Bogle has applied Occum's razor to all the noise that surrounds stock returns and has found that if you accept that the performance of individual securities and portfolios are unpredictable on a short term basis, one can arrive at three factors that determine long term stock performance. Those three factors are:
1. Dividend yield at time of initial investment
2. Subsequent rate of growth in earnings
3. The change in the price-earnings ratio during the period of investment.
Bogle then states that since 1926 that less than 20% of the markets return has been due to speculation. The majority of return is due to the two other factors: dividends and earnings growth.
He states that speculation is almost a neutral factor in the nature of long run returns.
This is important. It means that even if you had a speculative edge, over the long run, your advantage is not that great. Not to mention that the transaction costs involved may eliminate any edge you may have.
Occum's razor applied to the stock market: returns over the long run will equal dividend yields + long term economic growth. everything else is noise.
