Tuesday, March 3, 2009

The President Was Correct

The Lehmann Letter ©

Today President Obama said the stock market remains a good long-run investment, and also said now is a good time to invest because share prices are unusually low.

The President was correct on both counts: The stock market IS a good long-run investment and share prices ARE unusually low.

But, if you reflect on that statement for a while, some interesting arithmetic can come to mind. For instance, suppose the Dow rises five or ten percent a year on average for the next five or ten years. That would certainly be an improvement over what we’ve seen lately. Yet a five percent annual improvement over ten years or a ten percent annual improvement over five years would merely bring the Dow back to 10,000, where it was ten years ago.

That illustrates how far the stock market has fallen. To dramatize the gains required to reclaim the lofty heights of only a couple of years ago, remember that today’s Dow – at less than 7,000 – must grow by more than 100% to reach the 14,000+ level of a couple of years ago. That will require a stretch of time we can all call the long run, and we still won’t be ahead of where we once were.

© 2009 Michael B. Lehmann

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