Our analysis has found that over a long period of time capital gains of return is largely attributable to business value growth. But, the key is to adhere to a simple process that successfully identifies businesses that have the sustainable ability to grow their business values at above average rates and generate superior investment returns in the long-term. Read More @ http://multi-act.com/long-term-sources-investment-returns/ Website - http://multi-act.com/ Contact Us - http://multi-act.com/contact

2. Over 130 years, U.S. equities have
consistently compounded wealth at a
CAGR of 8.9%
(including dividends)

3. Total Return From Equities =
Dividend Yield + Inflation + Real Growth in + Valuation Ascribed to
Business Value Business
These values are
straightforward These values require us to find their ‘proxies’
This represents the change in the market’s
“perception” of the value of those
businesses

4. Total Return From Equities =
Dividend Yield + Inflation + Real Growth in + Valuation Ascribed to
Business Value Business
PROXY: Cyclically
Adjusted Earnings
(CAE)
PROXY: Cyclically Adjusted Price to
Earnings Multiple
(CAPE)

5. Total Return From Equities =
Dividend yield + Inflation + Real Growth in Business Value + Valuation Ascribed to Business
The 8.9% CAGR was comprised of the 4 elements of the equations as
shown

6. Decade
Total
Return
Dividends Inflation
CAE Growth
- Real
Multiple
Expansion
1881 - 1890 2.00% 5.10% -1.80% 1.30% -2.50%
1891 - 1900 8.70% 4.40% -0.40% 0.80% 3.90%
1901 - 1910 7.50% 4.60% -2.00% 5.40% -4.50%
1911 - 1920 3.30% 6.20% 8.20% 0.30% -11.50%
1921 - 1930 14.40% 5.40% -1.90% -2.10% 13.00%
1931 - 1940 1.90% 5.80% -1.40% -1.20% -1.50%
1941 - 1950 12.80% 5.90% 6.20% 3.00% -2.40%
1951 - 1960 16.30% 4.60% 1.90% 4.80% 5.00%
1961 - 1970 8.10% 3.20% 3.00% 2.90% -1.10%
1971 - 1980 8.40% 4.20% 8.40% 1.60% -5.80%
1981 - 1990 13.90% 4.10% 4.70% -0.70% 5.80%
1991 - 2000 17.50% 2.20% 2.70% 3.00% 9.60%
2001 - 2010 1.20% 1.90% 2.40% 2.20% -5.30%
2011 - 2014 5.50% 0.70% 0.90% 2.40% 1.50%
*There isn’t much to distinguish between
decades with high and low total return in terms
of inflation or EPS growth.
*Dividends too have made a much smaller
contribution to total returns since the nineties.
High Return
Low Return

7. • In the long term, the two primary drivers of the multiples assigned to
cash flows, namely interest rates and growth expectations, tend to
revert to mean.
• So, changes in valuation’s impact on total investment return over long
periods should be insignificant.
• Our view is supported by Table alongside which displays that changes
in valuation was a very small contributor to total investment returns
at 0.3%.

8. Since: Inflation + Real Growth = Nominal Growth
Hence:
Long Term Total Return from Equities = Dividend Yield + Inflation + Real Growth in Business Value
Long Term Total Return from Equities = Dividend Yield + Inflation + Real Growth in Business Value

9. • Above equation makes it clear that capital gains of return is
largely attributable to underlying business value growth.
• Using the data from Table alongside, capital appreciation
(Inflation + CAE Growth= Real) contributed about 4.0% to total
return from equities.
• Hence, business value growth of companies in S&P 500 has
approximated to an annual average rate of 4.0% over this
period.

10. • According to Flow of Funds report, net worth of nonfinancial corporate businesses grew at a CAGR of 7.1%
between 1945 and 2014.
• We consider net worth a good proxy for business value growth.
• Over this same time frame, S&P 500’s price increased at a CAGR of 7.2%.
• Thus, Flow of Fund Accounts, also support the assertion that price returns earned approximate the
underlying business value growth.

11. We conclude this section with the assertion
that price appreciation component of the
total return from equities is largely composed
of growth in underlying business value.

12. 7.2% return is the
geometric mean of the
S&P 500 yearly returns
between 1945 & 2014.
As seen, there are several
observations in the
negative territory.
Note: It doesn’t imply that every business included in the index grew at 7.2%.

13. • If price growth of a portfolio = the underlying business value growth;
• Then an investment process that successfully identifies businesses that grow their business values at above
average rates over long-term should generate superior long-term investment returns.
Key is to be able to identify businesses that are to the far right of the underlying business value growth
distributions and have the ability to stay in that zone.

14. It is important to understand that a business with “competitive advantage”
should have the ability to stay in that zone, which indicates its
“sustainability”.
Therefore, to enhance investment returns one must invest in businesses
that can grow their business values at above-average rates in a
sustainable manner.
We at Multi-Act refer to such businesses as High Quality (HQ)
businesses and we further posit that High Quality is a distinct
investment style.