Buffett and Others Share Their 10 Year Outlook

Warren Buffett

After 10 years of seeing stocks go up, this leaves us wondering what the next 10 will be like. With predictions of at least a slowdown, we should get prepared for this now.

We see all sorts of information and opinions about the direction of stock markets over the short term, where we may be heading this year, this quarter, next week, and even just where we may be tomorrow.

As a general rule though, none of this is should be of interest to investors. Investors, by definition, are in for the longer run, and none of these predictions really address that. It’s not that some of these stories don’t pretend to not be geared toward investors, for instance with things like investors may lose sleep over their positions the market day after daylight savings time kicks in due a tendency for markets to put in down days after this, but investors who have no plans on selling shouldn’t care about these things either way.

This does not mean that investors don’t worry about these short-term predictions, as with many, there is a real disconnect between the time frames they are holding under or at least should be and the scope of these shorter-term market views. Lots of them get excited or upset about short-term performance, the markets are down this week or even today for instance, or are up and making us happy, but this is usually not very relevant to them.

The length of one’s expected holding period with investments will dictate what will need to happen to change our outlook on them, and look to either reduce or close out our exposure to them. Scalpers for instance may act on very small moves, like something going against them a hundredth of a percentage or even less, because they are only in for a short while and this may indicate that the move they are planning on riding is over and the trade has failed.

If we are trading the Dow for instance, or have an ETF that tracks it if we are an investor, a trader may be long gone if the Dow dips 20 points, but an investor may stick to their guns with 1000 point move against them. The task is really all about trading the signals and ignoring the noise, and in this case 20 points may involve a clear signal for the trader, with smaller variations representing the noise.

With a long-term investor though, 20 points is meaningless noise, as is 200 points, and it will take a lot more than this to generate a signal that can be traded the every few years that they are looking to hold these positions generally. If you’re investing long term, you’ve been pretty happy with your position over the last 10 years actually, and the ups and downs that we’ve seen aren’t of the sort that will get long-term investors out generally.

Taking A Look at What the Next 10 Years May Bring

When we look at things like the market’s 10-year outlook, this is the stuff that is much more relevant to investors, and is long enough that even a buy-and-hold icon like Warren Buffett looks at seriously.

Since we’re 10 years into this current bull move, we might think that another 10 years of it may be too much to expect, and we may be right about this. However, the last 2 major up moves lasted 18 and 19 years, so it’s not out of the question.

We just don’t look at how long this has been going on, we also consider how company and economic fundamentals have changed and can be expected to change over the coming decade. These things are not so easy to predict that far out, but we can at least get a sense of where we are headed with this.

If we started investing in 1964, the S&P 500 has averaged a return of 6% since, but the journey has been nowhere near straight up. We actually started this trip with a bear market that lasted all the way to 1982, then saw a very nice bull market take us to 2000. We then lost significantly from 2000-2003, regained most of this loss during 2003-2007, saw things crash from the housing crisis from 2007-2009, and have been moving up since.

Sure, we could have held fast over the last 55 years, and received this 6% return on average, and that’s the strategy of many investors. This does not mean that this would be the best approach or even a good one, compared to actually paying attention to things and looking to be out during a significant part of these major bear markets, which is what we look to do with these forecasts.

Even Warren Buffett keeps his eye on such things though, and lot of long-term investors keep track of longer trends, not just for the sake of passing interest, but to actually have an exit strategy should certain conditions materialize. It wouldn’t make much sense actually to watch the market and care about its direction with no plans of ever doing anything.

With the potential of a long-term trend reversal out there these days, investors are particularly getting busy formulating their longer-term outlooks, including Mr. Buffett. He has been relying on forecasts like this for decades, and while his plan materializing may seem like watching grass grow, he does both plant and mow at various times.

Many investors don’t have a plan at all though, and while they may not want to jump in and out very often, we all should be keeping an eye on things and have some sort of strategy in place, a clear and objective one, not just something like we’ll sell when we get upset or scared enough. Emotions have no place in investing, as these are business decisions, should therefore be based upon how our business of investing is doing and what its business outlook is.

When we do this, we should be focused on real returns, net of inflation, with not only our stock positions but with any other investment as well, as this will provide a clearer picture of what a certain amount of wealth will be worth in the future in today’s dollars. This is particularly important if we’re saving for retirement where we are looking to calculate our future needs and need to have a good idea of how far our dollars will stretch.

What Some Experts are Telling Us

Robert Schiller, who won the Nobel Prize in Economics for his forecasting models, predicts the S&P will average a 2.6% real return over the next 10 years, which is not that exciting but still positive. Schiller looks at the ratio between price and inflation-adjusted earnings.

This still beats what we get from other types of investments such as bonds and savings, but not by a whole lot, so this does indicate that some diversification may be wise to manage the higher risk involved with stocks.

Warren Buffett’s calculations, on the other hand, show us losing an average of 2% per year over the next decade in the market. This would require much more diversification, even to the point where we might want to be out of the stock market altogether, with both higher risk and lower returns indicated here. Buffett focuses his analysis on comparing the S&P’s levels with GDP.

James Tobin’s q ratio, which doesn’t just look at the S&P 500 but all U.S. stocks, tells us that we should expect a net loss of 0.5% over this period. Tobin is another Nobel Prize winning economist and bases his calculations purely on company fundamentals.

Market analyst Stephen Jones uses a modified version of Buffett’s calculations, adjusting for changing demographics. His forecast is the most bearish of the group, predicting a net loss of 4.1% per year over the next 10 years. Jones’ formula has proven to be the most accurate of the four historically, and if this pans out, there really wouldn’t be a good reason to be in stocks at all during this genuine bear market.

The value of this information to investors isn’t to get them to jump the gun here and start selling based upon these forecasts, but rather, to get them more prepared should these less than exciting predictions manifest. If we get a prediction of a bear market and then things start looking more bearish, this can mean more than the same bearish move while everyone is expecting it won’t last.

This is also not an all or nothing thing, where we have to decide whether to keep everything or sell everything. We can and should use asset diversification to direct funds away from assets such as stocks as their outlook weakens, which may include moving out entirely if the situation becomes warranted.

These predictions have produced a battle cry to diversify among some market commentators, but there is really no need to be so anxious that we do a lot of this without good evidence. If they tell us the market will start going down in a couple of years, then we may have a couple of years.

As individual investors, we do not need to anticipate things well in advance as Mr. Buffett and funds need to, as we can wait to see the white of their eyes so to speak before we fire our guns. It’s important to fire them, but we should really wait until the right time and not just fire shots in the air with nothing around yet to shoot at.

We’re not there yet by any means, but this might be time to at least load our guns and keep our eyes on the horizon.


Editor, MarketReview.com

Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.

Contact Robert: [email protected]

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