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famed money manager mutual fund manager peter lynch makes a statement at an interview in 1994 about how the stock market works let's test that going back 27 and a half years see if he's right i'll explain coming up my name is mike bernard the host of the wise money show i'm also one of the certified financial planners right here at corehorn financial group make sure you hit that subscribe button turn on notifications and smash that thumbs up button so peter lynch is one of the most well-known investors of our generation he was a mutual fund manager of the fidelity magellan fund at fidelity up until i believe 1990 somewhere around there and he was you know became popular because his performance was more than double the s p 500 just did astounding during that time period and um became famous because of this and i believe even at the time he was considered the best mutual fund manager or money manager in the entire world at that time now that's during warren buffett's era so very interesting but i saw an article that was breaking down some comments that he made during a speech in early october of 1994.
guys it is just fascinating he makes a simple statement about how the stock market works and i want to test whether that applies today and whether this simple statement has turned out to be true let's check it out basically corporate profits have grown about eight percent a year historically so corporate profits double about every nine years the stock market ought to double about every nine years so i think the next market's about 3 800 today 3 700 i'm pretty convinced the next 3 800 points will be up it won't be down the next 500 points the next 600 points i don't know which way they're going so the market ought to double in the next eight or nine years it ought to double again in the 89 years after that because profits will go up eight percent a year and and stocks will fall that's all there is to it okay so he's saying basically that the stock market follows the profits it follows earnings he's absolutely right it's all about earnings and and back in 1994 he's referring to the dow jones which is around 3 800 at that time and said listen there's going to be volatility i'm not sure whether you know the next 500 points will be up or down 600 points will be up or down but i do know the next 3 800 points are going to be up because earnings corporate earnings profits tend to grow eight percent every year which means the market should double every nine years and the stock market's going to follow or corporate profit should double every nine years and the markets will follow those guys is he right let's check his math and then dive a little bit deeper okay so if the dow was around 3 800 at the time he gave that speech we're now 27 and a half years later by compounding that eight percent growth rate that should mean today the dow should be around 31 520 and we are around 3 500 with the dow pretty stinking close now you might say well that's not close enough we're we're 10 off there but a seven percent compound growth from 27 and a half years ago would get you around 24 000 okay we're not there a nine percent uh growth rate over that time would get you to around forty thousand six hundred we're not there yet um so yes it's around 8 growth rate we're just a little bit higher than that let's check it on the s p 500 at the time that peter lynch gave that talk the s p 500 was around 455 can you imagine that because right now we're over 4 000 um so if you do an 8 growth rate compound since that time that would get the s p 500 to around 37.78 and right now we're around 4 500 4 600 something like that a 9 rate of return would have gotten us to 4 800 so guys his math is right the math is right so guys i've been i've been doing this 20 years and yes there's always distractions there's always current events there's always things are going to be pushing the market around but the market's going to follow earnings okay so if he's right and the math works for this 27 and a half year time period let's then break into what he says go a little bit deeper into what he says to help all of us have a better perspective about what to expect in the market moving forward number one he says listen there's going to be some event there's going to be some event that comes out of left field i think is what he says that's going to push the markets down or push the markets up okay there will be volatility he's right and we're seeing it right now right with russia ukraine no one could have expected that that was going to happen at this time coronavirus no one was going to expect that that was going to happen we still don't know what the actual ramifications will be of all this money printing i mean guys this is it's unprecedented and we're not exactly sure how that's going to all pan out in the economy and the stock market so yes volatility is a feature of investing it is a feature it's not an exception that is just part of investing there will be volatility some up some down some event's going to come out of left field he's absolutely right and then the second point he makes again at the time is he says i'm pretty convinced the next 3 800 points will be up i don't know about the next 500 or 600 points those might be up they might be down but i do know the next 3 800 points will be up oh my goodness guys that is so helpful and let me put it into today's context i'll say it i'll say it differently i don't know if we're going to see a 15 or 20 drop in the markets that could happen and may happen during between here and the next 100 percent increase so that's just another way of saying there's going to be volatility along the way but because earnings should be growing and have grown at a pretty steady rate over time we might see some volatility and we will see some dips along the way but the march between where we are right now so if you're down thirty five thousand and seventy thousand okay we might see a 20 15 percent 15 percent pull pullback along the way i'm sure we will okay but the next 35 000 point swing is gonna be up okay it won't go from 35 to zero it'll go from 35 to 70 but there will be a lot of ups and downs along the way to geek out on this a little bit more i i said that okay the if you take that eight percent growth rate from where the dao was back when peter lynch gave that speech we'd be around um thirty thousand we're actually around thirty five thousand so the market is a little bit higher than that original math of eight percent compound well if you go a little bit deeper okay the earnings per share the actual profits that eight percent profit growth rate we're actually a little below that okay we're a little bit below that right now so the stock market is a little bit high compared to the actual earnings per share well yeah guys i've been telling you that for a while now that seem a little stretched so that suggests we very well could see a 15 20 pullback at some point um soon actually over the next year couple years that's going to be likely however the long-term trend if if corporate profits continue on their historic trend okay should push the markets higher doubling about every nine years and then speaking of that let's go into that third point because the market follows earnings and earnings grow about eight percent a year take a look at historic earnings here that's not flat he said yep about eight percent uh growth rate every year but it's not each and every year there's obviously some cyclicality to it if that's a word right there it's going to move in cycles based on are we in a recession are we in expansion where are we right but over time yeah an 8 growth rate two corporate profits is expected over a long period of time and because the market follows earnings you'd expect the stock market to do the same guys i know that's a lot okay but hopefully that that gives you some confidence because i am i do have a lot of concern about the near term we've got um we've got a lot of converging issues right now in in the economy and in the markets that that the outlook over the next 12 to 18 months might be a little rocky this gives but basically peter lynch says yes yeah i don't know where the next 500 600 point swing would be or to in today's world the next 5 000 or 6 000 swing will be i don't know it could be up it could be down however the long-term trajectory because the markets follow earnings and earnings tend to grow about eight percent a year on average then the long-term return the next 10 years we should see the market mark next nine years should see the market double are you are you structured to participate in that in your financial life are you saving the right amount into your long-term investments do you have the right long-term investment structure and are you doing what's necessary with both of those to achieve your long-term goals work with your certified financial planner on that i hope while this is detailed i hope this is a breath of fresh air and some encouragement to you during a volatile year thus far in the midst of what could be some you know a lot of volatility over the next year or so i hope this is encouraging to you work with your cfp on all of that if you don't have a cfp on your team you can contact one on my team find us online corehorn.com that's cohorn with the k wisemoneyshow.com you can find us there as well or give us a call 574-247-5898 take your next wise step in all right there you have it go out your financial life
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