NEW YORK (TheStreet) -- Warren Buffett of Berkshire Hathaway (BRK.A) (BRK.B) doesn't often opine on the value of the stock market or its likely direction, but he did so in 1999, near the height of the technology bubble.In a November 1999 Fortune article co-authored by Carol Loomis, Buffett explained frothy markets as follows: "The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts."
"Today, if an investor is to achieve juicy profits in the market over ten years or 17 or 20, one or more of three things must happen ... here are the first two:
"(1) Interest rates must fall further. If government interest rates, now at a level of about 6%, were to fall to 3%, that factor alone would come close to doubling the value of common stocks. Incidentally, if you think interest rates are going to do that -- or fall to the 1% that Japan has experienced -- you should head for where you can really make a bundle: bond options.
"(2) Corporate profitability in relation to GDP must rise. You know, someone once told me that New York has more lawyers than people. I think that's the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6% [emphasis added]. One thing keeping the percentage down will be competition, which is alive and well. In addition, there's a public policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems -- and in my view a major reslicing of the pie just isn't going to happen."
The third thing Buffett cited was superior portfolio management, which is extraordinarily rare. Buffett predicted the market would not "come close" to the 12.9% next-20-year annual return expectation of professional money managers polled at the time.
Buffett's prediction proved accurate. In fact, not only was the 12.9% expectation missed, annualized real returns for the S&P 500 were negative 4.9% in the 10 years following the publication of the Fortune article, and just 0.2% per annum through June 27, 2015, including dividends.