PERSONAL INVESTING THOUGHTS

Today I’ve been thinking about investment returns. When investing in an opportunity what kind of return should we expect?

There are two places to invest, your own business or a business you don’t own.

If you invest in a business you don’t own, then you can own part of it. If you buy stock, you own part of it. If you buy bonds or loan them money, you invest without becoming an owner.

How much do you expect to get back from your ownership? I think 10% per year is a good target return. But, the higher the expectation the lower the chance of achieving your expectation. So, generally lower expectation is considered lower risk, i.e. more likely to happen. Higher expectation is higher risk, i.e. less likely to happen.

The DJIA 30 index stocks have averaged a little more than 6% per year growth since 1935. The S&P 500 index has average a little less than that since its inception in 1969. At times these averages were in higher return territories. This is especially true in the period between 1985 and 2007. I don’t believe the real foundational returns ever exceed the trend lines of about 6%. But, one could venture into this financial situations and make returns greater than 6%. Many have done it.

The companies listed in the 30 Industrials do not all sustain real growth of 6%. There is a range above and below this average. Some might be as high or even higher than my target range of 10%. Others have to be below, maybe even losing money in order for the average to be 6%. And, the same company is likely to experience performance at different levels in the range over time. But. it appears that the average sustainable rate is somewhere around 6%. Always remember the companies listed in these indexes are the better companies. If one stumbles, it is likely to be replaced by a higher performance company. In the stock market, there are many companies that are not making money and some that never make money and eventually fail. The higher a company’s current return, the less likely they are to maintain or increase the level of return.

Be careful how you invest. If it sounds to good to be true it probably is.

There are many investors and investor groups who “gamble” in the open stock market. They chart the market and individual stocks trying to predict the ups and downs. Buying low and selling for a profit not based on the real performance of the companies. In this arena there are always gainers and losers. If someone makes money on the daily or periodic fluctuations, another person has to lose an equal amount.