The Investment Scientist

Posts Tagged ‘stock market volatility

My name is Dow. I was born in May 1896 to my father Charles Dow.

In 1900/1/1, I was 66. No, that was not my age, but my level.  People care about my level since the higher it goes, the richer they get.

In the first two decades of the 20th century, I wobbled around: 100% up and 50% down was the norm of the decades. Nevertheless, I ended the two decades at 108.

Dow 1900-1920

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Warren Buffet: “Price is what you pay, value is what you get.

The value of a stock is its dividend stream. (Also see Dividends to rescue in a “Great Depression”.) So far in this bear market, the S&P 500 has tumbled close to 50%. Does that mean dividends will fall by 50% … permanently?!

During the Great Depression, the S&P 500 fell by more than 80%, and yet the discounted value of the subsequent dividend stream barely declined (See Chart). In fact, the detrended value of the S&P 500 dividend stream was fairly stable throughout history while the index itself gyrated wildly. This led Yale Professor Robert Shiller to conclude:

Stock prices move too much to be justified by subsequent changes in dividends.

Chart: Price volatility compared to “value” volatility, from Robert Shiller’s 1981 paper “Do stock prices move too much to be justified by subsequent changes in dividends?”

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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