00:00:00
He said, "If you would whisper in
my ear every single future move
00:00:06
of the Fed, it would not change
one decision
00:00:10
I'm going to make
about stocks.
00:00:12
- And welcome to a special edition of
The Ripple Effect: Meet the Authors.
00:00:15
I'm your host, Dan Loney. In each
episode this month, the podcast
00:00:20
will feature Wharton faculty
authors in lively, fast-moving
00:00:23
conversations about their latest
books and research. We're going
00:00:27
to be covering a diverse range
of topics, bringing you the
00:00:30
latest insights and knowledge
that you can apply to your life
00:00:34
and to work. Well hello, and
welcome to The Ripple Effect:
00:00:38
Meet the Author series. I'm your
host, Dan Loney. And today a
00:00:41
pleasure to be joined by my
friend Jeremy Siegel about his
00:00:44
book <i>Stocks for the Long Run</i>.
Jeremy's book, which is a series
00:00:49
of editions, is about financial
market returns and long-term
00:00:54
investment strategies. Jeremy,
always great to bend your ear
00:00:58
for a few moments.
00:00:59
Happy to be here, Dan.
00:01:01
Let me ask you, I guess— let's
start with the editions part of
00:01:04
it. Because you do the first
edition, but you've updated it
00:01:08
several times over the years.
What's the dynamic for you, I
00:01:12
guess, with what you're seeing
in the market, of wanting and
00:01:16
maybe even needing to do new
editions?
00:01:19
Well, the first edition came out
in 1994, using data through
00:01:26
1992. And, you know, two years
ago, we completed the sixth
00:01:32
edition of the book. And
actually, the longest period, I
00:01:36
think was eight or nine years in
between. And I wrote one right
00:01:40
after the financial crisis. And
then, you know, so many things
00:01:44
have continued to happen. The
pandemic and, you know,
00:01:49
zero interest rate Fed. You
know, the ESG movement, and so
00:01:58
much more, I felt that there
should be a lot more material.
00:02:01
It is the biggest of all the
books. I mean, it contains
00:02:04
about, I think, 60 pages, 70
pages more than the fifth
00:02:10
edition.
00:02:12
So let's start there with,
obviously, what has happened in
00:02:14
the last few years. And off of
the concepts that you have
00:02:19
brought forward in the book,
what are the dynamics that are
00:02:22
most important that investors
should be thinking about right
00:02:25
now?
00:02:26
Well, I think I've expanded a
couple of things. One thing, I
00:02:31
expanded the whole section on
interest rates. The zero
00:02:35
interest rate period. Why, you
know, interest rates have jumped
00:02:41
dramatically. I emphasize that
interest rates, especially long-
00:02:46
term interest rates, are not just
determined by the Federal
00:02:51
Reserve. Everyone thinks the
beginning and the end of
00:02:52
interest rates is the Fed.
That's true on the short side.
00:02:56
But on the long side, there are so
many factors like inflation, growth,
00:02:59
and something else that my
research uncovered. And that is
00:03:03
how good a hedge are bonds to
other forms of financial risk?
00:03:09
And bonds are often, you know,
bought as a hedge. And I stress
00:03:15
that that's an important
component in interest rates and
00:03:18
returns.
00:03:20
Yeah, and the bond market is
obviously getting a lot of play
00:03:23
right now, because of some of
the dynamics. How do you view
00:03:27
the state of the bond market and
using it as a tool for
00:03:31
investment right now?
00:03:33
Right. Well, so we had a period
of extraordinarily low interest
00:03:36
rates. everyone sort of blames
it— if you will, if they don't
00:03:40
like it— on the Fed. But my
research actually found that a
00:03:43
lot of it was because during the
period from the great financial
00:03:49
crisis until the pandemic, bonds
were the best hedge you could
00:03:53
buy against stock market risk.
In other words, when there was a
00:03:57
crisis, or whatever, your bonds
went up when your stocks went
00:04:01
down. But there was one sort of
risk that bonds can't deal
00:04:05
with. And that's inflation
rates. And of course, that's
00:04:08
what has exploded over the last
two, three years, since the
00:04:11
pandemic. And what's happened is,
is bonds have not become as
00:04:16
good a hedge. And that's the major
reason why bond rates are going
00:04:19
back to the levels that we had
pre-financial crisis.
00:04:24
You mentioned the pandemic. And
obviously that kind of falls
00:04:28
into the category of black swan
events. - Yeah. - Take us through
00:04:32
just the impact that those types
of events have on the potential
00:04:37
mindset and the long-term
strategy that an investor has to
00:04:41
come to—
come to the table with.
