Friday, March 17, 2006

The Dow hit five-year highs this week. Is it on its way to the stars?

To celebrate the Dow's resurgence, you and your clients might enjoy tackling the question Warren Buffet posed in his Berkshire-Hathaway shareholders letter:

Q. Between December 31, 1899 and December 31, 1999, the Dow
rose from 66 to 11,497. Guess what annual growth rate is required to produce this result.

A. The Dow increased from 65.73 to 11,497.12 in the 20th century, and that amounts to a gain of 5.3% compounded annually. (Investors would also have received dividends, of course.) To achieve an equal rate of gain in the 21st century, the Dow will have to rise by December 31, 2099 to – brace yourself – precisely 2,011,011.23. But I’m willing to settle for 2,000,000 . . . .

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