It sounds as though Warren Buffett is pretty bullish on America. He has optimistically predicted that the Dow Jones Industrial Average will be over 1,000,000 in 100 years. But what does this actually amount to? Let i be the annualized rate of return for the Dow over the next century. The Dow closed today at 22,413. So, we have the following:
22,413 (1 + i ) ^ 100 = 1,000,000
(1 + i ) ^ 100 = 44.6
(1 + i ) = 44.6 ^ (1/100)
(1 + i ) = 1.039
i = 0.039 = 3.9%
In other words, Warren Buffett might just as easily have said that the annualized return on the stock market over the next 100 years will be less than 4%. But you can’t grab headlines with a lackluster prediction like that.