The 8 Most Fascinating Things I Read This Week

Suppose the stock market doubled in year one and then stayed flat for nine years. Over the 10-year period, the market return is 7.2% a year. ... If an investor invested $1,000 every year in an index fund that exactly matched the market, the investor would have $11,000 at the end of 10 years. Only the first $1,000 doubled. The other $9,000 had a zero return. As a result, the investor's dollar-weighted return is only 1.7% a year for 10 years. ...

Now suppose the stock market stayed flat for nine years and then doubled in year 10. Over the 10-year period, the market return is still 7.2% a year. If an investor invested $1,000 every year in an index fund that exactly matched the market, this investor would have $20,000 at the end of 10 years, resulting in a dollar-weighted return of 12.3% a year for 10 years. It's higher than the market return because in the year when the market return was high, the investor had $10,000 invested, versus only $1,000 invested in the previous example.

Depending whether the market had higher returns in the beginning or in the end, investors are seen either as dumb or smart, even when they made no effort to time the market.

I've written hundreds of articles about the economy in the last two years. But I think I can reduce those thousands of words to one sentence. Things got better, slowly.

Of course, there were peaks and valleys along the way. We tip-toed toward recession last summer. We flirted with a capital-R Recovery in the winter. We returned to the sad new normal in the spring. But basically: Things got better, slowly.

In the 2000s, the impact of the information revolution has come largely via enthralling entertainment and communication devices. How important is this? Prof [Robert] Gordon proposes a thought-experiment. You may keep either the brilliant devices invented since 2002 or running water and inside lavatories. I will throw in Facebook. Does that make you change your mind? I thought not. I would not keep everything invented since 1970 if the alternative were losing running water.

Starting in 1990, as China moved to a free-market economy, real per-capita consumption and gross domestic product doubled, then doubled again. Most households now have at least one color TV. Refrigerators and washing machines -- rare before 1990 -- are common in cities.

Yet there is no evidence that the Chinese people are, on average, any happier, according to an analysis of survey data (link opens PDF file) that colleagues and I conducted. If anything, they are less satisfied than in 1990, and the burden of decreasing satisfaction has fallen hardest on the bottom third of the population in wealth. Satisfaction among Chinese in even the upper third has risen only moderately.

Stocks aren't like professional athletes who have hot or cold streaks. If there are big problems at a company, they usually aren't so easy to fix. Starbucks (NAS: SBUX) did an impressive turnaround and so has Ford (NYS: F) but those are the exceptions. Big problems like to hang around and drain a company.

I'm a cautious investor so I don't even try to time the exact bottom for a stock. A trend always runs much further than you think it could. But Dell has done one thing that I like very much: it initiated a quarterly dividend of eight cents per share. The company shouldn't have much trouble covering that payout. As an investor, that guarantees us at least some money back.

My strategy would be to choose an interest rate where I'd be comfortable owning Dell. For now, I'd say 4% is enough comfort. That translates to a price of $8 per share. If Dell wasn't paying a dividend, then I wouldn't even consider it.