Jack Bogle on Long-Term Returns for Stocks, Bonds

[Stryker]

Recently from from Bloomberg TV where Jack Bogle enters a debate between Jeremy Siegel and Bill Gross. Video runs just over 6 minutes.

Jack Bogle on Long-Term Returns for Stocks, Bonds

[staythecourse]

Man I am at work and can't watch this. Anyone want to do a little synopsis? My guess: Seigel: Stocks for the Long Run, Gross: Bonds always stable and last 40 years have shown their stuff, and Bogle: Age in bonds and stay diversified.

Good luck.

[steve roy]

Little Synopsis:

Professor S. says that Bill Gross isn't looking at TOTAL historical return (6.6% or thereabouts) and is wrong. Bill Gross disputes Professor Siegel. ( "He should get back in his ivory tower.")

Jack Bogle thinks Bill Gross makes good point about lower future returns, but is a tad too low with his prediction. Mr. Bogle says that "buy and hold" still works, but there will probably be lower overall returns going forward. Says that you can't look backward "from the rowboat" and know what the future holds. (He thinks that the next ten years will be better than the last ten, but nothing close to the high flying 1990s.)

There. My short, and badly paraphrased, summary.

[Stryker]

The debate is too long and involved to give just a brief synopsis.

I'll give you the links to where it all started from.

Bill Gross starts with his August essay at Pimco called "Cult Figures".

Jeremy Siegel Explains How Bill Gross Got His Latest Analysis Totally Wrong

Bill Gross Goes Unleashed, Blasts Jeremy Siegel For Living In An Ivory Tower And Lacking Common Sense

Jack Bogle Is Siding With Bill Gross In His Feud With Jeremy Siegel

[Taylor Larimore]

Recently from from Bloomberg TV where Jack Bogle enters a debate between Jeremy Siegel and Bill Gross. Video runs just over 6 minutes.

When experts disagree, it is often because it does not make much difference.

Best wishes.
Taylor

[shawcroft]

Mr. Bogle's cautions are well reasoned and sobering. I was particularly intrigued by his comments regarding the often highly unrealistic investment returns being assumed by public (state and local) pension funds. Something unpleasant may be on the horizon in those situations.
Shawcroft

[RenoJay]

I watched the video and am confused.

Assuming a 50/50 portfolio, was Mr. Bogle calling for a 5% nominal return or a 5% real return? I thought I heard him say both a various points in the discussion and obviously this makes a huge difference for investors who think he knows his stuff.

On another note, I like all these guys (they are the thinkers as opposed to the Cramers) but I didn't hear Bill Gross rebut Prof. Siegel's point that Gross's analysis did not include dividends. From a technical point of view, do dividends count on top of price appreciation net of inflation? (I'm not big on ivory tower type ad-hominen attacks. I'd rather just hear the facts from smart people.)

[Tigermoose]

Why is Jack Bogle even attempting to make assertions about the future? Why is he insisting with Bill Gross that future returns will be reduced? That seems like an Anti-Bogle philosophy prediction.

[frugalhen]

I watched the video and am confused.

Assuming a 50/50 portfolio, was Mr. Bogle calling for a 5% nominal return or a 5% real return? I thought I heard him say both a various points in the discussion and obviously this makes a huge difference for investors who think he knows his stuff.

On another note, I like all these guys (they are the thinkers as opposed to the Cramers) but I didn't hear Bill Gross rebut Prof. Siegel's point that Gross's analysis did not include dividends. From a technical point of view, do dividends count on top of price appreciation net of inflation? (I'm not big on ivory tower type ad-hominen attacks. I'd rather just hear the facts from smart people.)

I was equally confused with their thoughts on real vs nominal. Can anyone clarify?

[TomatoTomahto]

When experts disagree, it is often because it does not make much difference.

Taylor,
I don't know if you originated that statement, but I had never heard the thought expressed so simply and clearly. Thank you, I'm going to reuse it

[peppers]

I thoght Mr. Bogle's comments were spot on. Agree with another poster's comment about ~8% return regarding pension fund returns.

