Wharton Professor Jeremy Siegel has received a lot of attention for his harsh criticism of the Federal Reserve recently , but that’s not why he is famous. His 1994 book, “Stocks for the Long Run,” chronicled almost 200 years of investing in stocks and bonds, and contained groundbreaking research on the long-term outperformance of stocks over bonds and the effect of inflation on both those investments. Siegel’s masterwork is one of a small handful of books in the past 30 years (including Burton Malkiel’s “A Random Walk Down Wall Street,” Charles Ellis’ “Winning the Loser’s Game,” and Jack Bogle’s “Common Sense on Mutual Funds”) that have become investment classics. Professor Siegel is back with the 6th edition of his book, completely updated with new data on the long-term performance of stocks and bonds, and whole new chapters on real estate returns (looking at REITS for fifty years), factor and ESG investing, indexing vs. active investing, and the optimum stock/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? Why well, think of how much had happened. I mean, the great bull market since the financial crisis… I wrote the last one just a couple of years after the crisis… So many questions came up. And this is by far the greatest revision that I have. There are five new chapters in it. There are many supplements of factors. I added real estate returns. talk about bitcoin, just to mention some of some of the new items that are in the book. As in previous editions, you conclude that real (inflation adjusted) returns on stocks have remained at 6.7% a year, roughly 10% or so not including inflation. adjusted. I think the key takeaway here is that in the long run stocks do tend to overcome inflation. Absolutely. Despite all the ups and downs and crises, and bear markets that we’ve had over the last 30 years, the real return on stocks has been absolutely the same, which is really quite remarkable. And secondly, as you point out, not only do stocks tend to overcome inflation in the long run, they completely overcome inflation. They have trouble when the Fed is tightening. We see that now. But once that tightening is done, once normalization comes back, they make up the lost ground and they get back to that long-term trend. The problem here right now is inflation is suddenly as high as it was in parts of the 1970s. Stocks can underperform during periods of sudden inflation. And how do you overcome that? What do you do about that? Well, it’s actually when the Fed tightens and raises real interest rates all assets go down in price. Look at bonds, stocks, real estate started to go down. There’s no question about that. And in fact, many commodities now are going 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 is raising interest rates, all those assets are gonna go down. So unless you can time the market, there’s really no place to hide. And this goes to the next question about indexing and staying in low cost index funds. Would you say the evidence is still as compelling as ever? 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, it’s more persuasive than when I wrote the first edition of the book. The percent of funds that can beat the S & P 500 has gone down and down over time. Some pick better stocks, but once fees are included, indexing comes out better than ever. Why is that? What accounts for this persistent underperformance? Charlie Ellis used to say it’s not because active managers are stupid. They’re actually really good. They’re just competing against other active managers and they don’t have an information advantage. That is a very important reason. But the other is the costs. I mean, you can now 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’re behind the index fund. What about style or factor investing? Academic research has suggested that some investing styles like small cap, value, or momentum outperform over long periods. What are your conclusions? There’s been literally dozens of factors that people have found. But one thing that I found very surprising and not in the literature at all, is that virtually all of those factors stopped performing in 2006, just prior to the Financial Crisis. What about growth versus value? There seems to be 25-year cycles when growth just really outperforms value and I think we just passed through one of them. Amazon, you know, Microsoft, Apple, of course, but yet we see that over the long run, those stocks do not keep up their superior growth. Is there something that’s happened since 2006 that’s caused this this breakdown? I think there’s a couple of things that went on, first of all, the Financial Crisis crashed the banks and they were the value stocks. And then of course, what we’ve seen over the last 15 years is the unprecedented growth of the mega tech stocks. We’ve never seen a period in history, where stocks that weren’t even in existence 10-15 years ago, have suddenly become the biggest cap stocks in the entire market. How about ESG: Environmental, Social and Governance. What do you think of it as an investment style? The first thing I do is contrast them with Milton Friedman fifty years ago, who said that what CEOs should be doing is making the most money and not paying attention to the social. Well, what we find is that maybe if, by doing well, you could also do good. For instance, 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 the social part of that becomes hard to define. I share some of the suspicions about everyone getting on the bandwagon to try to be properly diverse or socially governing in the exact way that fits the model. But the truth of the matter is that ESG investing does not necessarily mean that you’re going to grossly underperform the market. What about an optimal stock/bond allocation? Last year at this time, everyone was saying the 60/40 stock/bond allocation was dead forever. Now bond yields are rising. My feeling is you should be moving to a 75/25 or 80/20 stock/bond portfolio. There has been a very marked international decline in real (inflation adjusted) returns, which means that you’re not going to get the after-inflation rate of returns in bonds that you once did. And yet the valuation of stocks has remained much more stable. Now, I know yields have gone up sharply. And some people have said, “My goodness 4% yield on (2 year) bonds, doesn’t that look good?” Remember that is 4% before inflation, take that and compare it with the long run real return on stocks, which is 6.7% after inflation. Tell me where you want to be. Is there any reason to expect that the returns for the next decade or so might be subpar? 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 might go through a recession. I talked about the big monetary explosion [that the Fed created] but that basically is going to raise the price level of everything. And as we said at the beginning of this interview, stocks are claims on real assets, they’re claims on land and capital, intellectual property, copyrights, plant equipment. Those things will go up with inflation. That the Dow is going to be the same 10 years from now, really, I think totally flies in the face of history. You have a new chapter on real estate new data, looking back 50 years. I would have real estate in my portfolio. I would definitely have REITs and as you know, the S & P added that as the 11 sector of the market. What about home ownership? You should own your home… But don’t forget the real estate market and all the commercial real estate. One reason the REITs have done really quite well since the pandemic is because they don’t have as big ownership of some of those commercial buildings. A lot of the hot warehousing data centers, things like that, they’ve done very, very well. Professor, thanks for joining us on CNBC Pro.
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