Over nearly two centuries, stocks liave returned 7.0% after inflation. Put anotiier way, tiiis means you double your real capital in stocks every 10 years and 6 months. After 21 years your real capital increases fourfold, after 42 years-not an impossible time for people in their twenties or even early thirties-it increases 16 times.

Look again at the table, but this time at the retiarns of bonds and T-bills after inflation over the same periods. Long govemment bonds (column 2) and T-bills (colunrui 3) significandy underperformed stocks over 195 years. T-bills returned 2.9% and long bonds returned 3.4%, compared to 7% for equities. Stocks provided almost two-and-a-half times as much annually as T-bills and double the amount of bonds. That is one heck of a lot of outperformance. For gold bugs the news is even worse. Over this time, stocks retumed 117 times as much as gold on average each year.

But this is only for openers. Glance at the three major subperiods of the study. The disparity between stocks and the other investments becomes larger with the passage of time. In the 1802 to 1870 period stocks outperformed T-bills by 1.9%, or 37% annually. Stocks retumed 106% more than T-bills in the 1871 to 1925 period, and 12 times as much annually from 1926 to 1996. Bond retums, though marginafly better than T-bills, were also dwarfed by stocks.

Gold was a nonevent throughout. Holding money in gold, the ultimate investment of the prophets of doom, is simply a joke with rising prices. In the postwar period gold actually decreased capital by a fraction of a percentage point annually. Some ultimate investment!

Stocks outperformed T-biUs 73% of the time for all five-year periods between 1802 and 1996, 81% for ten-year periods, 95% and 97% respectively for 20- and 30-year periods. The results after the war are better yet. For any five-year period stocks outdistanced T-bills 82% of the time, and for any 20-year or 30-year period 100% of the time. The comparisons with long bonds are nearly identical.

What do all these rather remarkable numbers tell us? Clearly that stocks are a far better long-term investment than bonds or Treasury bills. Im not the first to make this statement, however.

In 1924 Edgar Lawrence Smith, a New York investment banker, wrote a book rejecting the conventional wisdom that high-grade bonds were a superior long-term investment to stocks. Smiths data went from the Civil War to the 1920s. His book, Common Stocks as Long Term Investments, although highly praised at the time, was in retrospect viewed as one of the contributors to the 1929 crash. Smith was lambasted for decades in books reviewing this debacle. Smith tumed out to be somewhat of a prophet, though. He had also written that even if an investor

bought stocks at the top, there was only a 6% chance that he or she would have to wait 6 to 15 years to break even. There is no record that Smith anticipated circumstances nearly as extreme as the Crash and the Great Depression, yet, as was indicated, it took an investor only 15 years to recover the money invested at the 1929 peak.

John Jacob Raskob, a director of General Motors and a major market figure of the era, also wore homs after tiie 1929 crash. Raskob, in an oft-quoted article in The Ladies Home Joumal, stated that an investor putting $15 a month into blue-chip stocks could accumulate $80,000 over the next 20 years. Raskobs timing was admittedly not quite perfect-the article appeared only a few days before the Dow hit its then all-time high on September 3, 1929. Too, his estimates, based on the enormous rates of retum of tiie 1920s bull market, were a touch optimistic-24% a year, or over three times the rate of retum of the previous 50 years. As a result, he too was ridiculed by historians as an example of the inane advice experts provided at the time. Wildly optimistic projections and terrible timing not withstanding, anyone following Raskobs advice would have more capital than a person putting money into T-bills at the same time-only four years later. Further, the investors stock portfolio, while not reaching $80,000 in 20 years, would still be a respectable $60,000 in 30 years.

Although inflation and taxes in the 1920s still had a minimal impact on the retums of T-bills or bonds, the superiority of investing in stocks was already recognized. Another leading advocate of stocks at the time was Irving Fisher of Yale, the outstanding American economist of his day. Unfortunately, his reputation was tarred by an 11-word sentence he made days before the 1929 Crash: "Stocks are now at what looks like a permanentiy high plateau."

All the same. Fisher foresaw the superior retums of equities clearly in the mid-twenties:

It seems then that the stock market overrates the safety of "safe" securities and pays too much for them, that it underrates the riskiness of risky securities and pays too little for them ... and finally that it mistakes the steadiness of money income from a bond for a steadiness of real income which it does not possess. In steadiness of real income or purchasing power, a list of diversified common stocks 8 88 8 bonds.

These prophetic sentiments were echoed by John Maynard Keynes and other leading economists and financial figures of the time.

Though the evidence was accumulating, the 1929 Crash and ensuing market collapse resulted in the perception that stocks were a risky in-

The Investment Revolution

To 1945 inflation was a nonfactor in markets. The 1940 dollar, for example, still had 88 cents of the purchasing power of the 1802 greenback. But since 1945 inflation has moved up relentlessly. The dollar today, as Figure 13-1 demonstrated, has only 8% of the purchasing power it had in 1802. From 1946 to 1996, prices rose 4.4% annually, or over 15 times as fast as the rate for the previous 143 years. Inflation has precipitated a revolution in investment markets that has irrevocably changed the investments that will preserve and enhance your capital, as well as those that will destroy it.

Since 1945, inflation and taxes-the twin horses of die apocalypse- have made a disaster of the pmdent method of savings we leamed from our parents and grandparents. Figure 13-2 shows the inflation-adjusted retums on Treasury bills, Govemment bonds, and stocks before and after taxes since World War II. If an investor put $100,000 into T-bills in 1946, after inflation it would have increased to $124,000, a gain of only

of 1 % annually. At this rate, it would take 150 years to double your capital. Bonds did only slightly better: $100,000 in 1946 became $155,000 by the end of 1996, or a gain of under 1% annually. Unfortunately, millions of Americans holding bonds, T-bills, money-market funds, and other fixed-income investments have tieen trampled by inflation, the first of the deadly horsemen. Its almost as though the Feds hired Jesse James to separate you from your savings.

By comparison, investing $100,000 in stocks hit the jackpot. It became $4,035,000, thirty-three times as much as T-bills and 26 times as much as bonds in the same time. Although stocks have done better than bonds since at least the early 1800s, they have dominated markets in the postwar period. After adjusting for inflation, stocks retumed 7.5% annually in this period, 18 times more than T-bills and nine times as much as bonds.

But bad as the results for bonds and T-bills are, they only get worse when the second horseman of the apocalypse rides through. If you pay income taxes on your investments, the disparity between stocks and

vestment, while bonds were a safe haven, persisting for several more decades. As strong as the superior performance of stoclcs over T-bills and bonds was in 1802 to 1945, it was only a part of the picture. The inflationary story that crippled the retums of T-bills and bonds only began after World War II. It is here we must look to find what the tmly risky investments are.