[ResNullius]

I hope Mr. Bogle is correct. I would gladly take a 5% real annual return over the next 10 years. I doubt we'll see it, but I hope so anyway. As for pension funds being toasted, I think almost everyone already knows it.

[Taylor Larimore]

When experts disagree, it is often because it does not make much difference.

Taylor,
I don't know if you originated that statement, but I had never heard the thought expressed so simply and clearly. Thank you, I'm going to reuse it

Hi Claude:

To my knowledge I originated that statement.

I have read hundreds of books and thousands of articles by investing experts who know much more than I do. I was struck by how often they differ on the best way to invest. I have concluded (and this most experts agree on): The stock and bond markets are remarkably efficient and that it is virtually impossible to know which investment or which portfolio will outperform in the future.

Instead of trying to beat the market by picking exotic funds and complex portfolios, most investing experts like Mr. Bogle recommend holding a simple, diversified, low-cost, tax-efficient, stock and bond portfolio suitable for our goals, time-frame, risk-tolerance, and personal financial situation--and then stay-the-course.

There are many roads to Dublin.

Best wishes
Taylor

[retiredjg]

When experts disagree, it is often because it does not make much difference.

This made me laugh!

I think there is an additional explanation. When experts disagree, sometimes it's because nobody knows....

[bayview]

When experts disagree, it is often because it does not make much difference.

Taylor,
I don't know if you originated that statement, but I had never heard the thought expressed so simply and clearly. Thank you, I'm going to reuse it

Kinda reminded me of this:

Non-actionable (Trolling) Topics
If readers can't do anything with the content of a topic other than argue about it, it does not belong here...

[Jack]

It appears that Bill Gross is going to double down and stake his reputation on a faulty understanding of one of the most fundamental calculations in finance, the Gordon Equation. William Bernstein has called the Gordon Equation the closest thing you will find equivalent to a law of physics in finance.

For a refresher on the Gordon Equation, see here:

http://delong.typepad.com/sdj/2007/05/a ... _note.html

The Gordon Equation says, that over the long run -- say 100 years -- the return on stocks is the dividend yield plus the growth rate:

R = D + G.

This can be further simplied if you like because D + G = E, earnings yield, the inverse of PE.

This relation has held for the last 100 years and we would expect it to hold for the next 100 years.

Gross, instead insists that R = G instead of R = D + G. He is ignoring dividends. He claims that stock returns cannot exceed growth. This is just fundamentally wrong. It was wrong for the last 100 years and will be wrong for the next 100 years. Gross goes so far as to say the last 100 years of returns were an illusion, a ponzi scheme.

This doesn't mean that anyone can easily predict stock returns in the short run. Dividend yield depends on prices paid for the stock and growth may vary. But for the last 100 years real growth has been about 1.3% and there is no reason not to expect the same for the future. So given the dividend yield you add 1.3% and come up with a projected real return. This is how Bernstein does it and this is how Bogle does it.

It is worth noting that DOW 36,000 Kevin Hassett made a similar mistake but in the opposite direction. Hassett claimed that
R = E + G, but as shown above E = D + G, so Hassett's calculations were based on R = D + G + G.

He used earnings yield where he should have used dividend yield which resulted in counting growth twice which inflated his calculation by about a half. It is baffling how Gross could make the same sort of error on something as fundamental as the Gordon equation.

In coming days you will hear more and more economists mocking Gross for his elementary error as his reputation goes into tatters. This is just embarrassing to watch.

[Jack]

Mr. Bogle's cautions are well reasoned and sobering. I was particularly intrigued by his comments regarding the often highly unrealistic investment returns being assumed by public (state and local) pension funds. Something unpleasant may be on the horizon in those situations.
Shawcroft

I don't see the same problem. Mr. Bogle estimated 5% nominal returns for a 50/50 portfolio. Pension funds are investing for a 75 year horizon or longer and like young investors would be expected to have not a 50/50 portfolio but something more like 90 or 95% stocks. If Mr. Bogle estimates a 5% return for a 50/50 portfolio, it doesn't seem unreasonable to estimate a roughly 8% return for a 95/5 portfolio.

[craigr]

Recently from from Bloomberg TV where Jack Bogle enters a debate between Jeremy Siegel and Bill Gross. Video runs just over 6 minutes.

