donganaaK Posted November 10, 2014 Report Posted November 10, 2014 Never understood why it was always the case, this example clarified it thoroughly for me. 53% of the world's stock market value is in the U.S. Well, if U.S. GDP [gross domestic product] grows at 4-5% a year with 1-2% inflation - which would be a pretty good, in fact it would be a very good result - then I think it's very unlikely that corporate profits are going to grow at a greater rate than that. Corporate profits as a percent of GDP are on the high side already - and corporate profits can't constantly grow at a faster rate than GDP. Obviously, in the end, they'd be greater than GDP. It's like somebody said about New York - that it has more lawyers than people. You run into certain conflicts as you go along if you say profits can get bigger than GOP. So if you have a situation where the best you can hope for in corporate profit growth over the years is 4-5%, how can it be reasonable to think that equities - which, after all, are a capitalization of those corporate profits - can grow at 15% a year? It's nonsense, frankly ... The other day, I looked at the Fortune 500. And the companies on that list earned $334 billion and had a market capitalization of $9.9 trillion at year end - which would probably be up to at least $10.5 trillion now. Well, the only money investors are going to make in the long run is what the businesses make. There's nothing added. The government doesn't throw in anything. Nobody's adding to the pot. People take out from the pot in terms of frictional costs - investment management fees, brokerage commissions and all of that. But $334 billion is all that the investment earns. If you own a farm, what the farm produces is all you're going to get from the farm. If it produces $50 an acre of net profit, you'll get $50 an acre of net profit. And there's nothing about it that transforms that in some miraculous form. If you owned all of the Fortune 500 - if you owned 100% of it - you'd be making $334 billion. And if you paid $10.5 trillion for that, well, that's not a great return on investment. Then you might say, "Can that $334 billion double in five years?" Well, it can't double in five years with GOP growing at 4% a year or some number like that. It would just produce things so out of whack in terms of experience in the American economy that it won't happen. Any time you get involved in these things where if you trace out the mathematics of it, you bump into absurdities, then you better change your expectations somewhat
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