Carty Capital Management
CFP | Fiduciary



Rose Colored Glasses

Good Morning,


Since 1982, no matter the economic picture through the windshield or in the rearview mirror, I have consistently been told I wear rose-colored glasses.


That would overlook the times we have felt concerned about events.  However, the overpowering signal from history is quite simple indeed.  Argue as some will, but many decades of history suggest it is far more valuable to wear those rose-colored glasses - even during the bad periods.


They don't come to stay.  They come to pass.


And we get stronger...even if painful at times in the process.


Quiet Confessions of an Optimist


Recently Mr. Buffett hinted at the idea that the DOW likely reaches 1,000,000 in another 100 years.  My hunch?




He is likely way too conservative.


As we all await the latest earnings parade, let's sit back and see what it all really means.  To the numbers please:


That 1,000,000 DOW sounds like pie-in-the-sky right?  Well, Mario Gabelli has put pencil to spreadsheet burning the midnight oil and found that a one-million Dow in 2117 would amount to right at a 3.9% compound annual growth rate (CAGR).


Now bear with me (pun intended) and slip those rose-colored glasses back up a bit.  Note the actual CAGR since 1917:


It is closer to 6%!


"You are Nuts Williams"


I might be - but a century ago, America entered World War I against Germany. The Dow industrials declined to 65.95 before closing out the year 1917 at just 74.38.


That was a big rally off those lows but the Dow sank even lower (under 42) in 1932 and remained under 100 in early 1942.  Imagine telling someone back then that less than 80 years later the Dow would be over 22,000!


Not on your life would you have been seen as sane.


The point?  Indeed, there was no smooth sailing early on.  Note also, the math geeks will tell you that the Dow did dip just under the 4% CAGR hurdle in the 1970s - up through 1982.  Remember?  That was the last "lost decade."


However, after that - as the Boomers began their life's trek, it was off to the races.  Even though 2008-2009 were dark marks on the psyche of investors worldwide, that fall did not take the long-term CAGR below 5%.


With the Dow closing last Friday at 22,773.67 - the 100 years just completed saw a 306-fold gain (+30,518%).


A similar gain in the next century would take the Dow to over 6,500,000, hinting that Mr. Buffett is, well, a tiny bit short.


Here is a great chart from Dr Ed and team.  It tells us that when we take it forward from the last day of 2016, a 5% CAGR would bring the Dow to 2,729,000 by the end of 2116.  Notch that up just one percentage point more to a 6% CAGR and you get to over 7,000,000:




More Math - Mind-Boggling


Note these calculations don't account for inflation, but neither do they account for dividends.  History shows us repeatedly that over time, re-invested dividends tend to not only compound well but also offset long-term inflation.


In fact, using the S&P 500, Dr. Ed tells us that total returns (with reinvested dividends) have risen 9%-11% (CAGR) since 1950, or 6% to 8% after inflation.


And finally....since the lows of the tech bubble bursting (inclusive of a very painful 2008 and early 2009), the Dow and S&P 500 have each more than tripled and that ugly old NASDAQ is up six-fold as Generation Y just begins to take the reins.


In case you might be wondering - that is not too shabby and is slightly above those long-term averages noted above.  In the grander scheme of things, a tripling in 15 long years may not sound great but fear has kept the masses out of most of it.  Even so, let's have some fun and note what the same math does over time:


9-fold in 30 years

81-fold in 60 years, and get this,

729-fold in 90 years


So - as noted, Mr. Buffett may be a long shot.


The Flip Side?


Just for grins, let's look at the other side of the prism.  You see, sometimes, the whole world we see changes dramatically - if we just shift the prism through which we see it slightly.


I bring to you a perfect example of fretting over nothing.


The US Dollar.  Recall that as 2017 began, the dollar had been rallying for a couple of months into the end of 2016.  Expert after expert told anyone who would listen that the dollar's "strong rally would surely decimate the earnings potential for many companies with global revenues...."


The chatter went on and on, with millions of gallons of digital ink wasted on the topic - and billions of dollars of expensive "movement" as brokers drove change through client portfolios and positions due to that crack, group-think analysis.


As one might guess, the dollar started off 2017 by immediately tanking - all the way until about two weeks ago.  And what do the same experts tell us now?  Well of course, "the dollar's plunge is getting worrisome, soon to ignite troubled inflationary pressures, jacking up rates and bringing the whole world to its' far-too-indebted-knees..." or something close to that...


Alas, the dollar has bounced - and as you might have already figured out - chatter is brewing that this time, yes - this time - it really will blow-up the earnings story for our multi-nationals.


The only important part of all this wasted mess, consternation, chatter and angst?


Check the chart below of the US Dollar.  I have drawn a straight line across the chart to help you see the ONLY important thing to focus upon - something that no one will mention because, well, it's not really exciting news.


You see, one can grab a napkin, do a little simple math and realize this stark reality:


The data below will show that the US dollar is almost exactly 1% lower than it was last year at this time....even after that ugly old rally of the last few weeks.


Meaningless indeed.







As Always....


The silent lesson?


We always get to choose what we are going to listen to and take in as important - or let it run off like water on a duck's back.


It's the long-term current we need to invest upon - not the short-term waves which will assuredly always roll ashore.  Those waves are the noise too many get lost in...and the reason the long-term game is so hard to win based on fearful activities.


Lastly for now, as nutty as it seems sometimes, history has more than proven that the rose-colored glasses were the best glasses to wear....for the long-term investor - period.


Play it Again Sam....


The next earnings flood is underway - with a solid start from the banks - all beating.


Expect more but pray for that correction.  I sure would like to see one.


Expect some "buy the rumor, sell the news" chop as the season unfolds.


Demographics Rule The Long-Term Game


Generation Y is set to do much greater things - far beyond what the Boomers accomplished.


Think Demographics, Not Economics.  We are in great shape!


Until we see you again - may your journey be grand and your legacy significant.

InvestingMike Williams