When experts disagree, it is often because it does not make much difference.

Best wishes.
Taylor

This is the best and most succinct statement I've read on this kind of debate. Well said.

[abuss368]

Good interview with Mr. Bogle.

Thanks for posting the link.

[bb]

At one point Jack Bogle states nominal returns will be 5% and then later states real returns
will be 5%. I believe in earlier pieces he has indicated he project real returns of around
4-5% for 50/50 stock/bond portfolio.

[VennData]

Recall that those pension funds have high-priced management teams who keep their high-paying jobs because the fiduciaries do not understand the futility of letting a simple three-fund portfolio beat a fee-laden, hedge-fund, commodity, PE and VC portfolio. Fees kill their returns. The entire pension structure in this country is based on fallacious reasoning encouraged by con men who add no value, in fact detract value in the aggregate.

[Jack]

At one point Jack Bogle states nominal returns will be 5% and then later states real returns
will be 5%. I believe in earlier pieces he has indicated he project real returns of around
4-5% for 50/50 stock/bond portfolio.

You have to be careful because Mr. Bogle is not always clear when he switches from talking about stock returns alone and a 50/50 stock/bond portfolio.

Both statements could be correct at the same time -- real returns for stocks of 5% and nominal returns of 5% for a 50/50 portfolio based on reasonable estimates of 8% nominal for stocks, 2% for bonds and 3% inflation.

[grayfox]

The debate is too long and involved to give just a brief synopsis.

I'll give you the links to where it all started from.

Bill Gross starts with his August essay at Pimco called "Cult Figures".

Jeremy Siegel Explains How Bill Gross Got His Latest Analysis Totally Wrong

Bill Gross Goes Unleashed, Blasts Jeremy Siegel For Living In An Ivory Tower And Lacking Common Sense

Jack Bogle Is Siding With Bill Gross In His Feud With Jeremy Siegel

Well, I normally don't agree with Jeremy Siegel, but in this case he is correct.

Now, Bill Gross would have had a leg to stand on if he said that earnings can't grow faster than real GDP. But he said that total returned can't be greater than GDP growth, which is clearly wrong.

To illustrate, right now say the S&P500 has dividend yield of about 2% and is trading at 1390. Suppose prices fell 90% (flash crash?) and you were able to pick up shares at 139. Then it would be yielding 20%. If the dividend continued unabated at the same level, obviously you would have a 20% return just from the dividend.

A lot of people seem to forget that, even with zero real growth, stocks would still return the dividend yield. It seems like Gross mis-stated, and now refuses to admit his error.

[RenoJay]

The debate is too long and involved to give just a brief synopsis.

I'll give you the links to where it all started from.

Bill Gross starts with his August essay at Pimco called "Cult Figures".

Jeremy Siegel Explains How Bill Gross Got His Latest Analysis Totally Wrong

Bill Gross Goes Unleashed, Blasts Jeremy Siegel For Living In An Ivory Tower And Lacking Common Sense

Jack Bogle Is Siding With Bill Gross In His Feud With Jeremy Siegel

Well, I normally don't agree with Jeremy Siegel, but in this case he is correct.

Now, Bill Gross would have had a leg to stand on if he said that earnings can't grow faster than real GDP. But he said that total returned can't be greater than GDP growth, which is clearly wrong.

To illustrate, right now say the S&P500 has dividend yield of about 2% and is trading at 1390. Suppose prices fell 90% (flash crash?) and you were able to pick up shares at 139. Then it would be yielding 20%. If the dividend continued unabated at the same level, obviously you would have a 20% return just from the dividend.

A lot of people seem to forget that, even with zero real growth, stocks would still return the dividend yield. It seems like Gross mis-stated, and now refuses to admit his error.

Thanks for the clarification. This helps a lot. Yeah, it seems Gross should have done more basic research before shooting his mouth off. He's known for bond analysis, not stocks.

