Why Warren Buffett’s Dow Jones Prediction Is Wrong

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Warren Buffett recently spoke at an event in New York celebrating the 100th anniversary of Forbes magazine.  Forbes first published in September of 1917.

 

Warren Buffett’s Prediction

At the event, Warren Buffett made a bold prediction about the Dow Jones Industrial Average.  He predicted that in 100 years, the Dow Jones will rise to “over one million.”  Just a century ago, the Dow Jones was at 81.  It is currently at 22,349.  To predict that it will be at a million in 100 years from now sounds incredibly high, or is it?

 

If we use the current 22,349 figure, the Dow would need to gain roughly 4,500% from its current level to exceed one million.  That sounds really high.  However, when you consider at the annualized gain of 3.9%, it seems much more palpable.

 

100 Years Ago

For context, 100 years ago in September of 1917, the Dow Jones was at 81.  It has risen to 22,349 currently, or an overall gain of 27,600%.  When you break that down into a compounded annual gain, the Dow has returned 5.8% compounded annual gain, or 10% when including dividends.

 

100 Years from Now

This means that if the Dow Jones performance continues to rise at the same pace of 5.8% for the next 100 years, the Dow would be worth over 6 million in another century, or 6 times what Warren Buffett predicted.  If the Dow somehow was able to eek out an additional .6% each year and reach 6.4%, it would increase to 10,000,000.

 

Long-Term Investors

Buffett shared that there have been over 1,500 people included on Forbes magazine’s annual list of the 400 richest Americans, since Forbes first started reporting these figures in 1982.

 

Many on this list were entrepreneurs.  Others have made their money through real estate or in the stock market.  “But the one thing you don’t see in those 1,500 names: you don’t see any short sellers,” Buffett said.

 

“Being short on America has been a loser’s game.  I predict to you it will continue to be a loser’s game.”

 

Yes, Buffett was specifically referring to the Dow Jones.  However, his point was that long-term investing in the stock market has been, and always will be, the best way to achieving wealth.  I couldn’t agree with him more.

 

S&P 500 Index Fund

Buffett has said many times that the best investment most Americans can make is investing in a low-cost S&P 500 index fund.  Buffett has even shared that when he passes away that his wife’s inheritance will be invested in this manner.  

 

This investment strategy virtually guarantees that it will match the market’s long-term performance.  Historically, this performance has been quite good.

 

Berkshire Hathaway

When it comes to betting long-term on American inventiveness, Warren Buffett has confidently and consistently been rewarded.  Berkshire Hathaway has returned 20% plus annualized return since 1965.

 

That’s not too bad for a billionaire who rehabilitated a failing textile company.  He turned Berkshire Hathaway into a conglomerate of more than 90 businesses worth over $400 billion.

 

Just imagine if Warren Buffet continues to run Berkshire Hathaway for the next 100 years with the same past performance.  With Class A shares worth around $275,000 and a 20% return for the next 100 years, your single share would turn each shareholder into a trillionaire.

 

While that probably won’t happen, that doesn’t mean that you should eschew Buffett’s philosophy.  There are always bumps in the road, yet America continues to prosper.  Hopefully, investing long-term in the future for the next century will continue to reward investors.

 

Readers, are you bullish on America?  What do you think of Buffett’s predictions?  Share your thoughts below.

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34 Comments

  1. Considering Warren Buffet has consistently predicted and significantly outperformed other investors over the course of his life, I’m betting he knows what he’s talking about. We do and will continue to invest most of our money in a low-cost total US stock index fund. I have heard too many professionals and financially independent individuals say the same thing too many times to ignore their advice. So far the autopilot strategy has worked out very well for us!
    Mad Money Monster recently posted…Awesome Fall Dates Guaranteed To Fit Your Frugal BudgetMy Profile

  2. In general, I don’t pay much attention to anyone’s predictions because anyone can say anything they want. If there are enough talking heads making predictions, eventually one will get it right. Just like the lottery.

    With that being said, I have a lot of admiration for Buffett and I don’t discount anything that he said. I don’t really care if he’s right or wrong, but I am willing to bet that the general trend is up and I don’t want to be a short seller.
    Leo T. Ly @ isaved5k.com recently posted…My 2017 Personal Net Worth Review – Q3My Profile

  3. While I don’t believe the Oracle is really an oracle, just a great business manager, I do agree here. (To explain my point Buffet isn’t investing like you or I. He has board seats and manages companies. That’s different). The us market and the world market will continue to go up over time so long as technical innovation persists. I don’t see an end to that.
    FullTimeFinance recently posted…Protecting Yourself From Financial ScammersMy Profile

    • Thanks for sharing Full Time Finance!!! I definitely agree that he has some opportunities that we definitely don’t as individual investors. I have a small percentage of my portfolio in BRK.B invested so I can reap some of Buffett’s rewards.

  4. If you assume 2% annual inflation and add 2% annual GDP growth over the next 100 years, you get to his 3.9% prediction. It assumes the future will be somewhat like the present in these areas. Seems like a reasonable expectation to me, but who really knows what will happen in 10 years let alone 100. Bullish or not, I plan to stay invested at my target asset allocation.
    Tom @ Dividends Diversify recently posted…U.S. Utility Sector: Should You Invest Now?My Profile

  5. While there are some things that I don’t agree with Buffett on, I do love his eternal optimism. I also like his comments towards those shorting the market. I certainly wouldn’t be doing that either. Although it can be a rocky road at times, the market tends to trend upward if history is any guide.
    Mr Defined Sight recently posted…Suicide and Coping with CoworkersMy Profile

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