Tuesday, July 28, 2009

High Growth Doesn't Equal High Investor Returns

So China's economy apparently grew 7.9%. Here's a recent article in the Wall Street Journal. The article makes the point that high growth does not equate to high stock returns. In fact, the economies with high growth produce the lowest stock returns by quite a margin.

Highest Growth Countries: 6% avg annual return
Slowest Growth Countries: 12% avg annual return

According to the article, this is based upon decades of data from 53 countries.

On a $ 50,000 investment...
  • At 6%/year over 35 years you'd have $384,000
  • At 12%/year over 35 years you'd have $2,640,000
...so ignoring this admittedly counter-intuitive reality is costly.

As usual, higher growth attracts competition and the new companies require capital. Labor costs are increased. Pricing power is diminished.

All of this may be good for civilization but generally adds up to reduced return on capital for investors.

It's a widely held false notion that high economic growth is correlated with high stock returns.


Related posts:
The Growth Myth Revisited - Jul 2009
The Growth Myth - Jun 2009
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