[Muchtolearn]

Mr. Bogle's cautions are well reasoned and sobering. I was particularly intrigued by his comments regarding the often highly unrealistic investment returns being assumed by public (state and local) pension funds. Something unpleasant may be on the horizon in those situations.
Shawcroft

I don't see the same problem. Mr. Bogle estimated 5% nominal returns for a 50/50 portfolio. Pension funds are investing for a 75 year horizon or longer and like young investors would be expected to have not a 50/50 portfolio but something more like 90 or 95% stocks. If Mr. Bogle estimates a 5% return for a 50/50 portfolio, it doesn't seem unreasonable to estimate a roughly 8% return for a 95/5 portfolio.

Jack, I don't think pension funds are investing for a 75 year horizon. It is more like 20 years or so. Regardless, it is irresponsible to estimate 8% returns for funding purposes as the money might not be there to pay the benefits. change that -- it won't be there.

[Muchtolearn]

The debate is too long and involved to give just a brief synopsis.

I'll give you the links to where it all started from.

Bill Gross starts with his August essay at Pimco called "Cult Figures".

Jeremy Siegel Explains How Bill Gross Got His Latest Analysis Totally Wrong

Bill Gross Goes Unleashed, Blasts Jeremy Siegel For Living In An Ivory Tower And Lacking Common Sense

Jack Bogle Is Siding With Bill Gross In His Feud With Jeremy Siegel

Well, I normally don't agree with Jeremy Siegel, but in this case he is correct.

Now, Bill Gross would have had a leg to stand on if he said that earnings can't grow faster than real GDP. But he said that total returned can't be greater than GDP growth, which is clearly wrong.

To illustrate, right now say the S&P500 has dividend yield of about 2% and is trading at 1390. Suppose prices fell 90% (flash crash?) and you were able to pick up shares at 139. Then it would be yielding 20%. If the dividend continued unabated at the same level, obviously you would have a 20% return just from the dividend.

A lot of people seem to forget that, even with zero real growth, stocks would still return the dividend yield. It seems like Gross mis-stated, and now refuses to admit his error.

Fox, that would be true if you invested after the crash you postulate. But the dividend yield on the current investment would be 2 %.

[bengal22]

When experts disagree, it is often because it does not make much difference.

This made me laugh!

I think there is an additional explanation. When experts disagree, sometimes it's because nobody knows....

Retiredjg, I think your explanation makes more sense. It always amazes me on so many levels when the so-called experts(talking heads) are so different on economic approaches. I respect both Paul Krugman and Congressman Ryan but they are night and day differenct on what needs to be done to fix the economy. And the same goes with investing advice or economic forecasting. The bottom line is that they disagree because no one can predict the future... so why do we ever think that we can.

[arcticpineapplecorp.]

At one point Jack Bogle states nominal returns will be 5% and then later states real returns
will be 5%. I believe in earlier pieces he has indicated he project real returns of around
4-5% for 50/50 stock/bond portfolio.

You have to be careful because Mr. Bogle is not always clear when he switches from talking about stock returns alone and a 50/50 stock/bond portfolio.

Both statements could be correct at the same time -- real returns for stocks of 5% and nominal returns of 5% for a 50/50 portfolio based on reasonable estimates of 8% nominal for stocks, 2% for bonds and 3% inflation.

Jack, I think most pension funds are around a 60/40 split. I think I remember reading that in one of the oft recommended books here. While the pension funds you could argue are more agressive with regards to their stock allocation (investing in "alternative" investments), they still contain a healthy portion (around 40%) I believe in various fixed income investments. Therefore, we would have to assume the return of the state pension funds are closer to Mr. Bogle's predicted 5% rather than the assumed 8%.

If you go to the link below you can read all about PA's pension and investments (below). Incidentally, they revised (downward) their projections from 8% annualized rate of return to 7.5%!! Maybe Mr. Bogle had a small impact on their projections!

The investments for PA pension as of 12/31/11 are:

Stock 29%
Alternative investments 27%
Real Estate 11%
Absolute Return Strategies 8%
Short Term Investments 4%
Fixed Income 21%

Not sure I like the idea of the absolute return if it involves leverage, short selling and high turnover

http://www.portal.state.pa.us/portal/se ... _2011.html

Maybe I'm wrong about the 60/40...are the percentages above more of an 80/20 asset allocation for our pension plan??
Also, this document says they use a 30 year amortization period.

