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Warren Buffett, Jeremy Grantham, and John Hussman on Profit, GDP and Competition

April 19, 2013 | About:
Greenbackd

Greenbackd

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Ratio of Corporate Profits-to-GDP and Returns (1947 to Present)

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Source: Hussman Weekly Comment “Taking Distortion at Face Value,” (April 8, 2013)

Warren Buffett, 1999

[F]rom 1951 on, the percentage settled down pretty much to a 4% to 6.5% range.



In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well.
Warren Buffett, Mr. Buffett on the Stock Market (November 1999)

Jeremy Grantham, 2006

Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.
Jeremy Grantham, Barron’s (c. 2006), via Katsenelson, The Little Book of Sideways Markets.

John Hussman, 2013

In general, elevated profit margins are associated with weak profit growth over the following 4-year period. The historical norm for corporate profits is about 6% of GDP. The present level is about 70% above that, and can be expected to be followed by a contraction in corporate profits over the coming 4-year period, at a roughly 12% annual rate. This will be a surprise. It should not be a surprise.
John Hussman, Two Myths and a Legend (March 11, 2013)

About the author:

Greenbackd
Greenbackd is a former corporate advisory and securities lawyer working in value-oriented activist funds management.

Rating: 3.5/5 (14 votes)

Comments

jonmonsea
Jonmonsea premium member - 1 year ago
I love the rigor of your articles, Greenbackd. How about one on an individual investment opportunity?

Keep up the great work!
Stephen Neumeier
Stephen Neumeier premium member - 1 year ago
Does anyone have any data that shows pre-tax profits? Its seems to me that the amount of taxes paid by corporations has declined in the last 60 years which skews the historical comparison.

Please leave your comment:


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