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Does Warren Buffett think that investors expect too much?

The problem is the starting point in predicting modest returns for equity investors. [Expectations were too high.] In 1999, a Gallup poll showed people expected 15% [returns from stocks] in a low inflation environment. In a low inflation environment, how much will GDP grow? If there’s 2% inflation and 3% [real] growth, that’s 5%. This will be the rate of corporate growth, so if you add dividends, you get 6-7% [annualized returns] before frictional costs — and investors incur high frictional costs (they don’t have to, but they do) — which adds up to 1.5%. [This 4.5-5.5% is] not bad.

Charles Munger: My attitude is slightly more negative than Warren’s.

It [6-7% growth] is not the end of the world. If we get 5-6% of the pie — those of us who put our capital out — I don’t know if it’s exactly what someone who designed the universe would come up with, but I don’t think that’s crazy in either direction. It provides a pretty decent real return in a period of low inflation. If you get high inflation, you could get very low real returns, even negative.

Charles Munger: I don’t you’ll get real help from me or from economists either. If an economist saw a job going to China, he doesn’t care — it saves costs. But if all the jobs go to China, what then? People actually get paid to say things like this.

Maybe we should export all economists to China.

Source: Berkshire Hathaway Annual Meeting
Time: 2003

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