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Bill Gross of PIMCO – August Investment Outlook 'Cult Figures'

July 31, 2012 | About:

The main points from Gross this month are:

- The long-term history of inflation-adjusted returns from stocks shows a persistent but recently fading 6.6% real return since 1912.

- The legitimate question that market analysts, government forecasters and pension consultants should answer is how that return can be duplicated in the future.

- Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.

I like the willingness of Gross to predict what is going to happen for decades in the future (inflationary solution to debt problems). How could a multi-decade prediction go wrong?

Here is the letter:

​The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of “stocks for the long run” or any run have mellowed as well. I “tweeted” last month that the souring attitude might be a generational thing: “Boomers can’t take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money.” True enough, but my tweetering 95-character message still didn’t answer the question as to where the love or the aspen-like green went, and why it seemed to disappear so quickly. Several generations were weaned and in fact grew wealthier believing that pieces of paper representing “shares” of future profits were something more than a conditional IOU that came with risk. Hadn’t history confirmed it? Jeremy Siegel’s rather ill-timed book affirming the equity cult, published in the late 1990s, allowed for brief cyclical bear markets, but showered scorn on any heretic willing to question the inevitability of a decade-long period of upside stock market performance compared to the alternatives. Now in 2012, however, an investor can periodically compare the return of stocks for the past 10, 20 and 30 years, and find that long-term Treasury bonds have been the higher returning and obviously “safer” investment than a diversified portfolio of equities. In turn it would show that higher risk is usually, but not always, rewarded with excess return.

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Dpradeep73 premium member - 5 years ago

Good Post! However, I need a clarification.

For sake of argument, let us assume that the economy (GDP) from here on never grow.

i.e. GDP Growth = Zero.

Does that mean that stocks wont return anything?

I dont think so.

Stocks will return their free cashflow in one of four ways 1.) Dividends 2.) Stock Repurchases 3.) Acquiring Revenue through M&A 4.) Reinvesting in the business to make it more efficient.

Example, J&J has a Free Cash Flow Yield of 6.3% half of which is paid out as dividends.

So even if J&J sales do not ever grow, we would still get an approximate return of 6.4%

So in my mind, it is possible for Stocks to return in excess of GDP Growth

Can someone please explain what I am missing?

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