00:00:00
He said, "If you would whisper in
my ear every single future move of the Fed, it would not change
one decision
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I'm going to make
about stocks. - And welcome to a special edition of
The Ripple Effect: Meet the Authors.
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I'm your host, Dan Loney. In each
episode this month, the podcast will feature Wharton faculty
authors in lively, fast-moving
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conversations about their latest
books and research. We're going to be covering a diverse range
of topics, bringing you the
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latest insights and knowledge
that you can apply to your life and to work. Well hello, and
welcome to The Ripple Effect:
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Meet the Author series. I'm your
host, Dan Loney. And today a pleasure to be joined by my
friend Jeremy Siegel about his
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book <i>Stocks for the Long Run</i>.
Jeremy's book, which is a series
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of editions, is about financial
market returns and long-term investment strategies. Jeremy,
always great to bend your ear
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for a few moments. Happy to be here, Dan. Let me ask you, I guess— let's
start with the editions part of
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it. Because you do the first
edition, but you've updated it several times over the years.
What's the dynamic for you, I
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guess, with what you're seeing
in the market, of wanting and maybe even needing to do new
editions?
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Well, the first edition came out
in 1994, using data through 1992. And, you know, two years
ago, we completed the sixth
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edition of the book. And
actually, the longest period, I think was eight or nine years in
between. And I wrote one right
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after the financial crisis. And
then, you know, so many things have continued to happen. The
pandemic and, you know,
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zero interest rate Fed. You
know, the ESG movement, and so much more, I felt that there
should be a lot more material.
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It is the biggest of all the
books. I mean, it contains about, I think, 60 pages, 70
pages more than the fifth
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edition. So let's start there with,
obviously, what has happened in the last few years. And off of
the concepts that you have
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brought forward in the book,
what are the dynamics that are most important that investors
should be thinking about right
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now? Well, I think I've expanded a
couple of things. One thing, I expanded the whole section on
interest rates. The zero
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interest rate period. Why, you
know, interest rates have jumped dramatically. I emphasize that
interest rates, especially long-
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term interest rates, are not just
determined by the Federal Reserve. Everyone thinks the
beginning and the end of
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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,
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and something else that my
research uncovered. And that is how good a hedge are bonds to
other forms of financial risk?
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And bonds are often, you know,
bought as a hedge. And I stress that that's an important
component in interest rates and
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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
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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
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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
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lot of it was because during the
period from the great financial crisis until the pandemic, bonds
were the best hedge you could
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buy against stock market risk.
In other words, when there was a crisis, or whatever, your bonds
went up when your stocks went
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down. But there was one sort of
risk that bonds can't deal with. And that's inflation
rates. And of course, that's
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what has exploded over the last
two, three years, since the pandemic. And what's happened is,
is bonds have not become as
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good a hedge. And that's the major
reason why bond rates are going back to the levels that we had
pre-financial crisis.
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You mentioned the pandemic. And
obviously that kind of falls into the category of black swan
events. - Yeah. - Take us through
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just the impact that those types
of events have on the potential mindset and the long-term
strategy that an investor has to
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come to—
come to the table with. Well, that's an interesting
question, Dan. And the
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important thing is, they— these
black swan events seem to have a very critical short-term effect.
But what is quite amazing, which
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I show, is they get washed out
and have very little long-term effect. For instance, let me
just give you an interesting
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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
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know what was the long term
return on stocks after inflation, annual return? And this was, you
know, more than 30 years ago—
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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,
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the pandemic black swan, and all
that. But the return on stocks has remained remarkably stable,
steady. And it's the same return
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that I had found in the very
first edition of <i>Stocks for the</i> <i>Long Run.</i>
- That's amazing,
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for 30 years— and it's
somewhat cyclical. It all comes back to right where it
began all those years ago,
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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
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in a special case. But, you
know, I stressed in my very first edition what we call "mean
reversion" of stock returns. And
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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—
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the reversion to a long-term
trend line that's astounding. And by the way, unique among
asset classes. Bonds don't have
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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,
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the most stable long run asset
class. And that's, I think, really important. Because how you
position your portfolio is
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dependent on your
horizon, and how long out you choose to to calculate.
- But again,
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that— just as you lay that
out, that just reinforces the component of having the long-run
philosophy in your mix, because
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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
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really, your expectation almost
should be that. Correct? Yeah. And that's it. And the reason
why so many people stay out of
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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-
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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
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work. You're saving for your
retirement, you're putting in IRAs, or, you know, whatever
retirement instrument, you know,
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defined contribution plan, you
have. You're talking 30, 40, 50 years and never been negative
return over that period, never.
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And you are a winner with
stocks, in terms of stability and higher returns than you are
when you stick with bonds. Bonds
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are great for liquidity short
run. When you get a lot older, certainly, you need more
certainty on your income. But,
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hey, we're all living longer.
Even 65 is too young to start piling into bonds, in my
opinion.
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Let me take a few moments and
talk about the Federal Reserve, which obviously has drawn a lot
of attention in the last few
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years. There's more and more
focus on the Fed. But when you think about the state of
investing, or just the mindset
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around investing, how much does
the activity of the Federal Reserve— and maybe it didn't as
much, you know, several decades
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ago, but how much does the
activity of the Fed end up playing some level of role in
how an investor has to think
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about, you know, some of the
moves that they make? Well, it's really important in
the short run, I mean, the Fed.
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But honestly, I'm gonna take
a famous quote of Warren Buffett. And he said this
30, 40 years ago. He said, "If you
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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.
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Hey, you also have talked about—
in the last edition— about ESG investing. You touched on it a
moment a little bit earlier.
