Lesson: 11 | 12| 13 | 14 | 15 | 16| 17 | 18| 19 | 20

Investment Theory: Population Growth and the Value of Equities Population Growth and the Value of Equities : continued

The End of the Great Age

Population Trends and the Value of Equities

If world population stabilizes and even declines during the twenty-first century as some demographers now predict, and if global corporate earnings continue to be correlated with population growth, under current investment theory the intrinsic value of equities, as an investment class, will decline.

The logic is as follows:

  1. The value of equities depends on the future stream of dividends.

  2. The future stream of dividends depends on future profits.

  3. Future profits (for the entire economy) depend on the size of the population.

  4. Therefore, if population growth halts or enters into decline, this is likely to have a negative effect on the value of equities.

Much of the theoretical value of stocks depends on dividend payouts that will occur fifty to one hundred years hence.

Plugging negative growth parameters into John Burr William’s equations leads to rapidly decreasing theoretical values for equities.

At some point, with sufficient negative growth, stocks become worthless, except perhaps for residual value of assets on liquidation.

If dividend and earnings growth becomes stable or negative, market capitalization of securities traded on the New York Stock Exchange may enter into permanent decline.

The End of the Common Stock Legend?

The Common Stock Legend will become a just another curious fairy tale, and future generations may have difficulty understanding how their ancestors could have been misled by such a fanciful myth.

The cult of the Growth Stock, so powerful today, may be hard to conceive if increasing earnings and dividends become rare.

Prognosticators of declining population do not expect the corner to be turned for fifty years or so.

However, the value of today’s equities is related to corporate earnings in the second half of the twenty-first century.

A capital-gains addict may hope to have sold his stock by then, having successfully funded his retirement, but perhaps not as advantageously as the optimistic returns he had plugged into his Quicken model at the beginning of the century.

The Future: The One Variable We Never Know

As we move closer to the year 2050, today’s distant future will become the short and medium term of tomorrow’s investors.

When we teach savings and investment habits to our children, we should remember the wisdom of Kahlil Gebran, the Lebanese-American poet, who said about descendants:

Their souls dwell in the house of tomorrow, which you cannot visit, not even in your dreams.
You may strive to be like them, but seek not to make them like you,
For life goes not backward nor tarries with yesterday

The future is hidden for us and for our children.

Even with negative population growth, it is possible to imagine circumstances in which a stock market may thrive.

It is as unwise to yield to pessimism, as it is to assume that the glass will be always more than half full.

Nevertheless, in valuing equities, prudence dictates that we place greater emphasis on near-term cash payback than on hoped-for growth in times beyond our understanding.

The end of the Great Age argues for a return to conservative methods of stock valuation and proper attention to dividends.

Investing Beyond the Great Age

Benjamin Graham and Warren Buffett were able to do extremely well by working hard to apply commonsense to stock selection in the waning years of the Age of Dividends.

We might wonder how well they might have done if they had started to invest modest savings in 1999, at the end of the Great Bubble.

Clever balance sheet analysis and appreciation of the nuances of intrinsic value may not be enough to overcome a scarcity of fairly-priced stocks.

Much of today’s Wall Street chatter deals with technology, mergers and acquisitions, and micro-variations in quarterly earnings of traded companies.

However, beyond the end of the Great Age, what matter perhaps will be not the products of invention and science but rather of the commonsense to organize society in a reasonable fashion.

Even as mankind moves beyond the Great Age of expanding population, the world economy is likely to continue to grow.

We need but contemplate the poverty stricken regions of Africa, Latin America, and Asia to realize the vast amount of economic development that remains to be done.

Just the task of building modern economies in Africa could offer greater economic rewards than any of the technological marvels of the 1990s.

Capital needed for third world development of public education, industry, agriculture, roads, bridges, and civil construction is vast, even if world population growth were to cease tomorrow.

Technology Is Not The Only Good Investment

Even if third world countries fail to provide investment opportunities and remain poor, the advanced nations need vast sums for maintenance and repair of the costly infrastructures of civilization.

In much of North America, the inner cities are decaying and falling into disrepair, bridges are rusting, telephone systems are outdated, dams are aging and settling, schools are falling down, and water mains and sewers are leaking.

