25 September 2024

At the Money: This Is Why Stocks Perform Best

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6Insights

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Insights & moments

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

Myth Buster· 1

Myth Buster06:21

Gold Hedged Inflation but Barely Grew Wealth

Gold's reputation as an inflation hedge is distinguished from its ability to compound wealth. Schwartz says it kept pace with inflation over two centuries but delivered less than 1% annually beyond that, far below equities.

Gold historically preserved purchasing power.
Its cited long-run real return was below 1% annually.
Stocks delivered roughly 6% annually on top of inflation.
An inflation hedge is not necessarily a strong wealth-compounding asset.

“It has kept up with inflation but”
Jeremy Schwartz · 06:26

“delivered less than one percent a year over the last”
Jeremy Schwartz · 06:28

#gold#inflation#real-returns#wealth

Explainer· 4

Explainer01:51

What Two Centuries of Data Say About Real Stock Returns

Jeremy Schwartz says Jeremy Siegel's long-run dataset shows equities producing roughly 6.5% to 7% annually above inflation. He argues that no other examined asset displayed the same stability of real returns across long periods.

The dataset spans more than 200 years.
Equities returned roughly 6.5% to 7% above inflation.
The comparison included stocks, bonds, bills, gold, and the dollar.
The claim concerns very long periods, not dependable annual returns.

“you had six and a half to seven percent over”
Jeremy Schwartz · 02:00

“Nothing had that same”
Jeremy Schwartz · 02:12

#returns#inflation#market-history

Explainer02:38

Why Inflation Can Damage Bonds for Decades

The discussion contrasts the longest inflation-adjusted loss periods for stocks and bonds. Schwartz says bonds experienced a roughly 35-year period of negative real returns, while inflation-protected Treasury securities were unavailable during the historical episode being discussed.

Real returns measure changes in purchasing power.
Stocks experienced a cited 17-year real-loss period.
Bonds experienced a cited 35-year negative-real-return period.
TIPS adjust their principal or returns for inflation.

“bonds had a double that time period, so they had”
Jeremy Schwartz · 02:51

“The primary risk to bonds was that inflationary period.”
Jeremy Schwartz · 03:02

#bonds#inflation#tips#purchasing-power

Explainer07:11

Risk Is the Source of the Equity Premium

Black-swan events and geopolitical shocks are presented as recurring features of investing rather than exceptional reasons to expect risk to disappear. Schwartz argues that investors receive premium returns precisely because equities expose them to uncertainty that Treasury bills avoid.

Serious risks have existed throughout market history.
Uncertainty contributes to the equity risk premium.
Treasury bills reduce risk but also forgo that compensation.
Premium returns cannot be separated from uncomfortable uncertainty.

“But that's one of the things that”
Jeremy Schwartz · 07:28

“gives stocks a risk premium. Their premium returns because they”
Jeremy Schwartz · 07:30

#risk-premium#black-swans#uncertainty#treasury-bills

Explainer07:51

Why High Stock Valuations Need a Bond Comparison

Schwartz argues that stock valuations should be assessed relative to inflation-protected bond yields rather than against equity history alone. With forward earnings yields around 5% to 6% and ten-year TIPS near 2%, he estimates an equity premium above 3%, close to the historical spread in Siegel's data.

Forward P/E ratios can be converted into earnings yields.
The cited forward earnings yield was approximately 5% to 6%.
The cited ten-year TIPS yield was approximately 2%.
The resulting equity premium was above 3%.
Relative valuation can look reasonable even when absolute expected returns are lower.

“So the equity premium of stocks”
Jeremy Schwartz · 08:20

“versus tips is above three percent, which is exactly the”
Jeremy Schwartz · 08:23

#valuation#equity-premium#earnings-yield#tips

Tool· 1

Tool06:41

Stacking Gold Exposure Without Selling Stocks

Schwartz describes a capital-efficient approach that layers gold exposure on top of an equity position. The concept aims to obtain exposure to both assets without funding gold by directly reducing the stock allocation.

Capital-efficient structures can combine multiple exposures.
Gold exposure may be layered onto equities.
The approach avoids a simple sell-stocks-to-buy-gold trade.
Layered exposure can introduce leverage, implementation, and product risks not explored in the episode.

“we stack like gold on top of stocks where you can”
Jeremy Schwartz · 06:47

“get both of them without having to sell your stocks”
Jeremy Schwartz · 06:50

#gold#capital-efficiency#portfolio-construction