00:04:43
Well, that's an interesting
question, Dan. And the
00:04:45
important thing is, they— these
black swan events seem to have a
00:04:49
very critical short-term effect.
But what is quite amazing, which
00:04:56
I show, is they get washed out
and have very little long-term
00:05:01
effect. For instance, let me
just give you an interesting
00:05:04
statistic. When I finished the
sixth edition of the book a few
00:05:08
years ago, I went back to my
first edition. And I said, you
00:05:11
know what was the long term
return on stocks after inflation,
00:05:15
annual return? And this was, you
know, more than 30 years ago—
00:05:19
6.7%. What was it in my sixth
edition? 6.7%. So 30 years, think
00:05:25
of everything that's happened. The
financial crisis black swan,
00:05:29
the pandemic black swan, and all
that. But the return on stocks
00:05:34
has remained remarkably stable,
steady. And it's the same return
00:05:41
that I had found in the very
first edition of <i>Stocks for the</i>
00:05:44
<i>Long Run.</i>
- That's amazing,
00:05:46
for 30 years— and it's
somewhat cyclical. It all
00:05:49
comes back to right where it
began all those years ago,
00:05:53
right?
- Yeah,
00:05:54
that— I mean, you know, the
ups and downs. And we— you know,
00:05:57
you know, we shake our heads,
and we always think we're
00:06:00
in a special case. But, you
know, I stressed in my very
00:06:05
first edition what we call "mean
reversion" of stock returns. And
00:06:10
that means that we revert to the
mean. You have a bad year or
00:06:13
two, it's followed by good years
that make it up. And then we're—
00:06:16
the reversion to a long-term
trend line that's astounding.
00:06:21
And by the way, unique among
asset classes. Bonds don't have
00:06:25
it. Other asset classes don't
have it. Stocks are very volatile
00:06:30
in the short run. They're the most
volatile short term asset class,
00:06:35
the most stable long run asset
class. And that's, I think,
00:06:41
really important. Because how you
position your portfolio is
00:06:46
dependent on your
horizon, and how long out you
00:06:51
choose to to calculate.
- But again,
00:06:55
that— just as you lay that
out, that just reinforces the
00:07:01
component of having the long-run
philosophy in your mix, because
00:07:07
you will have ups and downs over
the course of 10, 20, 30 years,
00:07:12
whatever that window is you're
going to put in there. And
00:07:16
really, your expectation almost
should be that. Correct? Yeah.
00:07:19
And that's it. And the reason
why so many people stay out of
00:07:23
stocks is they can't take the
short-run volatility. But as
00:07:28
I point out in the very first
edition, you know, over a 30-
00:07:32
year period— and don't forget,
for all the young people, you
00:07:34
know, even 30 years is too short.
Here's— you're beginning your
00:07:37
work. You're saving for your
retirement, you're putting in
00:07:40
IRAs, or, you know, whatever
retirement instrument, you know,
00:07:46
defined contribution plan, you
have. You're talking 30, 40, 50
00:07:50
years and never been negative
return over that period, never.
00:07:56
And you are a winner with
stocks, in terms of stability
00:08:01
and higher returns than you are
when you stick with bonds. Bonds
00:08:05
are great for liquidity short
run. When you get a lot older,
00:08:09
certainly, you need more
certainty on your income. But,
00:08:13
hey, we're all living longer.
Even 65 is too young to start
00:08:18
piling into bonds, in my
opinion.
00:08:21
Let me take a few moments and
talk about the Federal Reserve,
00:08:24
which obviously has drawn a lot
of attention in the last few
00:08:28
years. There's more and more
focus on the Fed. But when you
00:08:31
think about the state of
investing, or just the mindset
00:08:35
around investing, how much does
the activity of the Federal
00:08:40
Reserve— and maybe it didn't as
much, you know, several decades
00:08:44
ago, but how much does the
activity of the Fed end up
00:08:48
playing some level of role in
how an investor has to think
00:08:52
about, you know, some of the
moves that they make?
00:08:55
Well, it's really important in
the short run, I mean, the Fed.
00:09:00
But honestly, I'm gonna take
a famous quote of Warren
00:09:05
Buffett. And he said this
30, 40 years ago. He said, "If you
00:09:11
would whisper in my ear every
single future move of the Fed,
00:09:18
it would not change one decision
I'm going to make about stocks.