In the light of what needs to be done, the colossal diversion of capital into the pockets of professional managers during the Clinton years is all the more appalling.

Developed countries have enormous potential to reform and reorganize existing systems.

The creaking, archaic U.S. educational structure, now exceedingly inefficient and frightfully expensive, has only begun to explore electronic distance teaching or the virtual instructional worlds of 3D graphics and gaming.

Progress could also be made by eliminating the debilitating tort laws that suck vitality from American business.

The nation could stimulate economic growth by closing down labor monopolies that bar rational organization of honest work.

Much of the potentially valuable, but now wasted urban landscape, could be recovered by re-zoning, expropriation in eminent domain, and the purging of bad laws in everything from rent control to building codes.


The developed countries could also reindustrialize; reversing the hollowing out of manufacturing that went on in the last half of the twentieth century.

In 2001, the United States had a trade deficit in textiles, shoes, steel, automobiles, trucks, television sets, machines for data-processing, office machines, electrical machinery, power-generating machinery, metalworking machinery, industrial machinery and optical goods.

Changes in tax law, labor legislation, and operational rules could encourage the rebuilding of basic industry with capital intensive, sophisticated tools, bringing the extreme productivity increases that would permit both high wages for workers and dividends for stockholders.

Declining populations do not necessarily portend the end of equity markets or economic stagnation.

However, the transition to the next age requires wise leaders with a willingness to cut away the encrusted burdens of the past.

The Leadership Variable

During the new century, as in the past, some countries will have leaders that know how to attract immigration and capital, while other nations will be left out, hampered by inept politicians and obtuse policies.

Citizens of countries that encourage domestic savings to go abroad, while discouraging immigration, are likely to stagnate.

The United States, as the world’s premier capital market and the owner of the international currency franchise, has a unique opportunity to capitalize on its advantages and lead the world in economic progress.

However, if the Republicans are successful in discouraging immigration by building walls with armed guards on the Mexican border, while the Democrats persist in raising taxes, codling unions, and over-regulating business, capital will move elsewhere, as it has in recent decades.

Wall Street may prosper, while the American people languish, just as the City of London was able to maintain a certain luster during the dismal socialist decades that followed World War II.

Examining the precarious balance between Democrats and Republicans in the U.S. Congress and the lack of any clear economic vision for the new century from either party, it takes an enormous leap of faith to confidently predict that Americans will still be the leading world power by the year 2100.

Political leadership, although better than some third world countries, still seems to lack the urgency or spark of intelligence needed to reorganize and redirect the country to meet the challenges that will ensue as the Great Age passes.

New York City is illustrative of the difficulty in finding honest leadership and of clearing away a hundred years of political over-burden that has accumulated since Tammany Hall.

It has been easier to invent the wonders of micro-computer circuitry than it has been to remove the corrupt rent-control laws and criminal construction unions than hold back urban renewal in New York City.

In fact, before we hail Fukuyama’s End of History, and the triumph of “Western liberal democracy”, we might contrast the urban decay of Manhattan or Philadelphia with the revitalized cityscapes of Singapore and Hong Kong, miracles accomplished under political regimes that most would consider to be neither Western nor liberal democracies.

A comparison of New York’s decaying docks and wharfs along the Hudson with the shining splendor of Singapore’s harbor shows the immense investment in renovation and modernization that would be necessary for the Big Apple to regain its lost grandeur.

The End of the Great Age and Capital Flow Analysis

Questions about population growth and a conservative, commonsense evaluation of the ability of a country having the leadership capable of facing changing times with creative solutions, suggest that the outlook for corporate profits in 2001 is at least as uncertain as in 1901.

Consequently, price-earnings ratios of U.S. equities of twenty, thirty, or fifty — high compared to long-term averages of fifteen — seem to lack justification.

In measuring equity risk and the shortage of equities, there seems to be no reason to accept claims of a "new paradigm".

Therefore, U.S. equity prices, on the average, even after the collapse of the Great Bubble in 2000, were high, not only in historical terms, but also in terms of reasonable expectations of future earnings.