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Talk about that as a component
of investing in the philosophy of the long run,
because it's obviously something
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that is drawing the attention of
a lot of people right now. Yeah, and some negative attention.
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- That too, yeah.
- Right. I mean, you know, I was— it is much more negative attention
since after the book was
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published. But I explained, I do
a lot of hard analysis. It's not like I'm taking sides about
whether diversity, equity
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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
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might be the way you should
shift your portfolio. But I stress that in shifting your
portfolio like that, you may not
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get the best risk-return trade
off as a straight index portfolio. You know, you might enjoy it
more because you're not owning
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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
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about the state of climate risk,
and holding stocks that will hedge you against future climate
risk. That's a little bit
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different. I mean, if climate and
change appears in your so-called utility function, as we kind of
misuse the term, then you should
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actually make, you know, climate
as one of the factors you consider when you invest in
stocks. And may be hard to
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determine. But that becomes
one of your considerations. And I talk a lot about that, too,
and how you should structure in
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that case.
- So you— you bring up something
interesting, and I'll have you expand
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upon it. Because people go
into investing obviously looking to be successful, but
they also have components of
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their personal beliefs that in
many cases, they would prefer not to go against. - Right.
- How much of a challenge is that in the
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investing landscape, of weighing
the success, the financial success, against one's personal goals?
- Well,
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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
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things produce carbon dioxide,
hurt the climate. Now some people think, you know, half the
companies in the United States do
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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-
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diversified, and your portfolio
will be more volatile as a result. I brought out, in, actually
I think it was the second
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edition. And I did long run
historical work. The— you know, the best-performing stock from
1926 to the present. And also,
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since the S&P 500 was first
constituted in March of 1957 to the present, happens to be Philip
Morris. Cigarette producer.
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- 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
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telling, you know, if you
never held it, you nicked your portfolio. And that might be
okay. But you have to realize
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that you may be giving up
something. You've also discussed
international investing. How do
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you view the component of
thinking internationally about your portfolio?
- Well,
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then— and this is one thing
that's been disappointing from my second, third edition. And I
think everybody. I thought— I
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mean, we turns on international
investing have not been great, I'll be honest with you over the
last 15, 20 years. They— listen,
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nothing has really compared to
the US S&P 500. It's almost impossible to beat any of that
broad-based index anyway. And,
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you know, that— I'm not saying
it's hijacked the market, because these are great companies. But
they've done unbelievably well.
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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
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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.
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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
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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
00:14:16
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,
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"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
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great stocks are much better
founded. But don't— could— could mania take over?
Oh, yeah. History—
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- But— but—
- And the market says yeah. But the components of the
bubbles that we have seen pop up
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over time are probably
things that could still happen in different sectors - Oh, yes.
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Because of the mindset of people in and around those sectors and
what they're looking to—
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Dan, look at the meme stocks. Look at
the meme stock. - Yeah. - Craziness, much more than the dot-com craziness.
Really.
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Now fortunately, if you look
at the total market value of these memes— you know,
Gamestop and AMC and a couple other,
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they're still tiny. So they're not of the
magnitude of the the mania that
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took place in 1999 and 2000.
But yeah, it can strike anywhere at anytime. And it could strike
even, you know— I mean. People
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asked me, "Are the Mag-7, like
the crazy"— and I say, "Nowhere near it Not yet. Not yet."
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- I guess you—
- Could it happen? It could. I hope not. You take NVIDIA. You know, back
then, Cisco was a darling. Now
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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
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cheaper stock even at its
current lofty levels than, you know, what Cisco was. In fact,
the average of the Mag-7 of
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those days, believe it or not— I
went back to my records, Dan— was a 200 price-earnings ratio.
- Wow. Oh my God.
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Which is, you know, ten times the
current market ratio. So when you think back to the
first edition, in the mid '90s
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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
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the course of these 30 years?
- I— the basic strategy of the superior
long term of equities is
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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
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after inflation. Amazing. So
that thesis, which many say is is the main thesis,
remains absolutely intact.
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Others— I was more enthusiastic
about value stocks and international, and they have not
panned out as much. But yet
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still, if you held a world
portfolio, diversified, you still beat bonds, you still beat
Treasury Bills. And in fact,
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I've expanded on real estate in
the seventh edition and the S&P beats real estate over the last
50 years.
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I was gonna say, is that
the area that has drawn your attention the most in these last
few years, as you're getting
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ready for the seventh edition? I mean, I think my— my
wife might murder me if I do do
00:17:54
the seventh edition. She said,
"Jeremy when are you gonna stop and retire?"
- I was hoping
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I could get you to
kind of jump right into it. And maybe we could start a seventh
edition right here.
00:18:05
Well, I mean, everything that
happens, starts— and I keep on revising my— I still travel, you
know, around the United States.
00:18:14
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
00:18:20
data. One thing, by the way,
that's expanded tremendously is this discussion of value versus
growth stocks, which was only
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one chapter, I think in the
fifth edition. The sixth edition is four chapters. I really go
into a lot of details. So
00:18:35
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
00:18:45
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
00:18:55
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
00:19:03
edition is available all over,
everywhere. Online, probably in bookstores as well, - Yes.
00:19:10
For people that want
to dip in and take a deeper dive. Great to talk to
you as well. Jeremy, thanks
00:19:15
again. Thank you, Dan. It was a pleasure. You got it. Jeremy Siegel,
Wharton Emeritus Professor, and
00:19:20
of course, author of <i>Stocks for
the Long Run</i>. Thank you for listening to The Ripple Effect.
00:19:26
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00:19:31
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