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92

When I wrote Contrarian Investment Strategy in 1980, stocks were more out of favor than they had been in 15 years. As we saw in chapter 11, collectibles, diamonds, precious metals, and bonds burnt up the track in the previous eight years, while stocks lagged badly. If you had asked investors back then for the last place they wanted to put new money for their retirement, most would have said common stocks.

If these investors had had this chapter in front of them at the time, I think many of them would have changed their decisions instantaneously. Figure 13-1, from Jeremy J. Siegels first-rate book, Stocks for the Long Run, provides the rates of return from 1802 to 1996 for stocks, bonds. Treasury bills, gold, and the dollar after adjusting for inflation. As the chart indicates, the best way to make your money grow over a long period of time is to invest in the stocks of good companies.

The figures are staggering. A dollar invested in stocks over the life of the study became $512,232 (including reinvested dividends)-and this after inflation. Before inflation, it became $6,770,887. Bonds andTrea-

Figure 13-1

Stocks Have It

Total Return Indexes 1802-1996 (inflation adjusted)

$1,000,000 $100,000

One of the easiest ways to invest-buying blue-chip stocks-is also the best, providing spectacular returns over time.

1802

1840

1880

1920

1960 1996

Source: Jeremy J. Siegel, Stocks for the Long Run (McGraw-Hill, 1994), reproduced with permission of the McGraw-Hill Companies.

Stock Returns Over Time



Stocks

Bonds

Bills

Nominal Yield

Gold

Inflation

Periods

1802-1996

7.0%

3.4%

2.9%

4.3%

.06%

1.3%

1871-1996

Major Subperiods

1802-1870

1871-1925

-.82

1926-1996

Postwar Periods

1946-1996

-.13

1946-1962

-1.4

-1.3

-3.0

1963-1979

-2.6

-.05

10.9

1980-1996

11.5

-7.4

All returns are averages for the period, expressed as percentages.

"Nominal Yield" is the mean annual T-Bill return before inflation.

"Inflation" is the average increase in the Consumer Price Index.

Data: All data 1802-1945, Gold data 1802-1995: Jeremy Siegel. All odier data 1946-1996: Dreman Foundation.

sury bills (all interest is reinvested) are not even in the same league. A dollar invested in bonds in 1802 increased to 721 dollars at the end of 1996, after inflation, while one invested in T-bills increased to 262 dollars. Gold, one of the hottest investments in the late 1970s, barely keeps up with inflation; a dollar here only rose by 12 cents in 195 years. And look at the dollar itself. By 1996 the poor greenback had lost 92% of the purchasing power it had in 1802.

Lets put stock returns under the microscope. Sure the returns are enormous, but dont the historians say that most of the increase came in the late nineteenth century, with the great railroad boom and die rapid industrialization of the country; or even earlier when stocks of canal companies were the rapidly expanding blue chips of the day? They do, but most historians arent statisticians. The question is whether the returns are heavily weighted in one or two periods. Table 13-1, again based on Siegels numbers (and the Dreman Foundations after 1945), demonsti-ates that diey are not.

Table 13-1

Annual Returns to Stocks, Long-Term Government Bonds, T-Bills and Gold: Adjusted for Inflation

1802-1996



The table shows the return of stocks, along with Treasury bills, long government bonds, and gold, adjusted for inflation over time.*

The collectors of Monets or Degas in the 1870s, although they made a killing, made only a fraction of the amount on an inflation-adjusted basis. In fact, I went back to the 1870s and calculated these returns, which came to 6% annually, only 73% of the amount they would have made investing in stocks over the same period. The retums we should focus on are the inflation-adjusted ones, because they represent the increase in purchasing power from an investment over time.

From 1802 to 1996 our long-lived investor increased his capital by 7% annually, after adjusting for inflation, but before taxes. Now glance at the three major subperiods of the study: 1802-1870, 1871-1925, and 1926-1996. The rate of retum in all these periods is remarkably similar, 7%, 6.6%, and 7.2%. Those bom more recently than 1802 might say, "This is ancient history. How have stocks done since World War II?"

The postwar retum, at 7.5% after inflation, is actually a little better than the 6.8% annually over the previous 143 years. Breaking down the postwar retums further, the real retums (column 1) are positive for stocks in all three postwar periods. Even in the 1963-1979 period, the worst period for stocks in the past 50 years, you still would have increased your real purchasing power by about VA% a year, while almost tripling it in nominal dollars.

What about the investor who bought stocks at the top of the market in 1929, and then watched in horror as they lost 90% of their value by 1932? Surely this is the exception to the mle. Nope. It took time-15 years-but the investor buying stocks near the market high in August of 1929 came out slightly ahead after inflation. She had retained her entire purchasing power in the worst period for stocks in American history.

"But," someone might say, "buying bonds or T-bills at the same time would have put cautious investors miles ahead, particularly with the deflation of the early thirties." Again no. Had an investor purchased bonds at the top of the 1929 market, he would have lost a staggering 86% of his capital in real terms in the same 30-year period, while buying T-bills would have cost him over 92%. $ market drops in 1921,1973/1974, 1987, and 1990 all had similar outcomes. Rather than getting killed, equity investors who didnt panic were big winners over time.

* Nominal retums are much higher for these investments because they are not adjusted for inflation, thus exaggerating the results in terms of real purchasing power, t The nominal return is used in both cases.



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