Before proceeding, check your progress:


Future profit trends, for the entire economy, depend primarily upon:
Choice 3Management skills.
Choice 1The number of MBA graduates.
Choice 2The rate of population growth.
Choice 4The number of new inventions.
Zero population growth, applied to John Burr Williams' equations, will result in:
Choice 1A decline in the intrinsic value of equities.
Choice 3An increase in dividend payout ratios.
Choice 2Higher average return on equity.
Choice 4Greater demand for common stock.
Price earnings ratios in 2000 were higher than in 1900 because:
Choice 3 It was easier to predict the future.
Choice 1 Investors were smarter.
Choice 2 Companies were buying back equities.
Choice 4 Slow population growth was a good thing.

Investment Theory: Capital Flow Analysis   The Almighty Dollar : continued >

Lesson: 11 | 12| 13 | 14 | 15 | 16| 17 | 18| 19 | 20

Suggested Reading

"The National Interest", Magazine Subscription, Quarterly
"The End of History and the Last Man", Paperback, Francis Fukuyama

Fukuyama asserts that history is directional and that its endpoint is capitalist liberal democracy.

"From Hegel to Marx: Studies in the Intellectual Development of Karl Marx", Paperback, Sydney Hook, Christopher Phelps

How the political radicalism and philosophical materialism of Karl Marx issued from the mystical and conservative intellectual system of G.W.F. Hegel.

Books on G.W.F. Hegel
Books on Karl Marx
"The Real Jimmy Carter: How Our Worst Ex-President Undermines Foreign Policy , Coddles Dictators, and Created the Party of Kerry and Clinton", Hardcover, Stephen F. Hayward

As bank robber Willie Sutton said of Carter: "I've never seen a bigger confidence man in my life, and I've been around some of the best in the business."

"10 Reasons to Abolish the IMF and the World Bank", Paperback, Kevin Danaher, Anuradha Mittal

Most of the American public is unaware about how the U.S. government conducts its foreign policy through the IMF and World Bank.

"Crowded With Genius: The Scottish Enlightenment: Edinburgh's Moment of the Mind", Hardcover, James Buchan

Nothing surprised eighteenth-century residents of London and Paris more than the unexpected emergence of Edinburgh as a center of cultural illumination.

"Basic Writings of Nietzsche", Paperback, Friedrich Nietzschestar

Five of Nietzsche's most important works: The Birth of Tragedy; Beyond Good and Evil; On the Genealogy of Morals; The Case of Wagner; and Ecce Homo

Books on Nietzsche
"Intellectuals", Paperback, Paul M. Johnsonstar

Rousseau, Shelley, Marx, Ibsen, Tolstoy, Hemingway, Bertrand Russell, Brecht, Sarte, Edmund Wilson, Victor Gollancz, Lillan Hellman, Cyril Connolly, Norman Mailer, James Baldwin, Kenneth Tyan, Noam Chomsky, and others are revealed as intellectuals both brilliant and contradictory, magnetic and dangerous.

Paul Johnson's History Books

"Japan's Economic Dilemma: The Institutional Origins of Prosperity and Stagnation", Paperback, Bai Gao

Describes tensions within the Japanese economic system that created a bubble in the 1980s, yet became unsustainable and led to a stagnant domestic economy in the 1990s.

"Nature Calls: The History, Lore, and Charm of Outhouses", Paperback, Dottie Booth

In the late 19th and early 20th century, moving the toilet indoors was an important alternative to long-term saving.

"The American Kitchen: 1700 to the Present: From Hearth to High rise", Hardcover, Ellen M. Plante

A unique glimpse of American social and technological history.

"Beyond Malthus: Nineteen Dimensions of the Population Challenge", Paperback, Lester R. Brown, Gary Gardner, Brian Halweil

Population growth projections from the perspective of researchers at World watch Institute

Books on Malthus
"Beat the Nursing Home Trap: A Consumer's Guide to Assisted Living and Long-Term Care", Paperback, Joseph L. Matthews

Practical advice in a cruel world.

"Life Without Father: Compelling New Evidence That Fatherhood and Marriage Are Indispensable for the Good of Children and Society", Hardcover, David Popenoe

Rutger's Professor Popenoe argues that there should be a reversal of the "new family" trend back to traditional nuclear families, with strong emphasis on fatherhood and marriage as basic cultural fundamentals.

