Lessons from 100+ Years of Global Stock Returns (EP.166)

Episode Summary

Executive Summary: In this episode of the Rational Reminder Podcast, hosts Benjamin Felix and Cameron Passmore discuss the book 'Nudge' by Thaler and Sunstein, analyze a survey on emotional investing, and provide an update on return predictability. The main topic is a deep dive into lessons from over 100 years of global stock returns using data from Dimson, Marsh, and Staunton, covering U.S. vs. global returns, market crashes, bond risks, and inflation impacts. They also address a listener question on converting family members to evidence-based investing, offering advice from Adam Grant's 'Think Again', and critique a bad advice article on passive investing.

Main Topics: Book Discussion: 'Nudge' by Thaler and Sunstein (Priority: 3/5): Review of the updated edition, focusing on choice architecture, libertarian paternalism, and how framing decisions impacts outcomes. Examples include cafeteria layouts, automatic enrollment in retirement plans, and the influence of social norms. Emotional Investing Survey Results (Priority: 4/5): Analysis of a Magnify Money survey showing 66% of investors regret emotional decisions, 32% have traded while drunk (59% of Gen Z), and 37% lose sleep over markets. Links to thrill-seeking and overconfidence in trading. Return Predictability Update (Priority: 5/5): Correction on CAPE's usefulness based on John Cochrane's work. Present value logic implies returns are forecastable, but not precisely enough for market timing. New PWL model uses 25% predictability for stocks and 75% for bonds. Lessons from 100+ Years of Global Stock Returns (Priority: 5/5): Dimson, Marsh, and Staunton's data shows U.S. stocks returned 6.6% real vs. 4.5% for rest of world. Major crashes (e.g., -96% in Japan 1939-48) and the decomposition of returns into dividend yield, growth, and multiple expansion. Converting Family to Evidence-Based Investing (Priority: 4/5): Advice from Adam Grant's 'Think Again': avoid logic bullying, ask questions, find common ground, and use confident humility. Focus on few strong arguments and discuss the conversation itself if it gets heated. Bad Advice of the Week: Seven Downsides to Passive Investing (Priority: 3/5): Critique of an Entrepreneur Magazine article claiming passive investing limits control, overvalues holdings, and prevents learning. Hosts counter each point, emphasizing that index funds help avoid behavioral errors and provide market returns.

Key Arguments: Choice architecture significantly influences decisions; small changes in framing can lead to better outcomes without restricting freedom. Emotional investing leads to regret; thrill-seeking and overconfidence are linked to excessive trading and poor performance. Returns are forecastable in the long run, but not precisely enough for market timing; valuations provide wide confidence intervals. U.S. stock returns have been an anomaly; expecting 10% nominal returns going forward is unrealistic. Bonds are not always safe; high inflation can make them as risky as stocks, and correlations can turn positive. Converting others to evidence-based investing requires empathy and questioning, not bombarding with facts. Passive investing is not without limitations, but the criticisms often stem from misconceptions about control and knowledge.

Data Points: Investors regretting emotional decisions: 66% - Survey of 1,116 U.S. consumers with investment accounts. Investors trading while drunk: 32% overall, 59% of Gen Z - Same survey, highlighting impulsive behavior. U.S. stock real annualized return (1900-2020): 6.6% - Dimson, Marsh, and Staunton data; nominal return 9.9% with 3% inflation. Global ex-U.S. stock real annualized return (1900-2020): 4.5% - More than 200 basis points lower than U.S. Japanese stock cumulative loss (1939-1948): -96% - Worst individual country performance in the dataset. U.S. government bond real loss (1940-1991): -67% - Bond bear market that took 50 years to recover in real terms. Global stock cumulative loss (2008): -41% - Financial crisis impact on world index.

Pivotal Quotes: "Present value logic implies that if both returns and dividend growth are unforecastable, the price-dividend ratio is constant." — Benjamin Felix: Explaining John Cochrane's argument for return predictability based on volatile price-dividend ratios. "If you go and bombard somebody who doesn't share your beliefs with all of the facts and figures and data for why you hold your beliefs, that's one of the worst things that you can do." — Benjamin Felix: Advice from Adam Grant's 'Think Again' on how to discuss investing with family. "If you know a particular stock is overvalued or undervalued, your hands are tied." — Cameron Passmore: Quoting the bad advice article's criticism of passive investing, which the hosts refute.

Implications: Investors should temper return expectations, especially for U.S. stocks, and recognize that bonds carry inflation risk. Emotional discipline and diversification remain critical. When discussing investing with others, use empathy and questioning rather than data dumps. Passive investing is robust despite misconceptions.