[Anon1234]

The debate is too long and involved to give just a brief synopsis.

I'll give you the links to where it all started from.

Bill Gross starts with his August essay at Pimco called "Cult Figures".

Jeremy Siegel Explains How Bill Gross Got His Latest Analysis Totally Wrong

Bill Gross Goes Unleashed, Blasts Jeremy Siegel For Living In An Ivory Tower And Lacking Common Sense

Jack Bogle Is Siding With Bill Gross In His Feud With Jeremy Siegel

Well, I normally don't agree with Jeremy Siegel, but in this case he is correct.

Now, Bill Gross would have had a leg to stand on if he said that earnings can't grow faster than real GDP. But he said that total returned can't be greater than GDP growth, which is clearly wrong.

To illustrate, right now say the S&P500 has dividend yield of about 2% and is trading at 1390. Suppose prices fell 90% (flash crash?) and you were able to pick up shares at 139. Then it would be yielding 20%. If the dividend continued unabated at the same level, obviously you would have a 20% return just from the dividend.

A lot of people seem to forget that, even with zero real growth, stocks would still return the dividend yield. It seems like Gross mis-stated, and now refuses to admit his error.

Fox, that would be true if you invested after the crash you postulate. But the dividend yield on the current investment would be 2 %.

Grayfox, Muchtolearn: Help me with this GDP to earnings thing.

GDP is goods and services produced in US. I think of this as revenue.
Profit is revenue minus costs. Profit is earnings.
So, With GDP (revenue) constant, reduced costs can increase profits (earnings).
For my business, if I source my steel from china instead of Japan I can buy it cheaper.
I can increase profit faster than revenue. I can increase earnings faster than GDP.

[saurabhec]

It is kind of shocking that Gross cannot understand the difference between total returns and price appreciation. Even more ridiculous is his ad hominem attack on Jeremy Siegel. I myself think the Prof tends to be perpetually bullish, but at least he understands basic financial math, No wonder PIMCOs equity fund managers quit the last time around they tried to get into equity funds. Must be tough tonwork for a boss who is blissfully ignorant of the fundamental building blocks of stock market returns.

[baw703916]

Since I own ETFs from Vanguard, Wisdomtree, and PIMCO, I think I have all my bases covered in this debate.

[Fallible]

Not adding anything to the great comments already made here, but I do want to note a lighter part of Jack's comments that, despite the seriousness of this three-way debate, made me laugh and appreciate Jack Bogle all the more. In talking about how too many people still expect the "fantastic" returns of '99 and 2000 to recur, he says that's "simply naive and foolish and wrongheaded." Then he added with a chuckle, "I guess I made that clear."

Jack Bogle makes everything clear.

[baw703916]

Not adding anything to the great comments already made here, but I do want to note a lighter part of Jack's comments that, despite the seriousness of this three-way debate, made me laugh and appreciate Jack Bogle all the more. In talking about how too many people still expect the "fantastic" returns of '99 and 2000 to recur, he says that's "simply naive and foolish and wrongheaded." Then he added with a chuckle, "I guess I made that clear."

Jack Bogle makes everything clear.

To get returns like we had in the 1980s and 1990s, we first need another "Death of Equities" article!

[grayfox]

Grayfox, Muchtolearn: Help me with this GDP to earnings thing.

GDP is goods and services produced in US. I think of this as revenue.
Profit is revenue minus costs. Profit is earnings.
So, With GDP (revenue) constant, reduced costs can increase profits (earnings).
For my business, if I source my steel from china instead of Japan I can buy it cheaper.
I can increase profit faster than revenue. I can increase earnings faster than GDP.

That's true. GDP is revenue, the top line.
Say Profit Margin After Tax is 6%.
Even if GDP (Revenue) had zero growth, if you reduce expenses, you can increase profit margin to say 9%.
Profits increased 50% without any GDP or Revenue growth.
So you are correct.

But that's a one-shot increase.

