At a time when the Dow Jones industrial Average (DJIA), a widely watched index of 30 large U.S. company stocks, has been hitting records along with other indices, earlier this week, the famously optimistic, but usually quiet and conservative Warren Buffett, predicted that the Dow Jones Industrial Average will be over 1 million in 100 years, up from 22,350 as of yesterday.
The Dow, first created in the late 1890s to represent a basket of 30 big American companies, was at 88 a century ago. It’s now valued at nearly 250 times that level. To get to 1 million, the Dow would have to grow 4,374% from here. But, over 100 years, the compound annual return only needs to be 3.87%. Considering that the Dow had 10.7% annual rate of return between the end of 2008 and last year and gained about 25,298%, or about 5.8% compounded annually over the past century, the Dow at a 1 million by 2117 seems achievable.
Stocks like Apple – which is up 17% annually since 1980, Amazon – up 36% annually since 1997 and Tesla – up over 46% annually since 2010, make the case that Buffett’s prediction is not a ridiculous forecast. Of course, when the markets are at all time high, everyone feels optimistic. But, if history is any indication, the next 100 years could witness several recessions and maybe even a depression or two, not to mention, increased geo-political tensions and crisis situations that could temper the growth of the Dow and the other major indices.
Future Wealth’s View
While none of us, including the man who said it – Warren Buffett, is going to be around to see the Dow cross 1 million, Buffett’s long term view on the market is to be admired. The fact that he is thinking about the Dow 100 years from now, highlights the investment style that has made him a billionaire many times over.
In an industry where hedge fund and mutual fund managers get bonuses for their fund performance on a quarterly basis, one has to wonder, how many of these highly paid fund managers are taking a similar long term view for their clients’ retirement years, which could be anywhere between 10 – 40 years from now.
At Future Wealth, doing the math, we believe Warren Buffett is likely being conservative with his prediction and we project that it is more than likely that the Dow Jones could be well above 1 million in a 100 years. Math tells us that if the DJIA’s performance going forward is the same as it has been over the last 100 years, the index would be well over 5 million by 2117. It is worth noting that the Dow grew 899% in the first 50 years (1917-1967) but appreciated 2443% in the next 50 years (1967-2017). Given that value creation, innovation and speed of economic progress has accelerated in the past 50 years and is likely to continue over the next 50-100 years, we would be disappointed if Dow’s growth does not keep pace with the past 50 years.
But then again, I am not going to be around and neither are you, to confirm if any of this is going to happen by the turn of this century or 100 years from now in 2117.