As 2009 comes to a close the Dow Jones industrial average stands at 10,428. That is down from 11,497 on December 31, 1999 – yep, ten years and no gain.
The S&P 500 has declined 23 percent since the end of 1999, its first drop for a decade since the 1930s. Including reinvested dividends, investors lost 0.9 percent a year since 1999, the first decade of negative annualized returns in the index’s history stretching back to 1927, according to S&P analyst Howard Silverblatt as quoted in Business Week. The Wall Street Journal puts it this way “Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress.”
What does this mean for business appraisers looking at equity risk premiums? Bloomberg documents that there was no global equity premium over the 30-year period 1979–2009. Since 1979, a strategy of buying 30-bonds has outperformed the strategy of buying stocks and reinvesting the dividends. It may be time to do some serious reexamination of our valuation assumptions.