Is Buffett’s “Dow One Million” Call Ludicrous?

No.

I’m 40 years old and I regularly tell people that I expect to live to see Dow 100,000. Mathematically, this is well within the realm of historically reasonable possibilities. I may even see it higher if they freeze my head and hide it among the animatronic Pirates of the Caribbean like they did for Walt Disney. Yes, that’s him singing along to the Yo-Ho song, every day for the last forty years or so. He’s actually at the Anaheim park, not Florida. Something about the ice not holding together as well in the humidity…

Anyway, last night Warren Buffett was spittin’ that hot s*** at the Forbes 100th Year Anniversary party in New York City. Some color on his remarks from Matt Egan at CNN Money:

Buffett, a reliable optimist about the future of the U.S., predicted on Tuesday night that the Dow Jones Industrial Average will be “over 1 million” in 100 years. That would be roughly 45 times the Dow’s current level of nearly 22,400, which is already a record high.

“Being short America has been a loser’s game. I predict to you it will continue to be a loser’s game,” the Berkshire Hathaway chairman said. Buffett was speaking at a New York event commemorating the 100th anniversary of Forbes magazine.

…and…

So is Buffett’s Dow 1 million call just crazy talk? Maybe not.

Keep in mind that the Dow was sitting at just 81 a century ago. It’s now valued at nearly 300 times that level, as the U.S. has developed into the world’s most powerful economy and its only superpower.

To get to 1 million, the Dow would have to skyrocket 4,500% from here. But it would have 100 years to get there. The compound annual return would only need to be 3.87%. That sounds doable considering that the Dow sported a 10.7% rate of return between the end of 2008 and last year.

Josh here – so why, pray tell, would Buffett’s Berkshire Hathaway be sitting on a cash hoard of nearly $100 billion at last count if Dow One Million is in the cards (for future Berkshire shareholders, at least)? Because this sort of thing doesn’t happen in a straight line. Berkshire’s cash has always served as the sort of optionality that allows its shareholders to ride out the periods of wealth destruction – it’s the silver lining that gives them a chance to see their investment vehicle of choice take advantage of downturns, not merely be the victims of one.

I’ll give Warren the last word:

“That is not a ridiculous forecast at all, if you do the math on it,” Buffett said. “It’s an amazing country we live in.”

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