Podcast Summary
Learn effective communication skills from experts on the Think Fast, Talk Smart podcast: Improve communication abilities through expert tips on managing anxiety, taking risks, and more. The stock market offers consistent returns of 6.6-7.1% after inflation for long-term investments, making it a reliable investment strategy despite economic fluctuations.
Effective communication skills are essential in business and life, and the Think Fast, Talk Smart podcast can help you hone these skills. Hosted by Stanford lecturer Matt Abraham, the podcast features experts discussing tips on everything from managing speaking anxiety to taking risks in communication. With nearly 43 million downloads and being the number one career podcast in over 95 countries, it's worth checking out for anyone looking to improve their communication abilities. Meanwhile, in the world of investing, Jeremy Schwartz, the global chief investment officer at WisdomTree, emphasizes the importance of long-term investment in the stock market. In his latest book, Stocks for the Long Run, co-authored with Jeremy Siegel, Schwartz provides historical data showing that stocks have consistently returned between 6.6% and 7.1% after inflation over multiple holding periods. The foundation of the book is that the stock market is the best place for long-term investments, despite periods of high inflation. The book covers a range of topics, including safe withdrawal rates in retirement and the history of major economic booms and busts. Overall, the key takeaway is that investing in the stock market for the long term has proven to be a reliable strategy, despite economic fluctuations.
Historically, stocks have outpaced inflation over the long term: Stocks have provided a 5% real return after inflation on average due to companies' ability to raise prices and earnings growth
Stocks have historically served as effective inflation hedges due to their ability to provide returns that outpace inflation over the long term. This is because companies can raise their prices to keep up with inflation, leading to earnings growth that offsets the impact of inflation on stock values. The earnings yield, which is the inverse of the price-to-earnings (PE) ratio, is a key indicator of the market's expected real return. Historically, the PE ratio for the market has averaged around 15 to 16, which implies an earnings yield of around 6.7%, or a 5% real return after inflation. This relationship holds because the PE ratio and earnings yield are inversely related. While it is important to note that there are variations in valuations across different sectors and companies within the market, a fair multiple for the S&P 500 as a whole is around 20, implying a real return of around 5% after inflation. This long-term perspective contrasts with the short-term volatility that can be observed in response to Fed tightening cycles or other economic factors.
Understanding historical context vs current market realities: Historical stock market data provides insights but may not directly apply to today's investors due to economic and market changes. Adapt to current realities while learning from the past.
That while historical stock market data can provide valuable insights into the past, it may not directly apply to today's investors due to significant changes in the economy and market trends. For instance, the early stock market data (pre-1925) showed that stocks primarily offered dividend returns with minimal price appreciation, unlike today where buybacks and other factors contribute significantly to returns. However, even if an investor had held onto the original S&P 500 stocks from 1957, they would have still outperformed the index by about a percent, despite having no exposure to sectors like technology and healthcare that now dominate the market. This illustrates the importance of understanding historical context while remaining adaptive to current market realities.
Value of established companies: Investing in older, established companies can outperform sectors and beat bonds over the long term. Don't overlook their value and maintain a long-term perspective.
The value of investing in older, established companies should not be overlooked. The discussion highlighted that in nine out of ten sectors, the original companies outperformed the sectors themselves. This goes against the common belief that new and upcoming companies are always the best investments. The speaker also emphasized the importance of having a long-term investment horizon for stocks, as they have historically outperformed bonds over extended periods. For instance, over the last 150 years, stocks beat bonds 99% of the time for periods longer than 30 years. While the short term may present challenges, the long-term trend favors stocks. Furthermore, the speaker mentioned the example of Melville Shoe, which transformed into CVS after acquiring a smaller company, demonstrating how companies can adapt and continue to be strong investments. Overall, the message is that investors should not disregard the value of established companies and should maintain a long-term perspective when constructing their portfolios.
Bonds carry inflation risk and can decline in value: Despite being considered safer, bonds can still lose value due to inflation and market volatility. Consider solutions like floating rate treasuries and high yield bonds for managing risk and generating returns.
