Dow 1 Million!

Warren Buffett gave an interview to Forbes in 2017 where he made a bold prediction.

The prediction? The Dow Jones Industrial Average (Dow) would eclipse 1 million at some point over the next 100 years.

At face value, it seemed ridiculous.

1 million???

The Dow was at 22,400 when Buffett made the remark. 1 million was a galaxy away.

But Buffett showed the math might work in his favor, pointing out the Dow was at 81 a century prior.

The climb from 81 to 22,400 amounted to a nearly 280x return.

The climb from 22,400 to 1 million would only require a 43x return.

Barron’s recently hosted their annual investing roundtable with a few prominent investors to discuss markets, trends, and general outlooks. The group was asked to make a prediction on what the market might return this calendar year.

Answers were the usual suspects:

“Up five-percent.”
“Down five-percent.”
“Positive mid-single digits.”

Nothing remarkable—no prediction that made you pause.

Then Mario Gabelli provided a comment similar to the one Buffett made a half-decade ago:

“The Dow will be the equivalent of 1 million in 40 years and was under 1,000 40 years ago. So, invest long term.”

Today, the Dow sits at 38,000.

1 million in 40 years???

It’s been seven years since Buffett made the comment and it still feels like a galaxy away.

In Morgan Housel’s new book, Same as Ever, he makes an interesting point about how easy it is to discount the progress that is achievable.

He uses an example:

If someone were to say, “what are the odds the average person will be twice as rich fifty years from now?’” it sounds preposterous.

It feels far too ambitious.

But if that same person said, “what are the odds we can achieve 1.4 percent average annual growth for the next fifty years?” it sounds extremely reasonable. Maybe even pessimistic.

But those two sentences, of course, are the same.

It’s an interesting reference point while sorting through Gabelli’s prediction.

The Dow would need to return 8.8% annually between now and 2064 to hit 1 million.

If you look at capital market assumptions, an 8.8% annual return is well above any long-term forecast.

But if you look at the previous 40-years of U.S. market returns, it’s slightly below what investors actually experienced. Over the last 40-years, U.S. stocks returned more than 10% annually.

In short, it’s in the realm of possibility, even if unlikely.

And would it really matter if it took an extra 5-10 years—instead of the 40-years Gabelli predicted—to reach the 1 million mark?

Sitting here today, it seems impossible, regardless of time horizon.  

Einstein’s quote, “compounding is the eighth wonder of the world” comes to mind. It’s really hard to understand the exponential function, or in simpler terms, rapid and continuous growth.  

Specific to compounding, one fact that doesn’t get enough attention: most of compounding’s magic doesn’t happen until the end. 

The early years of compounding have a “yawn factor” (translation: boring) associated with them.

For example, the path to Dow 1 million—under Gabelli’s assumption—likely wouldn’t be what you expect.

From today’s starting point, it would take the Dow 32 years before the Dow hit 500,000.

Then only eight short years later, it would eclipse 1 million.

As Einstein alluded, compounding is like magic. But it takes a while, which makes it easy to ignore.

For investors, the minutiae of the day captures us all.

How will the Middle East impact markets?
Can the Mag 7 hold up?
Do new all-time highs mean a sell-off looms?
Will an election year cause the world to end?

Stating the obvious, the future always has and always will bring lots of bumps and bruises.

But don’t forget about the slow and subtle progress that isn’t always visible. And pay heed to the fact that a lot more might be achievable than we realize.