Saturday, August 16, 2008

Some insights into Investing for the Long Run

I have been reading a lot recently especially on topics related to Investing and Economics. It is a pretty interesting field out there. Some pointers which will make you explore them further

Stock Marker Real Rate of Return for the last 204 yrs has been 6.8% ( this is after accounting for inflation)

The average has been the same between two distinct periods namely prior to World War II and after even though inflation was less pre-war, this goes to prove that returns from stock take care of inflation.

The price of a stock is always equal to the net present value of all future dividends and not earnings. Valuing Stock by taking the net present value of earnings grossly over estimates the share price.The assumption is that the earnings when not given out as dividends are reinvested in the company to earn the same rate of return as what the stock is expected to return by an investor.

Real GDP growth is negatively correlated with stock market returns.The underlying reason is that to support a growth in GDP requires a corresponding growth in capital requirements which in turn leads to lower per share earnings. Although the aggregate earnings and dividends increase, the per share values do come down because of the increase in capital.

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