00:09:25
Hey, you also have talked about—
in the last edition— about ESG
00:09:29
investing. You touched on it a
moment a little bit earlier.
00:09:34
Talk about that as a component
of investing in the
00:09:37
philosophy of the long run,
because it's obviously something
00:09:41
that is drawing the attention of
a lot of people right now.
00:09:45
Yeah, and some negative attention.
00:09:47
- That too, yeah.
- Right. I mean, you know, I was—
00:09:49
it is much more negative attention
since after the book was
00:09:52
published. But I explained, I do
a lot of hard analysis. It's not
00:10:00
like I'm taking sides about
whether diversity, equity
00:10:03
and inclusion and all that is good or
bad, or ESG is good or bad,
00:10:06
environmental. I just say if
that is a factor for you, this
00:10:12
might be the way you should
shift your portfolio. But I
00:10:16
stress that in shifting your
portfolio like that, you may not
00:10:20
get the best risk-return trade
off as a straight index
00:10:25
portfolio. You know, you might enjoy it
more because you're not owning
00:10:28
companies you don't like. But in
a risk-return trade off, you may
00:10:34
be taking an inferior one. And
except climate risk. I talk
00:10:38
about the state of climate risk,
and holding stocks that will
00:10:42
hedge you against future climate
risk. That's a little bit
00:10:45
different. I mean, if climate and
change appears in your so-called
00:10:49
utility function, as we kind of
misuse the term, then you should
00:10:53
actually make, you know, climate
as one of the factors you
00:10:59
consider when you invest in
stocks. And may be hard to
00:11:03
determine. But that becomes
one of your considerations. And
00:11:07
I talk a lot about that, too,
and how you should structure in
00:11:11
that case.
- So you—
00:11:12
you bring up something
interesting, and I'll have you expand
00:11:15
upon it. Because people go
into investing obviously
00:11:19
looking to be successful, but
they also have components of
00:11:22
their personal beliefs that in
many cases, they would prefer
00:11:27
not to go against. - Right.
- How much of a challenge is that in the
00:11:31
investing landscape, of weighing
the success, the financial
00:11:37
success, against one's personal goals?
- Well,
00:11:41
it turns out it— I mean, it
depends on how strong you are. I
00:11:45
mean, if you think, you know— I
mean, if you think certain
00:11:48
things produce carbon dioxide,
hurt the climate. Now some
00:11:51
people think, you know, half the
companies in the United States do
00:11:54
that. Others are very narrow. So
it sort of depends on how broad
00:11:58
you are. The broader you are,
the more you're going to be un-
00:12:00
diversified, and your portfolio
will be more volatile as a
00:12:06
result. I brought out, in, actually
I think it was the second
00:12:12
edition. And I did long run
historical work. The— you know,
00:12:16
the best-performing stock from
1926 to the present. And also,
00:12:23
since the S&P 500 was first
constituted in March of 1957 to
00:12:29
the present, happens to be Philip
Morris. Cigarette producer.
00:12:34
- Yeah. - Now, you know, I hate
cigarettes. And you know, I
00:12:39
don't want to be around anyone
that's smoking. But I'm just
00:12:41
telling, you know, if you
never held it, you nicked your
00:12:45
portfolio. And that might be
okay. But you have to realize
00:12:52
that you may be giving up
something.
00:12:54
You've also discussed
international investing. How do
00:12:57
you view the component of
thinking internationally about
00:13:01
your portfolio?
- Well,
00:13:02
then— and this is one thing
that's been disappointing from
00:13:05
my second, third edition. And I
think everybody. I thought— I
00:13:09
mean, we turns on international
investing have not been great,
00:13:13
I'll be honest with you over the
last 15, 20 years. They— listen,
00:13:17
nothing has really compared to
the US S&P 500. It's almost
00:13:21
impossible to beat any of that
broad-based index anyway. And,
00:13:29
you know, that— I'm not saying
it's hijacked the market, because
00:13:33
these are great companies. But
they've done unbelievably well.
00:13:37
And as a result, they've left a
lot of the world behind. Now, by
00:13:43
the way, another thesis that has
been left behind is value
00:13:47
investing.
- Right.
00:13:50
And I myself am a fan
of value investment, but I have to
00:13:53
admit that the last 15 years
value has not given you return.
