Intrinsic Business Growth Always Wins Long-Term

Academic research dating back a century shows that the annual total return of U.S. stocks breaks down into two parts: investment return, which is dividends plus earnings growth, and speculative return, driven by changes in the price/earnings ratio. Over the period 1900–2005, the market returned 9.6% annually—9.5% from economics and just 0.1% from speculation.

Imagine a student charting two lines: sales revenue climbing steadily each year versus a volatile stock price line that spikes and crashes with every bit of news. The first is intrinsic value; the second is market emotion. Nobel laureate Robert Shiller calls these emotional swings the “excess volatility puzzle.”

In the dot-com bubble, P/E ratios doubled to 32, adding nearly 3% per year of speculative return. When the bubble popped, that gain disappeared. Behavioral science links this to herd behavior—when we see others buy, we buy too, amplifying price moves far beyond business performance.

By focusing on dividends and earnings growth—through a broad dividend-oriented or total market index fund—you cast your lot with the real economy, not the exuberant expectations market. Over decades, reality always wins.

You can start by pulling the past year’s statements and listing dividend yield and earnings growth rates against P/E changes. Recognize that only yield plus earnings growth drives your long-term real returns. Then shift more cash into funds or ETFs that emphasize dividends and broad earnings exposure, and away from funds built on hype. Give it a try tonight.