Stocks vs. Other Investments

The following is a summary of a section of the book called Stocks for the Long Run by Jeremy J. Siegel. For the KP Investment Club members in NY, I have multiple copies of this book that can be checked out. 

In the book Stocks for the Long Run, the author Jeremy Siegel tells a story about John J. Raskob, who was a senior financial executive at General Motors. In the summer of 1929, a journalist named Samuel Crowther interviewed Raskob about how the typical individual could build wealth by investing in stocks.  In the interview, Raskob claimed that American was on the verge of a tremendous industrial expansion. He stated that by putting just $15 per month into solid common stocks, investors could expect their wealth to grow steadily to $80,000 over the next 20 years. He predicted an average return of 24%, which was unprecedented. At the time, these returns seemed plausible in the atmosphere of the 1920s bull market. Millions of people were putting their life savings in the market seeking a quick profit.

On September 3, 1929, just days after Raskob’s interview was published, the Dow Jones Industrial Average reached historic highs. A mere seven weeks later, the stock market crashed representing the most devastating decline in U.S. History. The market value of the world’s greatest corporations declined 89%. Savings were eliminated. Many people borrowed money to invest and were forced into bankruptcy.

Raskob’s advice was ridiculed and denounced for years to come. Senator Arthur Robinson of Indiana publicly blamed Raskob for the stock market crash. However, was this blame fair? Was Raskob wrong? Can everyone be wealthy by investing in stocks early and often? Or should people pursue ‘safer’ alternative investments?

Investing over time in stocks is a winning strategy whether an investor starts at a market top or not. If you calculate the value of the portfolio of an investor who followed Raskob’s advice in 1929, patiently putting in $15 a month into the market, you find that his accumulation exceeds that of someone who placed the same money in Treasury bills after less than four years. By 1949, his stock portfolio would have accumulated almost $9000, a return of 7.86 percent, more than double the annual return in bonds. After 30 years the portfolio would have grown to over $60,000 with an annual return rising to 12.72 percent. Although these returns were not as high as Raskob had projected, the total return of the stock portfolio over 30 years was more than eight times the accumulation in bonds and more than nine times that in Treasury bills. The real losers were the people who sold or never bought stock in the first place, citing the 'great crash' as the vindication of their caution.

Consider the table below. Siegel traces year by year how real (after-inflation) wealth has accumulated for a hypothetical investor who put one dollar in stocks, long-term government bonds, U.S. Treasury bills, gold, and U.S. currency over the last 210 years.

  

The table below depicts the total nominal (not inflation adjusted) return for indexes of stocks, long and short-term bonds, gold, and commodities over the last 210 years.

Summing Up:

In the short run, stock prices fluctuate and sometimes widely. However, as seen in the graph, over the long haul, stocks outperform bonds and other investments by multiples. The short-term swings in the market become insignificant when compared to the overall upward movement of prices throughout history.
 
Market timing isn't for me. My plan is to continue saving early and often, buy solid blue chip companies that pay dividends, ride the ups and downs, and allow time and compound interest to work wonders.