The Rational Investor #019: Jeremy Siegel on “The Case for Equity”
Happy Saturday to you,
Welcome to the 19th edition of The Rational Investor Newsletter.
Today’s quote is the opening story of one of the all-time best investing books, which is Stocks for the Long Run by Jeremy Siegel. If you haven’t read it already, I consider this a must-read for all long-term investors. It’s data-heavy, but I think it’s impossible to read this book and not be convinced of the long-term wealth-creating power of equities.
The story I’m sharing today is included under my all-time favorite subtitle from any investing book simply because of the sheer truth of the statement. The subtitle is, “Everybody Ought to Be Rich.”
Okay, this is a long, but enjoyable one, so I’m just going to get to it.
Here’s Jeremy Siegel on The Case for Equity [Bold emphasis is mine]:
“In the summer of 1929, a journalist named Samuel Crowther interviewed John J. Raskob, a senior financial executive at General Motors, about how the typical individual could build wealth by investing in stocks. In August of that year, Crowther published Raskob’s ideas in a Ladies’ Home Journal article with the audacious title “Everybody Ought to Be Rich.”
In the interview, Raskob claimed that America was on the verge of a tremendous industrial expansion. He maintained that by putting just $15 per month into good common stocks, investors could expect their wealth to grow steadily to $80,000 over the next 20 years. Such a return—24 percent per year—was unprecedented, but the prospect of effortlessly amassing a great fortune seemed plausible in the atmosphere of the 1920s bull market. Stocks excited investors, and millions put their savings into the market seeking quick profit.
On September 3, 1929, a few days after Raskob’s advice appeared, the Dow Jones Industrial Average hit a historic high of 381.17. Seven weeks later, stocks crashed. The next 34 months saw the most devastating decline in share values in US history.
On July 8, 1932, when the carnage was finally over, the Dow Industrials stood at 41.22. The market value of the world’s greatest corporations had declined an incredible 89 percent. Millions of investors’ life savings were wiped out, and thousands of investors who had borrowed money to buy stocks were forced into bankruptcy. America was mired in the deepest economic depression in its history.
Raskob’s advice was ridiculed and denounced for years to come. It was said to represent the insanity of those who believed that the market could rise forever and the foolishness of those who ignored the tremendous risks in stocks. Senator Arthur Robinson of Indiana publicly held Raskob responsible for the stock crash by urging common people to buy stock at the market peak. In 1992, 63 years later, Forbes magazine warned investors of the overvaluation of stocks in its issue headlined “Popular Delusions and the Madness of Crowds.” In a review of the history of market cycles, Forbes fingered Raskob as the “worst offender” of those who viewed the stock market as a guaranteed engine of wealth.
Conventional wisdom holds that Raskob’s foolhardy advice epitomizes the mania that periodically overruns Wall Street. But is that verdict fair?
The answer is decidedly no. Investing over time in stocks has been a winning strategy whether one starts such an investment plan at a market top or not. If you calculate the value of the portfolio of an investor who followed Raskob’s advice in 1929, patiently putting $15 a month into the market, you find that his accumulation exceeded that of someone who placed the same money in Treasury bills after less than four years! By 1949 his stock portfolio would have accumulated almost $9,000, a return of 7.86 percent, more than double the annual return in bonds. After 30 years the portfolio would have grown to over $60,000, with an annual return rising to 12.72 percent. Although these returns were not as high as Raskob had projected, the total return of the stock portfolio over 30 years was more than eight times the accumulation in bonds and more than nine times that in Treasury bills. Those who never bought stock, citing the Great Crash as the vindication of their caution, found their savings far lower than investors who had patiently accumulated equity.
The story of John Raskob’s much-ridiculed advice illustrates an important theme in the history of Wall Street. Bull markets and bear markets lead to sensational stories of incredible gains and devastating losses. Yet patient stock investors who can see past the scary headlines have always outperformed those who flee to bonds or other assets. Even such calamitous events as the Great 1929 Stock Crash, the financial crisis of 2008, or the Covid-19 pandemic have not negated the superiority of stocks as long-term investments.
The history of the market has shown the perpetual ownership of equities to be, by a wide margin, the most reliable way to wealth. And yet, despite the entirety of history offering indisputable support, the media debates this topic endlessly in their fruitless quest for a better strategy. I encourage you to let them languish in their poor returns while we accumulate evermore equities for decades to come.
Lastly, I encourage you to read or re-read Siegel’s seminal book.
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
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