Some Good News ... And a Bold Prediction

Today, I was thinking about the current stock market fluctuations and discussing them with a woman who was worried about her retirement plan. Something occurred to me after I had driven back to my office that I think should offer some hope to long-term investors out there (this should be anyone with a 401k plan or an IRA account).

We often talk about Berkshire Hathaway, the great company that rose from $8 per share in the 1960's to more than $100,000 per share today. On its balance sheet are investments in corporations including The Washington Post. Many of those investments were made in the 1970's when the United States faced a bear market just like the one we are encountering today - some stocks trading at 4x earnings (for information on this, check out the article: P/E Ratio - A Quick and Dirty Way to Determine Relative Value, others falling 90% or more despite the near certainty that they will be generating higher profits in ten years, even if the short-term is bumpy. The Washington Post investment, for instance, is worth billions but it originally had a cost basis of roughly $10 million. For two or three years after Warren Buffett invested in those shares, they sat on Berkshire's balance sheet at a 50% paper loss. Yet, those companies are now some of the best long-term winners for the firm today.

Right now, you can plant the financial seeds to the future you want. Every day, in fact, is an opportunity to plant (or harvest) seeds in every area of your life - relationships, education, independence, skills, experiences, or money. If you don't know enough to invest in individual stocks, the historical odds are fantastic that if you begin dollar cost averaging into a low-cost index fund today, you will be substantially richer in ten years.

A Bold Prediction
In the history of the site, I've often told you that long-term, you will be better off if you are disciplined but the specifics of that have been vague. This is the first time in my life that I am willing to conclusively state that it is my opinion that those following such a program starting today, who continue to invest regular, fixed amounts regardless of what the market does in a broad-based index, reinvests all of their dividends, and protects that money by not touching it, will find themselves substantially better off one decade from now. To put it in quantitative terms, my best guess is that every $1 invested today would triple in value to roughly $3.11 over that time frame (which some specific investments doing far better if you have the skill to select them). That assumes a rate of return of around 12% per annum, compounded. All I can tell you is that at this point, my businesses, my family, my friends, and my personal resources have are being deployed at full-force to purchase stocks to the point that I'm draining the operating basis several times daily and having the money electronically transferred from our merchant bank directly to our brokerage firms.

Now, that doesn't mean your investments couldn't fall another 50%. What it does mean, however, is that it is my belief based on my own experience as well as decades of research that by the time those ten years have passed, the steadily upward bias, which comes in fits and starts, and the reinvested dividends will have achieved those results.