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What is a reasonable real rate of return?

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  • EntrepreneurMD
    replied




    Delusions of grandeur
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    I respond to that as Warren did at my age.

    Sure. Whatever you say.

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  • EntrepreneurMD
    replied
    I'm sorry you feel like less of a human being than someone else simply because they have more money. Warren would also never have that. Remove your shackles. I for one believe we were all created equal and to move mountains if it is His will. You are indeed, grand - even if you don't know it yet. Follow your dreams and ambitions, not limit yourself to your diploma young whippersnappers. Delusions of mediocrity? No, you are exceptional! Get over your roadblocks to success (and by success I don't mean just financial - no need to limit your identity to a superficial financial status, even if it is gazillionaire). You only get one shot at your best life - will you live grand or mediocre? Always ask. Who is Panscan? And if you're not there, constantly reinvent yourself. Don't stagnate in life. Who was more grand, Jeff Bezos or Mother Theresa? Maybe defining grandeur is in order before tackling that question. Makes me sad to see how little people think of themselves sometimes.

    Find your infinite rate of return in life. I'll never settle for less.

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  • Panscan
    replied
    Delusions of grandeur

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  • EntrepreneurMD
    replied





    That’s why Buffet and I (with shared philosophies) 
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    I wonder if Buffet is out there comparing himself to you as much as you compare yourself to him.
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    Warren and I generally agree on most things, from finances to life philosophy.

    People don't generally compare themselves to people with whom they agree, but to those with whom they disagree. So he has not expressed any comparison with me either.

    Thanks for your interest in our philosophy of buying low and selling high so we get a better than reasonable real rate of return.

    Leave a comment:


  • Tangler
    replied
    This is a great thread . thanks! Great articles linked! After reading more i have come to some learning take home points for myself:
    1. with high valuations expect lower returns (2-3%)
    2. be flexible/ agile ( ex. buy more equities after big drops)
    3. 4% rule should really be 3% rule if you retire early and live 60 years after retirement

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  • JohnW
    replied
    Over my ~20 years of investing, which admittedly has seen more than a few changes to my investment mix and allocations, my personal rate of return is ~5%.  That's nominal and pre-tax, calculated using an XIRR formula in excel assuming portfolio contributions are made in one lump sum annually.  If inflation has been about 2-3%, my real rate of return has been ... 2-3%.  Depressing, for sure, but it is what it is.

    The more I know, based on mistakes I have made, I have settled on a moderated aggressive stock/bond allocation for my retirement accounts.

    So that's a long-winded way of saying, or justifying, a 3% real rate of return for my estimate purposes.  The depressing reality is that my rate of return has turned me into a very good saver.

     

    Regarding my future rate of return assumptions, I have none (not smart enough), but from what I observe I think most investors get tunnel vision when assuming rates of return by only looking at U.S. stock market returns.  One only needs to look at various European countries and Japan to see how exceptional the US has been over the last 100 years.  There are good reasons to think the US will remain exceptional, but also plenty of reasons to think it won't.  But also, if people have material equity allocations outside of the US, then using US-based rate of return assumptions is definitely not appropriate.

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  • Lordosis
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    You could have left yourself out of this. You interjected yourself in with a like of an inaccurate premise.
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    Which premise was it that you disagree with in this thread?

    Or are you referring to the thread from a couple of weeks ago when I added to my kid's 529?

     

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  • CordMcNally
    replied


    That’s why Buffet and I (with shared philosophies)
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    I wonder if Buffet is out there comparing himself to you as much as you compare yourself to him.

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  • Zzyzx
    replied




    the writing on the wall has not convinced me that real rates of return in the markets will improve relative to other investment options in the short term (1-5 years), but should find balance over a longer time horizon.
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    agreed

    https://www.cnbc.com/2019/08/28/ron-insana-it-aint-different-this-time-for-the-inverted-yield-curve.html

     

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  • EntrepreneurMD
    replied




    You can leave me out of this.
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    You could have left yourself out of this. You interjected yourself in with a like of an inaccurate premise.

