By Gary North

> Gary North's REALITY CHECK
> Issue 66 July 12, 2001
> The U.S. Government's Bureau of Labor Statistics
> provides a handy-dandy inflation calculator. If you want
> to see what has happened to the dollar, here is where to
> begin. It's on the BLS's home page:
> Look for the third category, INFLATION AND SPENDING.
> The second link is "Inflation Calculator." Click it. A
> box will pop up on your screen.
> Enter 1,000 in the box. Use the pull-down box to
> select 1966. Then click "Calculate." You will see how
> much money it takes to match the purchasing power of $1,000
> in 1966. The result: $5,484.57.
> (If you know someone who probably hasn't seen this
> inflation calculator, forward this newsletter to him.)
> After taxes, your investment of $1,000 in 1966 had to
> net you this much money for you to have broken even on an
> investment held for 35 years. If the investment, after
> taxes, is worth twice this -- $10,970 -- then you have made
> approximately 2% per year on your initial investment of
> $1,000, not counting any income generated from it.
> The Dow Jones Industrial Average closed yesterday at a
> good deal less than less 10,970.
> In early February of 1966, the Dow Jones Industrial
> Average went over 1,000 on an inter-day basis. It then
> fell back, and it did not hit 1,000 until 1973. Then it
> gave that back.
> Stock market investors were paid dividends, but these
> fell to about zero in the 1990's after expenses from their
> mutual funds were deducted. They also paid earned income
> taxes on any net dividend income, 1966-2001. Then, after
> selling their shares, they must pay capital gains taxes.
> This indicates that the standard stock market
> recommendation to "buy and hold" has paid off poorly in
> terms of post-tax purchasing power for anyone who bought a
> typical portfolio of shares early in 1966. He would have
> been far wiser to have bought a rental home or homes,
> borrowing most the money, and using the rents to pay off
> his property. He would also have been able to depreciate
> the property for income tax purposes.
> This doesn't mean that smart stock market investors
> lost. Warren Buffett surely didn't lose. It means only
> that "buy and hold" has not been a good recommendation,
> despite all the hype by academic economists who have made
> most of their money from the appreciation of their homes.


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