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Long-term, homebuilders still beat the stock market

Posted by: Aaron Pressman on August 24, 2007

It’s the dawn of the middle of the last decade - January 1, 1995. Go back in time, bring $1,000 and answer this question: which will be the best investment choice for the next 12 plus years, the S&P 500, the Nasdaq or an index of homebuilding stocks. Think hard — the Internet bubble inflated the technology-tilting Nasdaq to obscene heights that the index is still far from recapturing. Homebuilders, well, that’s the popped bubble of today. And then you have the dowdy S&P 500, which remains quite close to its all-time despite the recent blow-off.

Thanks to the fine folks at Bespoke Investment Group, who produced the graph below, we learn that it’s the homebuilders (as measured by the S&P 1500 Homebuilders Index) that have the best return, with a gain of 313%. The Nasdaq shows a gain of 238%. And I did a quick check of the S&P 500’s level on December 31, 1994. It was 459.27 versus about 1472 right now, or a price gain of about 221%.


Who cares? Certainly not the hedge funds and Wall Street arb desks that trade from second to second. And probably not the vast majority of mutual fund managers who care more about quarterly, annual and 3-year returns. But all the rest of you, investing for retirement or other goals decades in the future, pay attention. You can worry a lot less than you may about the ups and downs of the market, even very violent swings, if you’re in it for the long haul.

The Bespoke fellows’ graph also makes for interesting reading by bubble historians. As they note, brick and mortar was as far out of fashion as could be at the height of the mania for virtual real estate on the Internet. And then fortunes reversed. Should make for some interesting dissertations in behavioral finance over the next 12 and half years.

One caveat: This is a thought exercise, not the definitive word in total returns. S&P’s web site doesn’t let you calculate the total return (price appreciation plus dividends) for whatever period you want, so the S&P return I cited above is, as I said, just price appreciation. Even when you use more complete information, it’s still tricky to compare returns. Many times “total return” assumes that all dividends are immediately reinvested in the index, which isn’t the way all investors act.

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