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He said, "If you would whisper in my ear every single future move of the Fed, it would not change one decision I'm going to make about stocks. - And welcome to a special edition of The Ripple Effect: Meet the Authors. I'm your host, Dan Loney. In each episode this month, the podcast will feature Wharton faculty authors in lively, fast-moving conversations about their latest books and research.
We're going to be covering a diverse range of topics, bringing you the latest insights and knowledge that you can apply to your life and to work. Well hello, and welcome to The Ripple Effect: Meet the Author series. I'm your host, Dan Loney. And today a pleasure to be joined by my friend Jeremy Siegel about his book <i>Stocks for the Long Run</i>.
Jeremy's book, which is a series of editions, is about financial market returns and long-term investment strategies. Jeremy, always great to bend your ear for a few moments. Happy to be here, Dan. Let me ask you, I guess— let's start with the editions part of it. Because you do the first edition, but you've updated it several times over the years.
What's the dynamic for you, I guess, with what you're seeing in the market, of wanting and maybe even needing to do new editions? Well, the first edition came out in 1994, using data through 1992. And, you know, two years ago, we completed the sixth edition of the book. And actually, the longest period, I think was eight or nine years in between.
And I wrote one right after the financial crisis. And then, you know, so many things have continued to happen. The pandemic and, you know, zero interest rate Fed. You know, the ESG movement, and so much more, I felt that there should be a lot more material. It is the biggest of all the books. I mean, it contains about, I think, 60 pages, 70 pages more than the fifth edition.
So let's start there with, obviously, what has happened in the last few years. And off of the concepts that you have brought forward in the book, what are the dynamics that are most important that investors should be thinking about right now? Well, I think I've expanded a couple of things. One thing, I expanded the whole section on interest rates.
The zero interest rate period. Why, you know, interest rates have jumped dramatically. I emphasize that interest rates, especially long- term interest rates, are not just determined by the Federal Reserve. Everyone thinks the beginning and the end of interest rates is the Fed. That's true on the short side.
But on the long side, there are so many factors like inflation, growth, and something else that my research uncovered. And that is how good a hedge are bonds to other forms of financial risk? And bonds are often, you know, bought as a hedge. And I stress that that's an important component in interest rates and returns.
Yeah, and the bond market is obviously getting a lot of play right now, because of some of the dynamics. How do you view the state of the bond market and using it as a tool for investment right now? Right. Well, so we had a period of extraordinarily low interest rates. everyone sort of blames it— if you will, if they don't like it— on the Fed.
But my research actually found that a lot of it was because during the period from the great financial crisis until the pandemic, bonds were the best hedge you could buy against stock market risk. In other words, when there was a crisis, or whatever, your bonds went up when your stocks went down. But there was one sort of risk that bonds can't deal with.
And that's inflation rates. And of course, that's what has exploded over the last two, three years, since the pandemic. And what's happened is, is bonds have not become as good a hedge. And that's the major reason why bond rates are going back to the levels that we had pre-financial crisis. You mentioned the pandemic.
And obviously that kind of falls into the category of black swan events. - Yeah. - Take us through just the impact that those types of events have on the potential mindset and the long-term strategy that an investor has to come to— come to the table with. Well, that's an interesting question, Dan. And the important thing is, they— these black swan events seem to have a very critical short-term effect.
But what is quite amazing, which I show, is they get washed out and have very little long-term effect. For instance, let me just give you an interesting statistic. When I finished the sixth edition of the book a few years ago, I went back to my first edition. And I said, you know what was the long term return on stocks after inflation, annual return?
And this was, you know, more than 30 years ago— 6.7%. What was it in my sixth edition? 6.7%. So 30 years, think of everything that's happened. The financial crisis black swan, the pandemic black swan, and all that. But the return on stocks has remained remarkably stable, steady. And it's the same return that I had found in the very first edition of <i>Stocks for the</i> <i>Long Run.</i> - That's amazing, for 30 years— and it's somewhat cyclical.
It all comes back to right where it began all those years ago, right? - Yeah, that— I mean, you know, the ups and downs. And we— you know, you know, we shake our heads, and we always think we're in a special case. But, you know, I stressed in my very first edition what we call "mean reversion" of stock returns.
And that means that we revert to the mean. You have a bad year or two, it's followed by good years that make it up. And then we're— the reversion to a long-term trend line that's astounding. And by the way, unique among asset classes. Bonds don't have it. Other asset classes don't have it. Stocks are very volatile in the short run.
