Sunday, March 3, 2013

The Final Infographic of the Series - Graphing and Understanding Growth of the S&P500

Hello,

Over the month of February, I was hard at work producing a series of three financial infographics, inspired by the work of Dr. Albert Bartlett on compound growth.  I think his message is important and I recommend watching videos of his lectures.  It would be an investment of only an hour and 15 minutes of your time.

Although the first infographics came together quite quickly, I really struggled with the third.  I didn't know what to do.  I wasn't interested in the old saw of compound growth and how it grows your investments.  Who hasn't heard that?  I wanted these infographics to be useful and I didn't think recycling old information was useful.

Long story short, I started mucking around with S&P500 data.  There were a few dead ends, but eventually I calculated the average growth rate of the S&P and the doubling time that corresponded with that rate.  I graphed it and then graphed the actual value of the S&P at each of the doubling times.

The two lines moved in sync for the first 50 years (1950 to 2000), but after 2000, the S&P500 couldn't sustain parabolic growth.  Wow, unlimited growth not sustainable.    In hindsight it seems so obvious, as that is what the esteemed Dr. Bartlett says, but I was very excited to see it.

Next step, more research.  Cutting another lengthy tale short, I came across the work of Dr. Robert J. Gordon from Northwestern University.  He published a working paper called, "The End of Growth?  Faltering Innovation Confronts the Six Headwinds".  A worth-while read.

I used Dr. Gordon's work to help explain the results of the doubling time graph.

I hope you enjoy the infographic.  Please send me a message with any comments or questions you have.  I'd love to hear from you.

In closing, the whole process got me thinking like stink about where the focus of my next investment analysis should be.  It's going to be a macro-view leveraging our financial analysis software and it'll be the topic of my next blog.


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