April 21, 2014 Comments

On Monday, the S&P 500 was up 0.4% while Toronto fell 0.1%

Lately, I was thinking about the fact that even if markets were to provide only say a 7% nominal return over the say the next 30 years, that might still work out to a fairly good real return if inflation is very low. So I decided to graph nominal and real returns from stocks over rolling 30 year periods. The following is the result.

April 21, 2014 - Comments

It turns out that for 30-year rolling periods starting with 1926 through 1955 all the way to 1984 -2013, the nominal total returns (includes dividends) from the S&P 500 have been surprisingly stable and usually in the 10 to 12% range. After deducting inflation the real returns were more volatile. It appears that in high inflation periods, nominal returns did not rise to “hedge” away the inflation. Instead the nominal returns remained fairly steady and it was the real returns that suffered with high inflation.

Warren Buffett had observed this in 1977 and wrote an article about it in Fortune magazine.

Since inflation is quite low today, this data would suggest that real returns from stocks should be higher than average if such low inflation continues for many many years.

In terms of trading, I have made some gains on the preferred shares that I bought in the last several months. I have now entered some orders to sell some of that if the prices rise to a certain point. I will sell the Canadian Western Bank and National bank five year rate reset pref. shares which I bought at $25, if they should happen to hit $26 (which may be quite optimistic indeed). Also I will sell some of my Wells Fargo perpetual pref. shares that I bought around $19.80 if it should hit $21.95, which it is pretty close to. I am just not entirely comfortable holding perpetual preferred shares. And I may sell the rest if it gets a bit past $22.

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