Episode 297 - Do Stocks Return 10-12% On Average? & Zero to Millionaire with Nicolas Bérubé

Episode Summary

Executive Summary: Episode 297 challenges the common claim that stocks should return 10% annually, arguing that such expectations rely on an exceptional U.S. post-1950 sample, valuation expansion, and hindsight bias. The hosts emphasize real vs. nominal returns, global history, and current valuations implying lower expected returns. The interview with Nicolas Bedouet reinforces long-term, behavior-focused, index-based investing over market speculation.

Main Topics: Why 10% stock return expectations are misleading (Priority: 5/5): The hosts argue that 10% annual stock return claims are often based on U.S. nominal returns from the strongest historical period, which is not representative of future expectations. Nominal vs. real returns and inflation (Priority: 5/5): They stress that nominal returns can be deceptive because inflation erodes purchasing power, so planning should be based on real returns. U.S. exceptionalism, valuations, and expected returns (Priority: 5/5): The discussion explains how rising U.S. stock valuations and survivorship/learning effects lowered expected returns while boosting realized returns. Global historical returns as a better benchmark (Priority: 4/5): The hosts cite global and developed-market data showing long-run real equity returns closer to 4.5%-5.3%, not 7% real. Behavior, indexing, and avoiding speculation (Priority: 5/5): Nicolas Bedouet describes his move from options speculation to disciplined index investing, emphasizing simplicity, diversification, and behavioral control. Media, recency bias, and investor psychology (Priority: 4/5): The interview highlights how financial media and recent performance bias can distort investor expectations and provoke poor decisions. Advice, fees, and implementation choices (Priority: 4/5): The conversation closes with practical guidance on DIY, robo-advisors, and professional advice, stressing low fees and behavior fit over complexity.

Key Arguments: A 10% stock return expectation is too high because it is anchored in an exceptional period of U.S. market performance and valuation expansion, not a neutral baseline. Nominal returns are not useful for planning because inflation materially reduces purchasing power; investors should think in real terms. Higher accessibility and perceived safety of markets tend to raise valuations and lower expected future returns, not increase them. The U.S. market’s post-1950 outperformance was partly unexpected; future returns would need similarly surprising good fortune to repeat it. Global and pre-1950 data suggest long-run real equity returns are closer to 4%-5%, making 7% real expectations aggressive. Behavioral mistakes, fees, taxes, and failure to capture index returns mean investors should likely assume less than headline market averages. Indexing is favored because a small fraction of public companies drive most of market wealth creation, making stock-picking a low-probability strategy. The role of financial media is usually counterproductive for investors because it amplifies short-term noise, negativity, and recency bias.

Data Points: U.S. stocks nominal return (1950-2023): 11.32% - Total U.S. market index, pre-fee and pre-tax, in U.S. dollars S&P 500 nominal return (1950-2023): 11.43% - Used to explain where the 10%-12% claim comes from U.S. total market return (last 20 years, nominal): 9.81% - Recent history that reinforces the 10% myth S&P 500 return (last 20 years, nominal): 9.69% - Recent U.S. market history in nominal terms U.S. stocks real return (1950-2023): 7.63% - Inflation-adjusted return in U.S. dollars U.S. stocks real return (last 20 years): 7.16% - Inflation-adjusted recent U.S. equity performance U.S. stocks real return (1900-1950): 5.57% - Pre-1950 U.S. real return, closer to global long-run returns U.S. market real return over 15 years ending April 1985: 10.58% annualized - Illustrates why nominal returns can look strong even when inflation is high Inflation over same 15-year period: 7.05% annualized - Shows erosion of purchasing power Example inflation change for $100 from 2010 to 2024: $140 - Bank of Canada inflation example used to show compounding of inflation Canadian stamp price increase: $0.42 to $1.07 - Illustrative example of long-term inflation in Canada Real expected return from U.S. CAPE earnings yield: just below 3% - Approximate current real return implied by valuation levels Valuation contribution to historical U.S. equity premium: 2% annualized - Binsbergen paper attributes part of U.S. outperformance to survivorship and learning effects via valuations Adjusted U.S. real return (1920-2020): 5.28% annualized - U.S. return net of the estimated 2% unexpected/valuation component Global stocks real return ex-U.S. (1900-2023): 4.35% annualized - Shows long-run non-U.S. returns are much lower than U.S. post-1950 returns Global stocks real return incl. U.S. (1900-2023): 5.16% annualized - Broader global benchmark for long-run equity returns Cederburg median international stock return: 5.28% annualized - Median of 30-year bootstrap samples across developed markets Cederburg median domestic stock return: 4.78% annualized - Median 30-year bootstrap return for domestic stocks PWL real expected return for globally diversified portfolio with Canadian overweight: 4.62% - Firm-level planning assumption used by the hosts PWL nominal expected return using 2.5% inflation: 7.24% - Converted from the real expected return assumption Nicolas Bedouet's options loss: about $10,000 - His early speculative trade loss that shifted him toward disciplined investing Monish Pabrai fund drawdown in 2008: 67% - Used as an example of extreme volatility and emotional discipline Growth concentrated in public companies: 1% to 4% - Bedouet cites research that most market wealth comes from a very small share of public firms DIY/behavior gap: 1% or higher - Mentioned as the typical shortfall between market returns and investor returns due to behavior

Pivotal Quotes: "The market doesn't really care how you feel, it doesn't care about your macro views, it doesn't care about what you think the price of oil is going to be a year from now." — Nicolas Bedouet: He explains what he learned after losing money on put options and abandoning speculative thinking "The fact that it's easier to invest in stocks today, and that the market is arguably safer than it was back then, reduces expected returns. It doesn't increase them." — Benjamin Felix: A rebuttal to the argument that modern market access justifies higher expected stock returns "What people miss sometimes is average over 5, 10, 20, 25 years, you're not average anymore. You're in the top 10 or 5% of investors just because of compounding." — Nicolas Bedouet: He explains the long-term advantage of staying invested in an index

Implications: Listeners should treat 10% equity return claims skeptically, plan using real and globally grounded return assumptions, and prioritize low fees plus good behavior. The industry should expect more emphasis on valuation-aware planning and evidence-based indexing.