They're the most volatile short term asset class, the most stable long run asset class. And that's, I think, really important. Because how you position your portfolio is dependent on your horizon, and how long out you choose to to calculate. - But again, that— just as you lay that out, that just reinforces the component of having the long-run philosophy in your mix, because you will have ups and downs over the course of 10, 20, 30 years, whatever that window is you're going to put in there.
And really, your expectation almost should be that. Correct? Yeah. And that's it. And the reason why so many people stay out of stocks is they can't take the short-run volatility. But as I point out in the very first edition, you know, over a 30- year period— and don't forget, for all the young people, you know, even 30 years is too short.
Here's— you're beginning your work. You're saving for your retirement, you're putting in IRAs, or, you know, whatever retirement instrument, you know, defined contribution plan, you have. You're talking 30, 40, 50 years and never been negative return over that period, never. And you are a winner with stocks, in terms of stability and higher returns than you are when you stick with bonds.
Bonds are great for liquidity short run. When you get a lot older, certainly, you need more certainty on your income. But, hey, we're all living longer. Even 65 is too young to start piling into bonds, in my opinion. Let me take a few moments and talk about the Federal Reserve, which obviously has drawn a lot of attention in the last few years.
There's more and more focus on the Fed. But when you think about the state of investing, or just the mindset around investing, how much does the activity of the Federal Reserve— and maybe it didn't as much, you know, several decades ago, but how much does the activity of the Fed end up playing some level of role in how an investor has to think about, you know, some of the moves that they make?
Well, it's really important in the short run, I mean, the Fed. But honestly, I'm gonna take a famous quote of Warren Buffett. And he said this 30, 40 years ago. He said, "If you would whisper in my ear every single future move of the Fed, it would not change one decision I'm going to make about stocks.
Hey, you also have talked about— in the last edition— about ESG investing. You touched on it a moment a little bit earlier. Talk about that as a component of investing in the philosophy of the long run, because it's obviously something that is drawing the attention of a lot of people right now. Yeah, and some negative attention.
- That too, yeah. - Right. I mean, you know, I was— it is much more negative attention since after the book was published. But I explained, I do a lot of hard analysis. It's not like I'm taking sides about whether diversity, equity and inclusion and all that is good or bad, or ESG is good or bad, environmental.
I just say if that is a factor for you, this might be the way you should shift your portfolio. But I stress that in shifting your portfolio like that, you may not get the best risk-return trade off as a straight index portfolio. You know, you might enjoy it more because you're not owning companies you don't like.
But in a risk-return trade off, you may be taking an inferior one. And except climate risk. I talk about the state of climate risk, and holding stocks that will hedge you against future climate risk. That's a little bit different. I mean, if climate and change appears in your so-called utility function, as we kind of misuse the term, then you should actually make, you know, climate as one of the factors you consider when you invest in stocks.
And may be hard to determine. But that becomes one of your considerations. And I talk a lot about that, too, and how you should structure in that case. - So you— you bring up something interesting, and I'll have you expand upon it. Because people go into investing obviously looking to be successful, but they also have components of their personal beliefs that in many cases, they would prefer not to go against.
- Right. - How much of a challenge is that in the investing landscape, of weighing the success, the financial success, against one's personal goals? - Well, it turns out it— I mean, it depends on how strong you are. I mean, if you think, you know— I mean, if you think certain things produce carbon dioxide, hurt the climate.
Now some people think, you know, half the companies in the United States do that. Others are very narrow. So it sort of depends on how broad you are. The broader you are, the more you're going to be un- diversified, and your portfolio will be more volatile as a result. I brought out, in, actually I think it was the second edition.
And I did long run historical work. The— you know, the best-performing stock from 1926 to the present. And also, since the S&P 500 was first constituted in March of 1957 to the present, happens to be Philip Morris. Cigarette producer. - Yeah. - Now, you know, I hate cigarettes. And you know, I don't want to be around anyone that's smoking.
But I'm just telling, you know, if you never held it, you nicked your portfolio. And that might be okay. But you have to realize that you may be giving up something. You've also discussed international investing. How do you view the component of thinking internationally about your portfolio? - Well, then— and this is one thing that's been disappointing from my second, third edition.