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  • Lordosis
    replied
    You can leave me out of this.

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  • EntrepreneurMD
    replied
    Hank, that was an incorrect assumption by somebody else. I bought the overwhelming majority of sector fund shares long before then. I purchased some more February 2018 after a great pullback, but buying on pullbacks at that time were much better as the underlying fundamentals were still strong. Of late I have been selling into new highs and refocusing resources as noted above. Buying on the recent pullback without any understanding of the underlying market conditions, as Lordosis did, cost him a poor entry point. That's the difference between those that understand market fundamentals and those that guess.

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  • Hank
    replied


    I saw the writing on the wall regarding the markets about 2 years ago.
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    But I thought you bought into your hot sector funds only 18 months ago?

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  • EntrepreneurMD
    replied




    I have a hard time seeing why anyone who believes in a 1% real rate of return would invest in stocks. Surely if the bar is that low you could hope to beat it significantly with real estate.

    One thing I think yield + long term growth of the company misses is stock buybacks. They’ve largely replaced dividends, but still represent a return of capital to shareholders.
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    Yeah, my CD's on my cash equivalent holdings give a better than 1% real rate of return given today's <2% inflation rate, at no risk to principal. I saw the writing on the wall regarding the markets about 2 years ago.

    At that time, I moved into commercial real estate that has seemingly outperformed a stock market that has been essentially stagnant since late January 2018. I also added another provider and increased offerings at my business which has also been very fruitful. Now my focus is on debt deleveraging. The one percent collectively rely on much more than just market returns to build wealth (business, real estate, good debt/refinances, deleveraging, other). Options are critical.

    That's why Buffet and I (with shared philosophies) either accumulate cash in overextended PE markets or invest in other ventures until the governments get their economies right and there is real value to be had in the markets, often after a correction and recalibration or a prolonged stagnation. Hopefully we're just currently in the latter (I have held on to limited current market holdings) although risk of the former has recently increased. Perhaps the correction of the Fed's mistakes last year can keep us afloat, but the US Fed doesn't have unlimited power over things like consumer sentiment, nationalism(trade war/Brexit), frozen financial markets, global economies etc. The US Fed also seems to be dangerously chasing market rates/conditions, not ahead of it.

    Currently given today's data (today as in this general time frame as people here incorrectly take you very literally), the writing on the wall has not convinced me that real rates of return in the markets will improve relative to other investment options in the short term (1-5 years), but should find balance over a longer time horizon.

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  • Tim
    replied
    Not to knock Buffet, but his views came about due to substantial criticism of BRK. Bluntly stated, BRK was sitting on a ton of cash and NOT investing.

    Come up with a metric, leave flexibility and a plan that makes sense. Price to book and share buybacks at reasonable prices was his solution.

    Cost of capital and capital allocations is just math.
    Buybacks, stock options, and investments are ALL uses of capital. Your share example is misleading if one reads the required disclosures of primary and fully diluted earnings. Dividends, buy backs, and options are all uses of capital which have different investor expectations.

    Sources of capital being stock or debt or past earnings sitting in the bank (so to speak) a different question.

    2007 and 2009 were certainly different capital markets. Issuing stock or debt . Buffet was in a great position, BRK will always keep $20 billion! Not every business has that luxury, thus trim dividends, options and buybacks. Some companies have issued debt and done buybacks. Capital markets and stock markets are two different fields. Focusing on outstanding shares alone or EPS (primary or diluted) is a math formula for disaster.
    Buffet attacked his excess cash issue very effectively using and ill defined “intrinsic value”. Very skilled and comes back to BRK’s ability to make value judgements.
    Additionally, he mentioned “trimming” positions if you want to create your own dividends. From a capital market standpoint, neither Buffet nor BRK have a need to raise capital in the foreseeable future.
    A wise man, but make no mistake he capably talks his book.

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