Stingy Investor pointed to a set of slides from Fairfax Financial Holdings that began with the quote “We expect to compound our book value per share over the long term by 15% annually.” Averaging a 15% per year return on a stock sounds great right now, but not too long ago it would have seemed very low.
Back in the late 1990s as tech stocks boomed, expectation for stock returns were well above 15% per year. These expectations turned out to be hopelessly unrealistic, but back then many investors wouldn’t have given Fairfax a second look if the company was only shooting for 15% per year.
I find this a useful reminder of how the world and people’s expectations can change drastically. It’s hard to even imagine a world with double-digit interest rates, but they could easily come back again. It’s dangerous to make your plans expecting today’s conditions to persist indefinitely into the future.
Every time I’m tempted to mortgage my house for half a million dollars and invest the proceeds, I think back to my brother- and sister-in-law who at one time had a mortgage at over 20%. That stops me pretty quickly. I don’t really have any appetite for debt.