And I think everybody. I thought— I mean, we turns on international investing have not been great, I'll be honest with you over the last 15, 20 years. They— listen, nothing has really compared to the US S&P 500. It's almost impossible to beat any of that broad-based index anyway. And, you know, that— I'm not saying it's hijacked the market, because these are great companies.
But they've done unbelievably well. And as a result, they've left a lot of the world behind. Now, by the way, another thesis that has been left behind is value investing. - Right. And I myself am a fan of value investment, but I have to admit that the last 15 years value has not given you return. Now, again, nothing seems to be— compare.
You could call it the Mag-7, the S&P 500, the tech sector in the US— which, you know, after the bust of the dot-com era— and you and I can remember that. We're old enough to remember that. Some of the young ones hardly remember that. I hope that we don't repeat that again, you know. We don't want— I'm often asked, you know, "Professor Siegel, are we seeing the beginnings of what we saw in 1997, '98, '99?" And I say "I hope not." I tell you, I think these great stocks are much better founded.
But don't— could— could mania take over? Oh, yeah. History— - But— but— - And the market says yeah. But the components of the bubbles that we have seen pop up over time are probably things that could still happen in different sectors - Oh, yes. Because of the mindset of people in and around those sectors and what they're looking to— Dan, look at the meme stocks.
Look at the meme stock. - Yeah. - Craziness, much more than the dot-com craziness. Really. Now fortunately, if you look at the total market value of these memes— you know, Gamestop and AMC and a couple other, they're still tiny. So they're not of the magnitude of the the mania that took place in 1999 and 2000.
But yeah, it can strike anywhere at anytime. And it could strike even, you know— I mean. People asked me, "Are the Mag-7, like the crazy"— and I say, "Nowhere near it Not yet. Not yet." - I guess you— - Could it happen? It could. I hope not. You take NVIDIA. You know, back then, Cisco was a darling.
Now NVIDIA is a darling. And Cisco is selling 60, 70, 80, 90 times earnings. NVIDIA is only 40 times earnings. So it's a much cheaper stock even at its current lofty levels than, you know, what Cisco was. In fact, the average of the Mag-7 of those days, believe it or not— I went back to my records, Dan— was a 200 price-earnings ratio.
- Wow. Oh my God. Which is, you know, ten times the current market ratio. So when you think back to the first edition, in the mid '90s there, and here we are 30 years later, are the strategies still at their core— I mean, how much has it changed in your mind over the course of these 30 years? - I— the basic strategy of the superior long term of equities is as strong as ever.
Again, to the 30 years with all that we've— we've suffered and gone through, we have 6.8% per year after inflation. Amazing. So that thesis, which many say is is the main thesis, remains absolutely intact. Others— I was more enthusiastic about value stocks and international, and they have not panned out as much.
But yet still, if you held a world portfolio, diversified, you still beat bonds, you still beat Treasury Bills. And in fact, I've expanded on real estate in the seventh edition and the S&P beats real estate over the last 50 years. I was gonna say, is that the area that has drawn your attention the most in these last few years, as you're getting ready for the seventh edition?
I mean, I think my— my wife might murder me if I do do the seventh edition. She said, "Jeremy when are you gonna stop and retire?" - I was hoping I could get you to kind of jump right into it. And maybe we could start a seventh edition right here. Well, I mean, everything that happens, starts— and I keep on revising my— I still travel, you know, around the United States.
In fact, the world— I give presentations, you know. You've seen me on the media, and I keep on keeping up and checking the data. One thing, by the way, that's expanded tremendously is this discussion of value versus growth stocks, which was only one chapter, I think in the fifth edition. The sixth edition is four chapters.
I really go into a lot of details. So there's a lot of expansion. And, you know, the basic theme is there. A little around the edges. You know, some of those tilts have not worked out because of the Mag-7 and the growth stocks. I think they will in the long run. But the major thesis is as true today as it was in the first edition.
Jeremy, always fun to talk with you. I guess we should say the sixth edition is available all over, everywhere. Online, probably in bookstores as well, - Yes. For people that want to dip in and take a deeper dive. Great to talk to you as well. Jeremy, thanks again. Thank you, Dan. It was a pleasure.
You got it. Jeremy Siegel, Wharton Emeritus Professor, and of course, author of <i>Stocks for the Long Run</i>. Thank you for listening to The Ripple Effect. We hope you found this episode informative and engaging. Don't forget to subscribe and leave us a review so that we can continue to bring you the best insight from the Wharton School.
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