Wharton professor Jeremy Siegel has received a lot of attention for his harsh criticism of the Federal Reserve recently, but that’s not what he’s famous for. His 1994 book, “Stocks for the Long Run,” chronicled nearly 200 years of investing in stocks and bonds, and contained groundbreaking research on the long-term outperformance of stocks versus bonds and the effect of inflation on these two investments. Siegel’s masterpiece is one of the few books of the last 30 years (including Burton Malkiel’s ‘A Random Walk Down Wall Street’, Charles Ellis’ ‘Winning the Loser’s Game’ and ‘Common Sense on Mutual Funds’ by Jack Bogle) that have become investment classics. Professor Siegel is back with the 6th edition of his book, fully updated with new data on the long-term performance of stocks and bonds, and whole new chapters on property returns (looking at REITs for fifty years ), factor and ESG investing, indexing to active investing, and optimal equity/bond allocation. The book is co-authored with Jeremy Schwartz, Global Chief Investment Officer at WisdomTree. I spoke with Professor Siegel from his home in Philadelphia. The excerpts below have been edited for length and clarity. Watch the full interview above. It’s been eight years since the last edition of “Stocks For the Long Run”. Why did you feel the need to update the book? Well, think of all that had happened. I mean, the big bull market since the financial crisis… I wrote the last one just a few years after the crisis… So many questions arose. And this is by far the biggest review I have. It contains five new chapters. There are many factor supplements. I added real estate returns. talking about bitcoin, just to mention a few of the new things that are in the book. As in previous editions, you conclude that real (inflation-adjusted) equity returns have remained at 6.7% per year, or about 10% or so without inflation. adjusted. I think the key takeaway here is that over the long term, stocks tend to overcome inflation. Absolutely. Despite all the ups and downs, crises and bear markets that we have experienced over the past 30 years, the actual performance of equities has been absolutely the same, which is truly remarkable. And second, as you pointed out, not only do equities tend to overcome long-term inflation, they have completely overcome it. They struggle when the Fed tightens. We see it now. But once that tightening happens, once normalization returns, they make up for lost ground and get back to that long-term trend. The problem here right now is that inflation is suddenly as high as it was in parts of the 1970s. Stocks can underperform during periods of sudden inflation. And how to overcome this? What are you doing about it? Well, it’s actually when the Fed tightens and raises real interest rates that all assets go down in price. Look at bonds, stocks, real estate started falling. there is no doubt. And in fact, many commodities are now down. I mean, the basic theorem of finance is that the value of any asset is the present value of all its cash flows, which is discounted at an interest rate. When the Fed raises interest rates, all of these assets will go down. So unless you can time the market, there’s really no place to hide. And that goes to the next question about indexing and holding in low-cost index funds. Would you say the evidence is still compelling? The recent S&P SPIVA study concluded that 90% of large cap active managers underperform their benchmarks after 10 years. Bob, not only is the evidence still there, but it’s more compelling than when I wrote the first edition of the book. The percentage of funds that can beat the S&P 500 has declined over time. Some pick better stocks, but once fees are included, indexing is better than ever. Why is that? What explains this persistent underperformance? Charlie Ellis used to say it’s not because active managers are stupid. They are really very good. They are simply competing with other active managers and they have no information advantage. This is a very important reason. But the other is the costs. I mean, now you can get index funds that charge three or four basis points, active funds can be 60 to 100 basis points. Once the costs are subtracted, you are behind the index fund. What about style or factor investing? Academic research has suggested that certain investment styles like small cap, value or momentum outperform over long periods of time. What are your conclusions ? There have been literally dozens of factors that people have discovered. But one thing that I found very surprising that is not in the literature at all is that virtually all of these factors stopped working in 2006, just before the financial crisis. What about growth versus value? There seem to be 25 year cycles where growth really outpaces value and I think we just went through one of them. Amazon, you know, Microsoft, Apple, of course, but yet we see that over the long term these stocks are not sustaining their superior growth. Is there something that happened since 2006 that caused this outage? I think there were several things that happened, first of all, the financial crisis caused the banks to crash and that was the value stocks. And then, of course, what we’ve seen over the past 15 years is the unprecedented growth of tech mega-stocks. We have never seen a period in history when stocks that didn’t even exist 10-15 years ago suddenly became the largest capitalizations in the entire market. What about ESG: Environment, Social and Governance. What do you think of this style of investing? The first thing I do is compare them to Milton Friedman fifty years ago, who said that what CEOs should do is make the most money and not pay attention to social. Well, what we find is that maybe if by doing good, you could also do good. For example, you can charge more for organically grown food and make a profit. It doesn’t necessarily contradict that by doing well. Certainly things like diversity and its social aspect become difficult to define. I share some of the suspicions about everyone jumping on the bandwagon to try to be properly diverse or to govern socially in the exact way that fits the pattern. But the truth is that ESG investing doesn’t necessarily mean you’re going to grossly underperform the market. What about an optimal stock/bond allocation? Last year around this time everyone was saying that the 60/40 stock/bond allocation was dead forever. Now bond yields are rising. My feeling is that you should switch to a 75/25 or 80/20 stock/bond portfolio. There has been a very steep international drop in real (inflation-adjusted) yields, which means that you will no longer get the post-inflation rate of return on bonds that you had before. And yet, stock valuations have remained much more stable. Now I know that the yields have risen sharply. And some people said, “My God, 4% bond yield (2-year term), doesn’t that sound good?” Remember that’s 4% before inflation, take that and compare it with the real long-term return on equities, which is 6.7% after inflation. Tell me where you want to be. Is there any reason to expect returns over the next decade to be below normal? Stanley Druckenmiller said he wouldn’t be surprised if the Dow Industrials was the same where it is now 10 years from now. I see no way that 10 years from now the Dow will be the same. I mean, we could go through a recession. I talked about the great monetary explosion [that the Fed created] but it will essentially raise the price level of everything. And as we said at the beginning of this interview, stocks are claims on real assets, they are claims on land and capital, intellectual property, copyrights, equipment of the factory. These things will increase with inflation. That the Dow will be the same 10 years from now, really, I think is totally against history. You have a new chapter on new real estate data, with 50 years of hindsight. I would have real estate in my portfolio. I would definitely have REITs and as you know the S&P added that as the 11th market sector. What about home ownership? You should own your home… But don’t forget the real estate market and all commercial real estate. One of the reasons REITs have done very well since the pandemic is that they don’t own as much ownership of some of these commercial buildings. A lot of hot storage data centers, things like that, have been very, very successful. Professor, thank you for joining us on CNBC Pro.
.
#Jeremy #Siegel #bet #stocks #long #term #market #overcome #inflation