Thursday, October 16, 2014

Please Stop Begging for Higher Rates of Return

A common question I get in my "alternative" financial life style is

"How can I get a higher rate of return on my investments?"

People are sick of the barely existent interest rates on their checking or savings accounts.  People don't like the rates on T-Bills or government bonds.  And people are also tired of the whopping 3-5% on high quality corporate bonds.

Isn't there ANYWHERE I can get a better return?  Why, I need my 401k to magically constantly forever unabattedly perpetually infinitely grow at 10% in order to retire at 62!

The charlatans come in and say "stocks."

But let me beat this dead horse one more time in case you didn't get it the first 40 times.

What is the REAL rate of return of stocks?  And when I say REAL I mean what kind of income do stocks generate?  I know everybody has formed a circle jerk around capital gains and believe that magically constantly forever unabattedly perpetually infinitely increasing stock prices will solve everybody's problem, but what drives those capital gains?  What gives stocks their value?

The answer is -dividends.

It's not "earnings" because ultimately a life long share holder never SEES all the earnings.  They are ONLY paid dividends (and a final cash out should the company be acquired or their shares be purchased), but even that final cash out is dependent upon the future dividends those acquired assets will generate.

So what "rate of return" are stocks truly providing?  What is the real "interest rate" you are earning on stocks?

Well my fine 401k Zombie Lemmings, here it is:

I strongly recommend you plan on working till you're 75.


Mark said...

The low rate of returns is discouraging people from investing in new businesses that would increase economic growth. It's being used for current consumption instead. A lot of money is also being siphoned off by the government into an unproductive welfare state. This is going to lead to people becoming poorer in the future which will put even more strains on the welfare state. The last chance to stop this was probably the Reagan era when books like "Losing Ground" were pointing out that the welfare state increased poverty. That last ditch effort failed. Neither of the Bushes were going to reverse anything and now we're stuck with Obama who doesn't have a clue how an economy runs.

sth_txs said...

Don't forget the 'welfare' also includes military spending and corporate cronyism. Go find the list of the top 10 to 25 defense contractors, their number of employees, and the number of offshoot business of that and think about it for a while.

Welfare is not only those in public housing or receiving other assistance.

Anonymous said...

Actually is the other way around I am afraid. Lower rates of return would ENCOURAGE investing in NEW businesses with the hope that a new business can generate more sells/revenue/profits/dividends than an old business. An old business may offer limited growth of their dividends because as businesses grow they have a harder time to expand, whereas a new business has much higher potential for growth. So bottom line, regardless of the interest rates, a new business can always be more appealing - since unlike an "old" business it offers a chance to capitalize on growth. This is where the profit ultimately comes from.

Pillar Of Autumn said...

The flood of money into the system has contributed to the low return rate for some investments.
Some scarcity of money will lead us back to 10% CD rates we saw in the late 80's. (Maybe)

Grizzly said...

Could you clarify that chart? Is this the dividend yield of the DJIA, S&P500, all stocks, etc.?

Anonymous said...

"I strongly recommend you plan on working till you're 75."

I prefer your Smith & Wesson early retirement plan.

If you plan on dying young, you don't need to worry about saving enough for your retirement and therefore you can tell employers to go fuck themselves.

Anonymous said...

You are going too far and too deep in your analysis.

Dividends is not what gives stocks their stock price value. What gives them their value is the pool of suckers willing to pay the price for those stocks.

Unless the dividend is extremely high with respect to the stock price, such as 25%, 50% then even at 5%, 10% this is still a sucker's market.

And a high dividend is not normal and you could buy a stock at a price that pays a high dividend only to see the company stop paying such a high dividend and the stock price falls and you end up loosing big.

Again, SUCKERS are what gives stocks their value, SUCKERS are what gives fiat currency it's value and SUCKERS are why bosses and HR have the upper hand.

Without SUCKERS, capitalism would collapse. to the radio said...

Rate of return means nothing without factoring in the rate of inflation.

just some guy said...

This is caused by the neokeynesian scum.

Anonymous said...

Captain Capitalism neglected to mention that owning your own business, when it is done right, averages a yearly return of 30%, that's even better than the advertised 10% return for stocks.

Anonymous said...

Capn, the reason why it is proper to use earnings rather than dividends is because earnings that are not paid out in dividends or buybacks are reinvested. They increase the actual wealth of the company, and (given a constant ROI on invested capital on the balance sheet) thus give more future dividends.

So yeah, while the "interest" on stocks might just be 2-3%, the principal grows too, unlike for interest-bearing securities like bonds. And that's fundamental value, based on actual capacity for future profit generation.

-Red Knight

Jones said...

Returns matter when you're pinching every penny out of your speculation before you dump it.

Long-term investments that are generating income from services as well as capital gains aren't speculations, they're proper investments.

When I hear someone whinging about how they're not getting an ideal percentage rate out of their speculations, I think of ways to help add a minus sign in front of that percentage rate ...

Then I speculate briefly, but accordingly.

H man said...

All capital gains are in the end speculation. You should not have to sell your piece of a business to get cash flow out of it. However, that is not how our system works. Too bad if you want a stock for cash flow. There is always going to be someone who outbids you in order to speculate on rising prices.

Anonymous said...

Timberland:One of the few ways you can make double on what you paid in under 5 years. That said, to make the highest returns you need to be like me: in the industry -in a hands on capacity - on a daily basis. If you have to hire a manager ( forester) to do it all for you you can expect to kiss 25-30% of that profit goodbye.If you choose to go it alone and have no industry experience on the ground level - expect to get fucked and hard. Its a ruthless dog eat dog industry that weeds out the naive, weak and stupid very, very fast.