"Sex and the City: The First Five Seasons", DVD Pack, Sarah Jessica Parker

A glimpse at mainstream U.S. culture at the beginning of the 21st century

"The Shaker Experience in America: A History of the United Society of Believers", Paperback, Stephen J. Stein

Communal celibacy is a dead end.

"Demolition Man", DVD, Sylvester Stallone, Wesley Snipes, Sandra Bullock

This action Science Fiction movie shows Sylvester Stallone having cyber-sex with Sandra Bullock in the Los Angeles of the future

"Homosexuality and Civilization", Hardcover, Louis Crompton

A history of homosexuality from ancient times until the present.

"Obscenity and Pornography Decisions of the United States Supreme Court", Paperback, Maureen Harrison, Steve Gilbert

15 federal court decisions illustrating the extent to which the First and 14th Amendments protect free speech and the expression of sexually explicit material published in various media formats.

"The Theory of Investment Value", Paperback, John Burr Williamsstar

Published in 1938, this classic defines investment value of common stock as the present value of future dividends.

"Common Stocks as Long Term Investments (1928)", Paperback, Edgar Lawrence Smithstar

A Wall Street classic influential in creating the Common Stock Legend

"Benjamin Graham: The Memoirs of the Dean of Wall Street", Hardcover, Benjamin Graham, Seymour Chatman, Warren Buffett, Marjorie G. Janis

The father of value investing and teacher of Warren Buffett

"One Nation After All: What Americans Really Think About God, Country, Family, Racism, Welfare, Immigration, Homosexuality, Work, the Right, the Left, and Each Other", Paperback, Alan Wolfe

The largest survey of American moral and cultural values ever made, authored by acclaimed sociologist Alan Wolfe.

"Centuries of Success: Lessons of the World's Most Enduring Family Businesses", Hardcover, William T. O'Hara

How family businesses succeed over the generations -- in one case 47 generations!

"From Third World to First: The Singapore Story: 1965-2000", Hardcover, Lee Kuan Yew

The memoirs of one of the greatest leaders of the 20th century.

"Leadership: Theory and Practice", Paperback, Peter G. Northouse

A textbook on leadership adopted by 250 colleges and universities.

"The Third Wave", Paperback, Alvin Toffler

Written 25 years ago, the book about the future did remarkable well, considering the track record of futurologists.

"Financial Reckoning Day: Surviving the Soft Depression of the 21st Century", Hardcover, William Bonner, Addison Wiggin

Is the U.S. economy turning Japanese? The impact of demographic change.

"Before the Industrial Revolution: European Society and Economy, 1000-1700", Paperback, Carlos M Cipolla

What the world was like before the Great Age of rapid population growth.

"In the Wake of the Plague: The Black Death and the World It Made", Paperback, Norman Cantor

Economic and social change brought about by rapid population decline.

"A World Lit Only By Fire: The Medieval Mind and the Renaissance, Portrait of an Age", Paperback, William Manchester

A description of the world with (almost) zero population growth, or where we may be by the year 2100.

"Wealth of Nations", Paperback, Adam Smithstar

Adam Smith viewed capitalism with a deep suspicion, and tempered his celebration of a self-regulating market with a darker vision of the dehumanizing potential of a profit-oriented society.

Books on Adam Smith
"The Industrial Revolution, 1760-1830", Paperback, Thomas S. Ashton

Not just economic history but also social and cultural, war and peace, and the framework of law and institutions.

"A Concise History of World Population: An Introduction to Population Processes", Paperback, Massimo Livi Bacci

The history of human population; changing patterns of its growth, and the effects of migrations, wars, disease, technology and culture. .. the most widely read account of the subject,

"Chapters of Brazil's Colonial History: 1500-1800", Hardcover, Joao Capistrano de Abreu

A beautifully written history of the colonization of Brazil: a land mass larger than the continental U.S.

"Swanee: The Music of Stephen Foster", CD, Joe Weed and Friends

All up and down the whole creation,
Sadly I roam
Still longing for the old plantation
And for the old folks at home.

"The Economics of the Family and Family Policy", Hardcover, Francisco Cabrillo

A global approach to the modern economics of the family, family law and family policy

"Historical Development Of Capitalism In The United States And Its Affects On The American Family: From Colonial Times To 1920 : Volume One", Paperback, Lionel D. Lyles

A giant step out of conventional thinking, establishing the connection between the American Family and capitalism.

