Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) CEO Warren Buffett spoke at a recent event celebrating Forbes magazine's 100-year anniversary and made a seemingly bold prediction about the future of the stock market. It may sound far-fetched compared to the current level, but Buffett thinks the Dow Jones will be over 1 million points in 100 years.
Despite how high that number may seem to you and me, there's an argument to be made that Buffett isn't making a bold prediction at all. In fact, the Oracle of Omaha could be making a rather conservative estimate.
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Why Buffett's prediction of 1 million could be too conservative
At an event in New York, Warren Buffett said that he expects the Dow Jones Industrial Average to rise to "over one million" in 100 years. Think about what this means. A Dow Jones Industrial Average of 1,000,000 would be a gain of roughly 4,500% from the current level over the next century -- which may sound like a pretty ambitious target at first.
However, keep in mind that if the Dow Jones hit that level in 100 years, it would translate to an annualized gain of less than 4%. Over the past 100 years, the index has risen from 81 to 22,370 (as of this writing), which corresponds to an overall gain of about 276,000%, or about 5.8% compounded annually.
In other words, it would actually be a bit disappointing from an historical perspective if the Dow Jones were to only rise to 1 million points over the next century. In fact, if the Dow Jones' performance going forward is the same as it has been over the last 100 years, the index would be well over 6 million after another century goes by.
To be fair, Buffett did say that the Dow will be over a million. My point is that, if you think his claim might be a little far-fetched, the exact opposite could be true.
Buffett thinks betting against American business is a mistake
Why did Buffett say that the Dow will rise to 1 million? Simply put, he believes that the success of America is an excellent long-term bet.
"Whenever I hear people talk pessimistically about this country, I think they're out of their mind," said Buffett. At the event, Buffett said that there have been over 1,500 people included on Forbes magazine's annual list of the 400 richest Americans over the years, and:
You don't see any short-sellers... Being short on America has been a loser's game. I predict to you it will continue to be a loser's game.
Still the best way to invest
Buffett's main point is not that the Dow will get to any specific milestone, but rather that long-term investing has always been, and will continue to be, the best way to go. More specifically, Buffett has said in the past that the best investment most Americans can make is a simple low-cost S&P 500 index fund.
In fact, it's Buffett's wish that his own wife's inheritance will be invested in such a way after he's gone. Doing so virtually guarantees that you'll match the market's long-term performance, which has been quite good historically. And if Buffett is right, investors who take his advice will do just fine.
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