Seymour Butts @rastawoj - Twitter Profile

rastawoj retweeted

17 days ago

IF YOU HAVE MONEY IN AN INDEX FUND, READ THIS BEFORE YOUR NEXT CONTRIBUTION!!! Everyone anchors to 10% because that’s what the market did historically. Here’s what it’s actually going to do from here, and what the gap costs you: Realistic number is closer to 6%. From 2011 to 2025 the index compounded at about 14.1% a year. That’s incredible, and everyone has built their retirement plan around it continuing at this rate. But that stretch was powered by 4 things. Multiple expansion, rates collapsing, record profit margins, and enormous buybacks. None of those are available again from here. Look at where we're starting from. Shiller CAPE is sitting above 41. That's the 98.9th percentile of every month since 1881. Only 18 months in history have been higher and all of them were 1999 and 2000. The record is 44.2 from December 1999. The long run median is about 17. Almost every time CAPE has started above 30, the next 10 years of real returns came in at low single digits. The maths on future returns isn't complicated. It's 3 things. Dividend yield, plus earnings growth, plus whatever the multiple does. Dividend yield should average around 1.4% over the decade. Earnings growth realistically 6%, because you can't grow EPS faster than nominal GDP forever once margins stop expanding and buybacks stop shrinking the share count. Then the multiple. Forward P/E is above 20 now, and even a mild drift down over 10 years takes about 1% a year off your return. 1.4 + 6 - 1 is 6.4%. Those are assumptions, not facts, but they're defensible ones. And it's not me being bearish. Goldman's published base case is 6.5%. Worth saying that 1% is the gentle version. If CAPE actually reverted from 41 toward 28 you'd be losing closer to 3.7% a year, and the answer becomes something like 3.7% total. 2 things nobody accounts for on top of that. Profit margins are near all time highs. Capitalism has never let margins stay there forever. And concentration is extreme. A handful of names have driven most of the earnings growth and most of the multiple expansion. That can't continue at the same rate forever. I’m not calling for a crash and I'm not telling anyone to sell right now. But if your plan assumes 10% and you get 6%, you’re planning around roughly double what you’re going to end up with… This is why, in my opinion, you’re much better off picking stocks over the next 10 years than buying index funds. But you have to know what to buy and when to buy it, and most people can’t analyse a company from A to Z and work out whether it’s actually a buy. That’s exactly why I created The Assembly. A team of 8 analysts doing that every single day, FOR YOU. Last week I shared 3 stocks I think do extremely well long term and beat the index. A lot of people are going to look back in a few years and wish they’d joined. You can join from my bio.

NoLimitGains's tweet photo. IF YOU HAVE MONEY IN AN INDEX FUND, READ THIS BEFORE YOUR NEXT CONTRIBUTION!!!

Everyone anchors to 10% because that’s what the market did historically.

Here’s what it’s actually going to do from here, and what the gap costs you:

Realistic number is closer to 6%.

From 2011 to 2025 the index compounded at about 14.1% a year. That’s incredible, and everyone has built their retirement plan around it continuing at this rate.

But that stretch was powered by 4 things.

Multiple expansion, rates collapsing, record profit margins, and enormous buybacks.

None of those are available again from here.

Look at where we're starting from.

Shiller CAPE is sitting above 41. That's the 98.9th percentile of every month since 1881. Only 18 months in history have been higher and all of them were 1999 and 2000. The record is 44.2 from December 1999. The long run median is about 17.

Almost every time CAPE has started above 30, the next 10 years of real returns came in at low single digits.

The maths on future returns isn't complicated. It's 3 things.

Dividend yield, plus earnings growth, plus whatever the multiple does.

Dividend yield should average around 1.4% over the decade. Earnings growth realistically 6%, because you can't grow EPS faster than nominal GDP forever once margins stop expanding and buybacks stop shrinking the share count.

Then the multiple. Forward P/E is above 20 now, and even a mild drift down over 10 years takes about 1% a year off your return.

1.4 + 6 - 1 is 6.4%. Those are assumptions, not facts, but they're defensible ones.

And it's not me being bearish. Goldman's published base case is 6.5%.

Worth saying that 1% is the gentle version. If CAPE actually reverted from 41 toward 28 you'd be losing closer to 3.7% a year, and the answer becomes something like 3.7% total.

2 things nobody accounts for on top of that.

Profit margins are near all time highs. Capitalism has never let margins stay there forever.

And concentration is extreme. A handful of names have driven most of the earnings growth and most of the multiple expansion. That can't continue at the same rate forever.

I’m not calling for a crash and I'm not telling anyone to sell right now.

But if your plan assumes 10% and you get 6%, you’re planning around roughly double what you’re going to end up with…

This is why, in my opinion, you’re much better off picking stocks over the next 10 years than buying index funds.

But you have to know what to buy and when to buy it, and most people can’t analyse a company from A to Z and work out whether it’s actually a buy.

That’s exactly why I created The Assembly. A team of 8 analysts doing that every single day, FOR YOU.

Last week I shared 3 stocks I think do extremely well long term and beat the index. A lot of people are going to look back in a few years and wish they’d joined. You can join from my bio.

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