"Wild by Law: The Sierra Club Legal Fund and the Places it Has Saved", Hardcover, Tom Turner, Carr Clifton

About the first public-interest law firm devoted exclusively to environmental litigation, with 120 color photos.

Sierra Club Nature Books

"An 'Epidemic' of Adolescent Pregnancy? Some Historical and Policy Considerations", Hardcover, Maris A. Vinovskis

A prominent demographic historian and a participant in both Carter's and Reagan's Presidential initiatives on teenage pregnancy -sets these questions within a historical framework.

"Love and Economics: Why the Laissez-Faire Family Doesn't Work", Paperback, Jennifer Roback Morse

In too many families, the parents' hand has given way to the Invisible Hand in the raising of children.

"High Crimes and Misdemeanors: The Case Against Bill Clinton", Paperback, Ann Coulter

The first Baby-Boomer to reach the White House and the first to be impeached.

"Fatherless America: Confronting Our Most Urgent Social Problem", Paperback, David Blankenhorn

Fatherlessness has been a hot-button issue since 1992, when Vice President Dan Quayle lambasted TV's Murphy Brown for "mocking the importance of fathers."

"On the Pill: A Social History of Oral Contraceptives, 1950-1970", Hardcover, Elizabeth Siegel Watkins

An important reexamination of the role of the pill in the sexual revolution. The impact on the capital market went far beyond the profits of drug companies.

"Time Discounting and Future Generations", Hardcover, Erhun Kula

A member of the New York Academy of Sciences challenges the use of discounted future values in economic decisions.

"Common Stocks and Uncommon Profits and Other Writings", Paperback, Phillip A. Fisher, Kenneth L. Fisher

Fisher is one of the pioneers in promoting common stock investment. His ideas are regarded as gospel by many investors. This classic, first published in 1958, indicates the origins of the Common Stock Legend.

"The Intelligent Investor: The Classic Bestseller on Value Investing", Hardcover, Benjamin Grahamstar

Commonsense that went out of fashion during the Great Bubble

"Global Investing: The Professional's Guide to World Capital Markets", Hardcover, Roger Ibbotson, Gary P. Brinson

An expert overview of cross-border investing, covering 40 countries.

"World Stock Exchange Fact Book: Historical Securities Data for the International Investor", Paperback, Meredian Securities Markets

A comprehensive reference source containing over 20 years of data from more than 45 stock markets worldwide.

"The Leadership Challenge, 3rd Edition", Paperback, James M. Kouzes, Barry Z. Posner

The best-seller on research of ordinary people achieving individual leadership standards of excellence.

"Leaders and Their Followers in a Dangerous World: The Psychology of Political Behavior", Jerrold M. Post

Professor Post was founding director of the Center for the Analysis of Personality and Political Behavior for the CIA.

External Links

Equations : "The Scientific Evolution of Finance", Don Chance and Pamela Peterson. September 1997. [Return]
Kahlil Gebran : Works, art, museum. Gebran website. [Return]
Electronic Distance Teaching : Northern Arizona University website. [Return]
3d Graphics And Gaming : "The Future of 3D Graphics", Nick Stam. ExtremeTech.com. [Return]
Debilitating Tort Laws : "Fundamental Reform of Tort Law", Paul H. Rubin. CATO.org. [Return]
Reindustrialize : "Reindustrialization, The Capital Question", William R. Hawkins. Foundation for Economic Education. [Return]
Hollowing Out : "The Hollowing Out of America", Patrick J. Buchanan, The American Cause. [Return]
Mexican Border : "Militarizing The Border", Jose Palafox. Covert Action Quarterly. [Return]
Tammany Hall : "Boss Tweed And The Tammany Hall Machine", David Wiles, State University of New York. [Return]
Rent-control Laws : "A History of Rent Control", About.com. [Return]
Criminal Construction Unions : "Union Corruption Update", National Legal and Policy Center. [Return]
Wharfs : "Manhattan's Hudson River Piers Virtual Tour", Old NYC. [Return]
Singapore Harbor : "Pictures of Singapore", Jim Berryman. [Return]

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