The Markets Are Telling Us…

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Dear fellow investors,

“The stock market is there to serve you and not to instruct you.” – Warren Buffett. May 5th, 1997 at the Berkshire Hathaway Annual Shareholder Meeting

The future is always unknown. One of the most common fallacies that we’ve heard over the last two years is investors saying to us what the stock market or bond markets are telling us about the future. We find this interesting because it doesn’t tell you anything. As Buffett says, these market prices can serve you, but they can’t instruct you. We would like to share a couple of historical examples to settle this debate.

Let’s begin with what the markets were teaching investors during the early 1960s. Below is a chart of the 10-year U.S. Treasury back to 1962 (as far back as Bloomberg goes) and inflation back to 1960. During the early 1960s, inflation was subdued at less than 2% and interest rates stay persistent at around 4%. To use the current illogical thinking of today, an investor at the beginning of 1965 could be asking what the markets were telling us about the future.

The answer was nothing. The 10-year Treasury went from 4.20% to 7.88% while inflation ended the 1960s at 6.20%. The person that bought the 10-year note at the beginning of 1965 nominally made less than 5% on a total return-basis and lost over 15% in real returns. If the stock market investor purchased the S&P 500 at that same time, they would have made roughly 27.50% cumulatively, including dividends reinvested. If you count the cumulative inflation of that period (that amounted to over 20% total), the S&P 500 investor made 1-2% compounded in real returns. The low inflation and steady Treasury rates of the early 1960s taught them nothing about the future.

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