29 November 2023

At the Money: Here's Why Stocks Are Your Best Bet

1Frameworks

6Insights

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Long-Horizon Equity Investing

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 2

Myth Buster02:19

The Long Run Can Still Include 17 Years of Real Losses

Long-term superiority does not mean stocks win over every extended period. Schwartz cites a 17-year stretch of lost purchasing power for equities while noting that bonds experienced an even longer period of negative real returns.

Stocks can lose purchasing power for many years.
The cited maximum equity period was 17 years.
Bonds faced a cited 35-year period of negative real returns.
Inflation is a major threat to fixed-income purchasing power.

“The longest period we had in our data was seventeen years of losses of persing power, so after inflation, persing.”
Jeremy Schwartz · 02:37

“bonds had a double that time period, so they had a thirty five year period where it had negative real returns.”
Jeremy Schwartz · 02:51

#drawdowns#purchasing power#bonds#risk

Myth Buster06:11

Gold Preserved Purchasing Power but Added Little Growth

Gold historically kept pace with inflation, but Schwartz says it delivered less than 1% annually over two centuries. That makes it a potential inflation hedge, though not an equivalent substitute for equities as a long-term wealth-building asset.

Gold historically kept pace with inflation.
Its cited long-run return was less than 1% per year.
Stocks delivered substantially higher returns above inflation.
An inflation hedge is not necessarily a strong wealth compounder.

“It has kept up with inflation but delivered less than one percent a year over the last two hundred years.”
Jeremy Schwartz · 06:26

“So it's been a good inflation hedge you kept up, but not much more when stocks did six percent on top of inflation.”
Jeremy Schwartz · 06:31

#gold#inflation#asset allocation#returns

Explainer· 3

Explainer01:21

Why Businesses Can Make Stocks an Inflation Hedge

Schwartz argues that stocks can protect purchasing power because companies may pass higher prices into revenue and profits. Over very long periods, equities produced positive returns above inflation rather than merely keeping pace with it.

Higher revenue and profits can support higher stock prices.
Historical equity returns were roughly 6.5% to 7% above inflation.
Real returns matter more than nominal gains for long-term purchasing power.

“stocks are not just a good hedge for inflation, they're the best hedge for infort Right.”
Jeremy Schwartz · 01:42

“If revenue goes up, if profits go up, stock prices are going to go up.”
Jeremy Schwartz · 01:47

#inflation#equities#real returns

Explainer07:00

Why Stock Market Risk Is the Source of Higher Expected Returns

Black swans and geopolitical shocks are not exceptions to the equity case; they help explain why equities offer a premium. Investors receive potential compensation precisely because stocks expose them to risks that Treasury bills largely avoid.

Major risks are persistent rather than new.
Risk helps create the equity premium.
Treasury bills offer less risk and therefore less compensation.
Higher expected returns cannot be separated from uncertainty.

“But that's one of the things that gives stocks a risk premium.”
Jeremy Schwartz · 07:28

“The premium returns because they have risk if you didn't have risk just being t bills, but then you don't get compensated for that risk…”
Jeremy Schwartz · 07:30

#risk premium#black swans#treasury bills#markets

Explainer07:39

High P/E Ratios Need the Context of Real Bond Yields

Schwartz evaluates equity valuations relative to inflation-protected bond yields rather than declaring stocks expensive in isolation. With forward earnings yields above 5% and ten-year TIPS near 2%, he estimates an equity premium above 3%, similar to the historical spread.

Absolute valuation does not capture the available alternatives.
Forward P/E ratios can be converted into an earnings yield.
TIPS provide a real-yield comparison for equities.
The cited equity premium remained close to its long-run historical level.

“The ten year tips are right around two percent.”
Jeremy Schwartz · 08:10

“So the equity premium of stocks versus tips is above three percent, which is exactly the same as seguals.”
Jeremy Schwartz · 08:20

#valuation#tips#earnings yield#equity premium

Takeaway· 1

Takeaway08:51

Geopolitical Headlines Are Noise Against Decades of Compounding

Schwartz identifies panic caused by inflation, central-bank policy, and geopolitics as the main obstacle to staying invested. These events can create intense volatility, but his long-run focus returns to the compounding of real equity returns.

Short-term volatility triggers emotionally costly decisions.
The dominant headline risk changes over time.
Geopolitical events can move markets without changing a long-term plan.
Long-term real compounding is the central investment objective.

“It is really that short term volatility and the sort of panic moments of all sorts of these risks that come up last few years…”
Jeremy Schwartz · 08:57

“But over the long run, you look at that long term compounding of six percent real after inflation returns is what we come back to.”
Jeremy Schwartz · 09:19

#geopolitics#behavior#compounding#volatility