Thursday, May 10, 2007

When the good times no longer roll

This is the title of one chapter of John Bogle's book.

Here is a brief summary:

* over the past century, the average return earned by stocks was 9.5% per annum
* during the most recent 25 years, the average return was 12.5%
* the speculative return of 3% is far above the business reality
* this has resulted in an increase in PE ratio from 9 to 18 times

John Bogles believes that the current PE ratio is too high and will have to correct in the future.

He ask us to expect a more modest rate of return in the future.

My reading is that it may have to be 3% below 9.5%, i.e. 6.5% for the next 25 years. I think that this is an acceptable rate of return.

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