00:14:00
Now, again, nothing seems to be—
compare. You could call it the
00:14:04
Mag-7, the S&P 500, the tech
sector in the US— which, you
00:14:09
know, after the bust of the dot-com
era— and you and I can remember
00:14:14
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
00:14:22
again, you know. We don't want—
I'm often asked, you know,
00:14:27
"Professor Siegel, are we
seeing the beginnings of what we
00:14:31
saw in 1997, '98, '99?" And I say "I
hope not." I tell you, I think these
00:14:38
great stocks are much better
founded. But don't— could—
00:14:41
could mania take over?
Oh, yeah. History—
00:14:45
- But— but—
- And the market says yeah.
00:14:47
But the components of the
bubbles that we have seen pop up
00:14:51
over time are probably
things that could still happen
00:14:55
in different sectors - Oh, yes.
00:14:57
Because of the mindset of people
00:15:00
in and around those sectors and
what they're looking to—
00:15:02
Dan, look at the meme stocks. Look at
the meme stock. - Yeah.
00:15:05
- Craziness, much
00:15:08
more than the dot-com craziness.
Really.
00:15:12
Now fortunately, if you look
at the total market
00:15:15
value of these memes— you know,
Gamestop and AMC and a couple other,
00:15:18
they're still tiny. So they're not of the
magnitude of the the mania that
00:15:24
took place in 1999 and 2000.
But yeah, it can strike anywhere
00:15:28
at anytime. And it could strike
even, you know— I mean. People
00:15:32
asked me, "Are the Mag-7, like
the crazy"— and I say, "Nowhere
00:15:38
near it Not yet. Not yet."
00:15:42
- I guess you—
- Could it happen? It could.
00:15:43
I hope not.
00:15:46
You take NVIDIA. You know, back
then, Cisco was a darling. Now
00:15:50
NVIDIA is a darling. And
Cisco is selling 60, 70, 80, 90 times
00:15:55
earnings. NVIDIA is only 40
times earnings. So it's a much
00:16:00
cheaper stock even at its
current lofty levels than, you
00:16:05
know, what Cisco was. In fact,
the average of the Mag-7 of
00:16:11
those days, believe it or not— I
went back to my records, Dan—
00:16:15
was a 200 price-earnings ratio.
- Wow. Oh my God.
00:16:19
Which is, you know, ten times the
current market ratio.
00:16:23
So when you think back to the
first edition, in the mid '90s
00:16:27
there, and here we are 30 years
later, are the strategies still
00:16:34
at their core— I mean, how much
has it changed in your mind over
00:16:39
the course of these 30 years?
- I— the
00:16:41
basic strategy of the superior
long term of equities is
00:16:47
as strong as ever. Again, to the
30 years with all that we've—
00:16:54
we've suffered and gone
through, we have 6.8% per year
00:16:58
after inflation. Amazing. So
that thesis, which many say is
00:17:04
is the main thesis,
remains absolutely intact.
00:17:10
Others— I was more enthusiastic
about value stocks and
00:17:14
international, and they have not
panned out as much. But yet
00:17:19
still, if you held a world
portfolio, diversified, you still
00:17:24
beat bonds, you still beat
Treasury Bills. And in fact,
00:17:30
I've expanded on real estate in
the seventh edition and the S&P
00:17:34
beats real estate over the last
50 years.
00:17:38
I was gonna say, is that
the area that has drawn your
00:17:42
attention the most in these last
few years, as you're getting
00:17:46
ready for the seventh edition?
00:17:48
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
00:17:57
retire?"
- I was hoping
00:17:59
I could get you to
kind of jump right into it. And
00:18:02
maybe we could start a seventh
edition right here.
00:18:05
Well, I mean, everything that
happens, starts— and I keep on
00:18:09
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
00:18:16
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
00:18:24
this discussion of value versus
growth stocks, which was only
00:18:27
one chapter, I think in the
fifth edition. The sixth edition
00:18:31
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
00:18:41
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
00:18:49
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.
00:18:59
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
00:19:09
bookstores as well, - Yes.
00:19:10
For people that want
to dip in and take a
00:19:12
deeper dive. Great to talk to
you as well. Jeremy, thanks
00:19:15
again.
00:19:16
Thank you, Dan. It was a pleasure.
00:19:17
You got it. Jeremy Siegel,
Wharton Emeritus Professor, and
00:19:20
of course, author of <i>Stocks for
the Long Run</i>.
00:19:25
Thank you for listening to The Ripple Effect.
00:19:26
We hope you found this episode
00:19:28
informative and engaging. Don't
forget to subscribe and leave us
00:19:31
a review so that we can continue
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00:19:35
from the Wharton School.
