Real vs. Imaginary Returns – Part II

“The riskiness of an investment is not measured by beta but rather by the probability—the reasoned probability—of that investment causing its owner a loss of purchasing-power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And a non-fluctuating asset can be laden with risk.” — Warren Buffett, in his 2011 Berkshire Hathaway shareholder letter.

In the last post we looked at the US market over the last 65 years. That should cover the investment experience of everybody here unless Buffett is lurking. He’s 95 and purchased six shares of Cities Service Preferred at $38⅛ each shortly after he turned 11 (ca. 1942). That’s almost $4,200 in today’s dollars. Half of that was for himself, the other half for his sister Doris.

Now we’re going to look at the entire dataset back to 1871 courtesy of Robert Shiller. The effect of inflation and deflation on returns is astounding. The distinct upward pivot after WWII suddenly dissolves into a very soft knee. Post-war gains from productivity-driven earnings may have become the fuel of entrepreneurs and investors, but in real terms there was no fire, only a slow burn.

As in Part I, regions where real returns flatlined are shaded. Market history doesn’t repeat, but it harmonizes exceedingly well. Don’t be fooled into that “lost decade” stuff—if you stayed invested, you maintained real wealth. The stock market remains the real investor’s best friend.

Real S&P 500 1871–2025 Graph

There are so many cool things to point out about that plot, but I’m just going to add one. I’ve been talking about those table tops, but what about the fun parts? The real upward slopes? They are very limited in time—and if you’re out of the market or poorly diversified, you’re paying for the meal without eating it.

The following is a sobering 37-year study on this issue. Tune out the naysayers—choose an asset allocation appropriate for you and stick to it until something in your life, not the market, warrants reallocation. The prophets of doom are poison to your profits.

Fidelity Missed Days Chart

In summary, illusions are for artists and salesmen; reality is for investors. Good investing is boring. Focus on inflation-adjusted returns. Fiat currency is a moving target, the gold standard isn’t gold—it’s purchasing power. And with that power, buy contentment.

“Contentment makes poor men rich; discontent makes rich men poor.” — Benjamin Franklin

(Graphs are high-resolution and should be viewed full screen. You can download them.)

Go to Part I

Go to Part III