>
>
> But if stock market returns are proportional to profits, and profits can
> only grow over the long run at the same rate as GDP growth (because if
> they outsripped it consistently, eventually they would outstrip GDP), that
> seems to mean it's impossible for the stock market to generate an
> historical average return that's greater than GDP growth over the long
> run. But hasn't it done just that, by historically returning 6%? Under
> this assumption, shouldn't profits have eaten the whole economy long ago?
>
Very interesting question. My half-assed guess is that the answer has something to do with the average (as in investment-weighted) investor's never getting even close to that historical average through
1) Enormous friction costs of financial middlemen (was it 50% of net investment ending up in the pockets of the finance industry, Doug?).
2) A fair fraction of the investing public buying tops and selling bottoms, which may mean that the "average" investment is not peak-to-peak, not trough-to-trough, but peak-to-bottom or close to it. On the other hand, for every buyer there is a seller, so I am not sure this is a logically sound argument.
And then there's the fact that we are looking at stock market returns with hindsight. Today everybody "knows" that buying the SP500 is the way to go in the stock market, but did stock investors know this 30, 40, 70 years ago?
Best I can do.
-- Enrique Diaz-Alvarez Office # (607) 255 5034 Electrical Engineering Home # (607) 272 4808 112 Phillips Hall Fax # (607) 255 4565 Cornell University mailto:enrique at ee.cornell.edu Ithaca, NY 14853 http://peta.ee.cornell.edu/~enrique