Principles
The data below is taken from Table 1.1, 1.2, Fig 1.5 and Fig 6.4 in the 2002 edition of the book.
| Duration | Stocks | Gold | Bonds | Dividend Yld | Inflation rt | Eqity Prem | Fed Model |
|---|---|---|---|---|---|---|---|
| 1871–2001 | 6.8 | -0.1 | 2.8 | 4.6 | 2.0 | 0–11 | NA |
| 1946–1965 | 10.0 | -2.7 | -1.2 | 4.6 | 2.8 | 3–11 | NA |
| 1966–1981 | -0.4 | 8.8 | -4.2 | 3.9 | 7.0 | 11–6 | TY |
| 1982–2001 | 10.5 | -4.8 | 8.5 | 2.9 | 3.2 | 6–3 | YT>=EY. |
This table presents some of the main findings presented in Chapter 1 and some related text. Stocks on the long term have returned 6.8% per year after inflation, whereas gold has returned -0.4% (i.e. failed to keep up with inflation) and bonds have returned 1.7%. The equity risk premium (excess return of stocks over bonds) has ranged between 0 to 11%, it was 3% in 2001 also. The Fed model of stock valuation was not applicable before 1966. Before 1982, the treasury yields were generally less than stock earnings yield.
Why the long-term return is relatively constant, remains a mystery.
The dividend yield is correlated with real GDP growth, as shown in Table 6.1.
Explanation of abnormal behavior:
- The low stock return during 1966–81 (and high gold return) was due to very high inflation.
- The equity risk premium rose to about 11% in 1965, however that should be unsustainable over a very long term.
In Chapter 2, he argues (Figure 2.1) that given a sufficiently long period of time, stocks are less risky than bonds, where risk is defined as the standard deviation of annual return. During 1802–2001, the worst 1-year returns for stocks and bonds were -38.6% and -21.9% respectively. However for a holding period of 10-years, the worst performance for stocks and bonds were -4.1% and -5.4%; and for a holding period of 20 years, stocks have always been profitable. Figure 2.6 shows that the optimally lowest risk portfolio even for a one-year holding, will include some stocks.
In Chapter 5, he shows that after-tax returns for bonds can be negative for a significant period of time.
| Duration | Stocks | Stocks after tax | Bonds | Bonds after tax |
|---|---|---|---|---|
| 1871–2001 | 6.8 | 5.4 | 2.8 | 1.8 |
| 1946–1965 | 10.0 | 7.0 | −1.2 | −2.0 |
| 1966–1981 | −0.4 | −2.2 | −4.2 | −6.1 |
| 1982–2001 | 10.5 | 6.1 | 8.5 | 5.1 |
Read more about this topic: Stocks For The Long Run
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