Bill Gross is Wrong

In this piece, Gross says that stocks have had a 6.6% real return historically and asks how that can continue if the GDP grows at only 3.5% per year.

The answer is simple - you get a dividend of 3% and the value of your stock goes up by 3.5% in real terms to reflect the growth of future dividends in line with the growth of the economy. If you don't pay any taxes and reinvest all your dividends, the value of your asset grows at 6.5% per year and you would own an increasing share of the stock market. But in the long-run no-one can do this. At least they haven't. Even endowments like Harvard spend some of their earnings all the time. The stock prices of companies that don't pay dividends but make normal profits would go up at 6.5% per year. Berkshire Hathaway is a company that hasn't paid dividends for more than 40 years and its stock price has gone up enormously. At some point the model of buying more and more companies will run out of steam. In fact, I expect that after Buffett dies the managers will end up breaking up the company.