2001)
History has provided an unambiguous answer to this question: dividends have been the overwhelming source of stockholder returns throughout time, and firms that have higher dividend yields have given better returns to investors. (Location 2021)
Buffett is particularly good at spotting those opportunities. In addition, if he thinks that his own shares are underpriced, he will buy them in the open market through share repurchases, as he considered doing in 2000 when Berkshire A shares were trading below $45,000.7 (Location 2121)
Buffett’s investment strategy focuses on buying stocks or businesses that generate healthy cash flows, the prerequisite of dividends. (Location 2123)
In other words, Buffett’s own investment objective of buying companies with consistent cash flows at reasonable prices mimics investors who reinvest their dividends. (Location 2127)
Many investors do not understand the gravity of this situation. Some acknowledge that Social Security and Medicare may not be available to them when they retire, but they comfort themselves by believing that their own portfolio of stocks, bonds, and real estate is adequate to support them during their retirement. (Location 2834)
asset values will fall, the retirement age will rise, and benefits will be cut across the board. The “remarkable persistence” of strong equity returns that we reported in the previous chapter will be a relic of the past. (Location 2838)
These statistics mean that the predictions about the pending bankruptcy of public pension and medical care programs likely understate, by a wide margin, the magnitude of the aging problem. (Location 2932)
If the age wave hits full force, we can expect a significant impact on asset prices. Inflation will increase as the demand for goods by the retirees outstrips the dwindling supply produced by the decreasing number of workers. (Location 3000)
on retiring at sixty-two, the current retirement age? Real asset prices will fall as boomers try to convert their stocks, bonds, and real estate into consumption goods. Retirees will not be able to generate nearly enough income from the sale of their assets to maintain a standard of living that they reached during their working years. (Location 3062)
increasing retirement age, accepting lower standards of living, or raising taxes on the working young—are inevitable unless other measures are taken. (Location 3071)
Japan also shows that it is possible for countries to save too much and actually reduce living standards. (Location 3098)
The rate of productivity growth required to keep the retirement age at sixty-three in the United States is staggering, on the order of 7 percent per year. (Location 3124)
far in excess of the current U.S. population. (Location 3175)
Discoveries and inventions were made, but many were lost to the next generation. For example, Rome of AD 100 is said to have had a better infrastructure (roads, sewage systems, and water distribution) than many European cities in the 1800s.1 (Location 3244)
There is one reason that stands out: The inability to communicate ideas within and across generations. (Location 3251)