It does look like Buffet does not account for dividends in his forecasts of the 5.3 % return. I read a research paper, where they calculated the value of Dow Jones Industrials Average with dividends being reinvested. They found out that if you started in 1928 and reinvested all dividends untill 2000, the value of the Dow would have been around 250,000 by 1999 yearend. Pretty nice, compared to the 11,750 high that Dow hit in 2000…

Also, do not believe everything that Buffet tells you. Buffet is a market timer. HE does sell stocks occasioanly. He does trade in futures ( currencies). He does use derivatives in his insurance businesses ( he also sold some long-term put options contracts (20 years or more) )
If you read his early partnership letters from the 1950′s and 1960′s , you will see that he always forecasted below average stock index returns.
But he also mentions that he is not in the business of forecasting ( lucky for him) but in the business of buying good solid companies.

Average Dividend Yield (%) of
All Dow Jones Industrial Average Stocks 3.13

This is not included in the figures.
With dividend reinvestment, not looking at 15% tax on dividends its not that bleak.

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Of course, I might just invest more in Berkshire. The very tiny portion of a Berkshire B share that I own is up over 15% in the last three months.

Mike

Individual stocks, or small stocks, or stocks that begin with the letter U might have done much better, of course. The trouble is that the individual investor, hoping to identify the “best” sector, is unlikely to beat the market – since most professional money managers can’t, either.

Statistics, of course, are arbitrary. Vanguard has some interest in convincing people to buy index funds, of course. Buffet has some interest in convincing people he is smarter than an index fund investor, of course. I simply think Buffet’s point is interesting because it challenges a dearly – almost religiously – held belief in the stock market as an automatic wealth creator and for many people it will not be true. As more and more people enter the market through 401(k)s, etc., it’s going to become a more critical question for the US.

“Since 1928, according to the University of Chicago Center for Research in Securities Prices (CRISP), small stocks have provided an annual return of 12.5%, vs. 10.8% for large caps.”

(http://www.vanguard.com/bogle_site/sp20020626.html – dated 6/26/2002 so it caught some of the dot bomb)

With a big crash right around the corner, 1928 should be an unfavorable year for starting any measurement of stock performance, right? So why is the 10.8% figure for large caps so much higher than the 5.3% for the Dow? Some wild guesses:

1. Stocks tanked from 1900-1927.

2. What they’re calling “large caps” is a very different basket of stocks from the Dow.

3. The Dow was not measured consistently for the entire 20th century (like hypothetically, if one day someone decided the Dow should be 30 stocks instead of 100, so it instantly plummeted).