When we talk about growing earnings, we are talking about a sustainable compound annual growth rate (CAGR) of say 3% real p.a. over the long term. In theory, that would mean 3% real growth p.a. forever. 3% p.a. growth for 50,100,200 years would increase real profits 4-, 20-, 370- fold.

Increasing Net Profit Margins (NPM) can increase earnings in the short term, but it can't compound earnings growth over the long term. Obviously, it is impossible for NPM to be greater than 100%. 100% Net Profit Margin would mean there are no expenses. So practically, NPM would have to be a lot less. NPM varies by industry, application software 22%, auto manufacturers 3.6%; and across companies within an industry, Apple 20%, Dell 5%.

But as index investors, we are interested in the aggregate. And in the aggregate, sInce 1929, Net Profit Margin has never been more than 10%, and it has averaged just under 6%. Most of the revenue has to go to pay labor and materials, the other inputs to production. Not to mention taxes.

Here's a chart of Net Profit Margin since they started collecting data in 1929:



Then there is mean reversion of Profit Margins which most economist expect and has historically been the observed. When profit margins get high, it attracts competition which reduces profit margins.

Over the long term, the only way for corporate earnings to have a sustainable CAGR of 3% real p.a. is for revenue (GDP) to also have a CAGR of 3% real p.a. Earnings can't grow indefinitely just by cutting expenses,.

[saurabhec]

Over the long term, the only way for corporate earnings to have a sustainable CAGR of 3% real p.a. is for revenue (GDP) to also have a CAGR of 3% real p.a. Earnings can't grow indefinitely just by cutting expenses,.

Yeah I have no problems granting that real price appreciation might only be 3%. However that does not account for the total return component from dividends and their reinvestment.

[OutOfCyan]

It is kind of shocking that Gross cannot understand the difference between total returns and price appreciation. Even more ridiculous is his ad hominem attack on Jeremy Siegel. I myself think the Prof tends to be perpetually bullish, but at least he understands basic financial math, No wonder PIMCOs equity fund managers quit the last time around they tried to get into equity funds. Must be tough tonwork for a boss who is blissfully ignorant of the fundamental building blocks of stock market returns.

Cut the guy some slack... price appreciation? Isn't that the same thing as falling interest rates? He manages a bond fund, for goodness sakes. Price appreciation is dead - interest rates can't go any lower!

I couldn't resist, but seriously, I've got a lot of respect for Gross and his ability to manage a bond fund. His awesome bond fund constitutes a good chunk of my tax-deferred investments. He's the only active fund manager I employ.

Why is Jack Bogle even attempting to make assertions about the future? Why is he insisting with Bill Gross that future returns will be reduced? That seems like an Anti-Bogle philosophy prediction.

I hope Mr. Bogle is correct. I would gladly take a 5% real annual return over the next 10 years. I doubt we'll see it, but I hope so anyway. As for pension funds being toasted, I think almost everyone already knows it.

It appears that Bill Gross is going to double down and stake his reputation on a faulty understanding of one of the most fundamental calculations in finance, the Gordon Equation. William Bernstein has called the Gordon Equation the closest thing you will find equivalent to a law of physics in finance.

[snip]

Gross, instead insists that R = G instead of R = D + G. He is ignoring dividends. He claims that stock returns cannot exceed growth. This is just fundamentally wrong. It was wrong for the last 100 years and will be wrong for the next 100 years. Gross goes so far as to say the last 100 years of returns were an illusion, a ponzi scheme.

[snip]

In coming days you will hear more and more economists mocking Gross for his elementary error as his reputation goes into tatters. This is just embarrassing to watch.

Bernstein's book was perhaps the best investment book I've ever read. ... that and the Bogleheads Guide, of course.

I was going to respond to these two quotes with the Gordon Equation. The common return I've heard for the decade starting in 2010 is 7-8%, which is pretty close to what the GE would predict, assuming earnings growth of 5-5.5% and dividends of 2-2.5%. With a 7.5% nominal return and 2.5% inflation, a 5% real return seems pretty realistic.

The Gordon Equation was right circa 2000. With 2% yield and flat growth, it was a horrible decade for equities.

Gross may be a little off when it comes to equities, but it'll take a lot more than that to his reputation. The man is a living legend in bond fund management.