While people often view bonds as safer than stocks, the truth is that inflation can still erode the value of bond investments over time. The bond market, including ETFs, can carry risks, as evidenced by last year's 13% decline. WisdomTree, a leading ETF provider, offers solutions like their floating rate treasury product (USFR) for managing short-term cash and high yield bond ETFs (WisdomTree High Yield Bond Fund) for those willing to take on more risk. USFR provides high yields due to the inverted yield curve, while the high yield bond ETF screens for quality companies with strong free cash flow to mitigate potential defaults. Historically, high yield bonds have offered returns similar to the stock market but with less volatility. With the current economic climate, it's crucial to consider these options as part of a well-diversified investment portfolio.
Tax implications and investor preferences for dividends vs buybacks: Companies may prefer share buybacks for tax efficiency and executives for capital gains, while some investors prefer dividends for income generation and predictability.
While both dividends and share buybacks are ways for companies to return capital to shareholders, they have different tax implications and investor preferences. Share buybacks can be more tax-efficient for companies and executives due to the tax treatment of capital gains versus dividends. The shift towards buybacks in the 1980s was influenced by tax laws and executive compensation structures. However, some investors still prefer dividends due to their predictability and income generation. WisdomTree, the firm discussed, specializes in fundamentally weighted indexing, which differs from market cap-weighted indexes by weighting stocks based on their financial characteristics rather than their market size. This approach can provide more exposure to undervalued stocks and potentially outperform market cap-weighted indexes over time. Despite the book's focus on indexing, WisdomTree acknowledges the drawbacks of some index construction methods and the value of both dividends and buybacks as measures of a company's value.
Impact of defining growth and value differently in investing: Differing definitions of growth and value lead to varying portfolio compositions and cutoffs. Focusing on dividends can create value-like indexes, while fundamentals-based indexes sell overpriced stocks, benefiting value investors in less frequent rebalancing.
The way you define growth and value in investing significantly impacts your portfolio and the resulting cutoffs between these categories. This was evident during an unusual rebalancing season when the energy sector, previously considered value, was reclassified as growth and removed from value indexes. By focusing on total dividend streams instead of market capitalization, you can achieve a value-like cutoff, with dividend-weighted indexes being cheaper than the market in large, mid, and small caps. This discrepancy between high dividend stocks and traditional value indexes is currently at record levels. Additionally, fundamentally weighted indexes sell stocks when prices deviate from fundamentals, while market cap indexes do not. Rebalancing a fundamentally weighted index less frequently helps mitigate the impact of momentum factors, making value better suited for less frequent rebalancing. The book also suggests that at least a third of your equity allocation should be international stocks, a tough sell given recent performance, but a recommendation based on diversification benefits and long-term growth prospects.
Investing in Foreign Markets: Lower Valuations and Attractive Yields: Investors should not overlook foreign markets, particularly Europe and emerging ones, due to lower valuations and attractive yields. Valuation matters over the long run, and faster-growing countries do not always provide the best returns. The speaker, a monetary economist, warns of potential inflation and calls for more interest rate hikes.
Investor Horizon has a significant allocation to foreign stocks, particularly in Europe and emerging markets, due to their lower valuations compared to the S&P 500. The speaker argues that investors should not ignore these markets, as they represent a large portion of the global economy and can offer attractive yields. He also emphasizes that valuation matters over the long run and that faster-growing countries do not always provide the best returns. Furthermore, the speaker, who is a trained monetary economist, believes that the Federal Reserve may be making a mistake by being too restrictive and potentially behind the curve on inflation. He has been warning about an inflation problem since 2020 and has called for more interest rate hikes than what was anticipated by the market.
Economist Jeremy Siegel Criticizes Fed Chairman Powell's Monetary Policy: Renowned economist Jeremy Siegel argues the Fed should have acknowledged inflationary pressures earlier and pause or even cut interest rates to prevent deeper recession. He criticizes Powell for ignoring money supply and wages adjustment.
Jeremy Siegel, a renowned economist, believes Federal Reserve Chairman Jerome Powell is being too restrictive with monetary policy. According to Siegel, the Fed should have acknowledged the inflationary pressures earlier and should now pause or even cut interest rates. He criticizes Powell for ignoring the relationship between money supply and inflation, and for not allowing wages to adjust to inflationary pressures. Siegel also points to the housing market data and the record yield curve inversion as signs of economic instability. He argues that the Fed's restrictive policy could lead to a deeper recession than necessary, as inflation will eventually come back down. Siegel's impassioned stance on the issue is a continuation of his view that the Fed needs to pivot sooner than expected.
