PodcastThe Meb Faber ShowRoger Ibbotson

Stocks Grew Astronomically for 100 Years. So Why Isn't Everyone Rich?

The discussion examines what long-run stock and bond returns show—and why investors may not keep the full benefit of compounding after spending, taxes, fees, and transaction costs. It also explores how inflation, interest rates, risk premiums, and shifting correlations affect returns, while cautioning that valuation signals do not make market timing easy. The guest's forecasts put median returns at 7% nominal and 5.6% real, while the host raises the uncertain possibility that a wave of large IPOs could add enough supply to help end the bull run.

EquitiesInvestment StrategyMarket ValuationsInflationInterest RatesRisk Management

Preview · 16 more points in the app

Read the Full Summary

Key Takeaways

The episode contrasts strong long-run stock compounding—$1 invested 100 years ago grew to about $15,000 in large-cap stocks and $32,000 in small-cap stocks—with a forward-looking median forecast of 7% nominal and 5.6% real returns. The guest says investors may not capture the full compounding effect if they spend returns or lose value to taxes, fees, and transaction costs.

The guest says stocks outperformed bonds, Treasury bills, and inflation over the historical period shown, with small caps outperforming by almost 1% annually, much of it from 1974 to the early 1980s. But the speaker cautions that neither market extremes nor valuation measures such as CAPE reliably establish what comes next: markets can keep rising or falling, and the 1987 market’s 20% one-day drop was followed by a slightly positive total return for the year.

The guest links bond yields to expected inflation, attributing the rise to double-digit yields by 1980 mainly to double-digit inflation and saying Volcker’s money-supply cuts brought inflation down and ultimately lowered rates. The speaker explains that rising yields can also create bond price losses—approximately 10% for a bond with a 10-year duration when yields rise one percentage point—and contrasts those losses with the capital gains bonds received during the post-1980 period of falling yields, which largely ended around 2022.

The guest argues that young people can hold 100% stocks because their earning power is a form of human capital, while people should become more risk-averse as that capital declines and they have less time to recover from losses. The speaker also warns that small caps and long bonds’ near-zero historical correlation is only an average: the assets moved together in 2022, and correlations can shift between positive and negative regimes.

ECONOMY

Inflation And Yields — The guest says expected inflation is a key driver of bond yields because yields must compensate for inflation. He attributes yields rising to double digits by 1980 mainly to double-digit inflation. In response to stagflation, Paul Volcker cut back on the money supply, bringing inflation down and ultimately lowering rates.

“So you can see that the yield pretty much bottomed about around 1940 but then climbed all the way up to double digits in 1980…”—

MARKETS

Compounding Returns — A dollar invested 100 years ago grew to about $15,000 in large-cap stocks and $32,000 in small-cap stocks. The guest says investors may not capture the full effect if they consume rather than reinvest returns; taxes, fees, and transaction costs also reduce what they keep. He describes the example as buying the whole market rather than picking stocks.

“But, you know, we talk about a dollar a 100 years ago worth 15,000 in large caps, another 32,000 in small caps.”—

Historical Returns — The guest says the stock-return chart was first presented in 1974, just after the 1973–1974 recession, which he describes as producing the worst returns since the 1930s. The chart showed stocks outperforming bonds, Treasury bills, and inflation. Small caps outperformed by almost 1% a year over the full period, with much of their return coming from 1974 to the early 1980s.

“This was a big recession. This was the worst return since the 1930s that actually happened in 1973 and 1974…”—

Market Timing — The speaker argues that knowing whether markets are in a boom or a crash is not enough to predict what comes next: either move could continue or reverse. That makes market timing difficult, and riding out market ups and downs is more likely to work over time.

“You don't know if the crash is going to continue or have the big rebound…”—

FORECASTS

Long-Term Forecasts — The guest says the 1976 forecast was generally close to the middle of its probability distributions over the 50-year horizon. High inflation led to an overestimate in nominal terms and an underestimate in real terms. The book's forecasts extend to 2050 in both nominal and real terms, with inflation forecast as part of the process. For future U.S. returns, he says the forecast is about 1.5 percentage points below the U.S. forecast when using the average of global markets; the median forecast is 7% nominal and 5.6% real.

“Actually, it's pretty accurate. It was almost perfectly accurate out in nominal terms out to 2000…”—

IPO Supply Risk — The host suggests that a wave of very large IPOs, including Anthropic and OpenAI, could add enough stock supply to help end the bull run, while explicitly saying the outcome is uncertain. The proposed mechanism is that additional issuance shifts supply and demand in the U.S. market.

“These big massive IPOs, we see Anthropic, we see Open AI, who knows what else…”—

Introduction of Roger Ibbotson

Roger Ibbotson explains that the century-scale growth of stocks assumes full reinvestment and minimal taxes, fees, and trading costs, conditions that most investors do not experience.

Overview of "Centuries of Stock and Bond Returns"

Ibbotson recalls how his total-return chart, first published in 1974, showed stocks outpacing bonds, bills, and inflation despite the severe market decline of 1973–74.

The challenges of market timing

The speakers warn that booms and crashes do not reliably signal what comes next, making market timing difficult; riding through volatility is generally more dependable.

Market cycles, risk, and the role of human capital for young investors

Ibbotson says investors should account for substantial market risk, while younger people can hold more stocks because their earning power is a form of human capital.

Historical bond yields, probability of ruin, and small caps vs. long bonds

He traces bond returns through rising yields and inflation before 1980 and falling yields afterward, then discusses fat-tailed stock risks and the unstable relationship between stocks and bonds.

Investor preferences and historical market forecasts

Ibbotson describes popularity as a force shaping expected returns: investors accept lower returns for liquid, reputable assets and demand more compensation for risk and illiquidity.

Nominal vs. real returns, inflation, and bond yields

Reviewing forecasts made decades earlier, he finds long-run results broadly near the projected distributions and says his current median forecasts are 7% nominal and 5.6% real.

Valuation metrics, market anomalies, and long-term outlook

The speakers discuss valuation metrics that can flag expensive markets without offering reliable timing; Ibbotson also argues that buybacks complement dividends as a form of shareholder payout.

Buybacks vs. dividends and private company valuations

Ibbotson questions how private-company valuations reflect future prospects, while the host notes that early investors and holders may create substantial stock supply when companies go public.

IPO trends

Ibbotson recounts how an early IPO investment sparked his interest in markets, then explains that today’s IPOs tend to be large companies rather than the small firms common in earlier cycles.

Related Episodes

Important Disclaimers

Not Investment Advice: For education only — not financial, tax or legal advice.

AI-Generated: Made by AI from source transcripts and may contain errors.

No Guarantees: Past performance does not predict future results; investing carries risk.

Our Commentary · Request Removal