Hedge Fund Edge, Mark Boucher, John Wiley & Sons, 1999.

The Hedge Fund Edge, Mark Boucher, John Wiley & Sons, 1999.

"Historically, following every secular bull market of high annual returns for a decade, there has been a sharply falling rate of return on the next decade holding of the S&P. Following World War I, the 10-year average annual return of the S&P fell to near 0 percent, not including inflation… For the entire decade prior to 1921, would have had virtually no net return … for the entire decade… Investors holding the S&P for a decade, pretty much any time from 1975 to 1981, actually showed losses on capital for the entire decade, during a time of high inflation." [p. 20]

Bogle's Model

John Bogle, founder and chairman of the … Vanguard Mutual Fund Group … [developed a model that ] "since 1957... has an extremely accurate 0.78 correlation to the actual decade-long annual return of the S&P … through 1993. The computation is fairly simple. Take the initial dividend yield at the beginning of the projected decade, add that to the average annual earnings growth for the past 30 years, and then take the average PE over the past 30 years and compute what rate of return (positive or negative) would have to develop over the next 10 years to achieve that average PE at the end of the term - and add this final number to the previous total… Thus, for 1997 to 20006 we take the S&P dividend yield of 1.65 percent, add the 6.5 percent average earnings growth, and then subtract 3.5 percent for the annual rate required to take the 23 PE down to average over the next 10 years - to get an estimated average annual return of 4.6 percent a year for the S&P from 1997 to 2006." [p. 21-22]

"Big secular bear markets (e.g., 1929-1932; 1966-1981) took 90 percent and 72 percent respectively off the value of blue-chip stock investments after inflation… From 1960 to 1969, investors in growth funds had a very high rate of annual return (over 15%), as their capitalgrew from $10,000 to $35,728. However, $10,000 invested in 1969 actually fell in value at an average annual rate of 8.21 percent through 1975, leading to a 57.3% loss in that 6-year period, not including inflation. The entire 16-year period showed an average annual gain of under 2 percent, with investors needing to sit through a drop in capital of over 60% in a 6-year period to achieve that less than 2% annual gain." [p. 23]

"The after-inflation effects of holding blue chips like the S&P or Dow Jones Industrial Average (DJIA) from the mid-1960s to 1981 were practically incomprehensible… In inflation-adjusted terms, the Dow [declined] in real terms over 72% … during this 15 year period… Investors had to hold on for 30 years from 1965 to 1995 before they broke even in after-inflation terms… Few people have a retirement plan that would allow them to retire comfortably if they simply break even on their investments after a 30-year period." [p. 25]

According to Figure 1.8 on page 31, United States stocks from 1943 to 1997:

Compound annual return:	8.5%
Volatility:	16.1%
Worst Drawdown:	-54.0%
Average Downside Volatility:	-10.3%
Reliability of Gain:	65.0%

"During environments when a market as a whole is being revalued from overvalued to lower-valued somewhere between 75 percent and 99 percent of all individual equities decline." [p. 112]

"over the long run there are three main sources of appreciation in any major market index: (1) dividends (in most developed markets these actually make up 20-30% of long-term gains); (2) growth in the economic earnings capacity of the underlying equities (earnings growth); and (3) multiple expansion (the change in the PE)." [pp. 112-113]