Motivation John Bogle Javier Estrada (On market timing) IESE - - PDF document

1

• 1. Motivation
• Why this topic?
• 2. Evidence
• USA
• International evidence
• The equity risk premium

Long‐Term Trends (I):

Return

Javier Estrada ADFIN – Winter/2014

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Motivation – John Bogle “After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently. I do not even know anybody who knows anybody who has done it successfully and consistently.”

(On market timing)

2

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Motivation – Warren Buffett “I never had the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two. But I think it is very easy to see what is likely to happen over the long term.”

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Motivation

• So, why this topic?
• Most investors are obsessed with the short term
• But our ability to predict it is near zero (DWM v. GM)
• Finance addresses long‐term relationships
• Ours are equilibrium models
• The CorpFin notion of risk is very limited
• Only two measures of risk (SD and beta)
• Little or no mention of the holding period
• Long‐term trends provide useful perspectives
• How normal/abnormal is a current situation
• Several facts useful for your investment decisions

3

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Motivation

• John Raskob
• $15 a month in stocks over 20 years
• Expected result: $80,000 (GM=24%)
• Observed result
• $15 a month in stocks would have outperformed $15

a month in bonds in less than four years

• After 20 years the stock portfolio would have been

more than double the size of the bond portfolio

• After 30 years the stock portfolio would have been

more than eight times the size of the bond portfolio

• Takeaway
• For the patient investor, sooner or later stocks do
• utperform bonds

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Evidence

• What can we learn from the long‐term evidence?
• For all markets
• Diversified stock portfolios
• Medium/long‐term government bonds
• USA

Go

• Global markets

Go

• So, the long‐term global evidence is clear
• Stocks enhance purchasing power
• Bonds may destroy purchasing power (6/19)
• The compounding power of stocks is much higher

than that of bonds

• The equity risk premium is positive in all markets

 AM: 3.1–8.1% / GM: 1.4–5.3%  World ERP ≈ 5%

4

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Wrapping Up

• We will discuss two other pervasive patterns
• Value beats growth
• Small‐caps beat large‐caps
• But back to the evidence on stocks v. bonds
• The outperformance in terms of returns is beyond

discussion

• The question is why?

 Why do stocks outperform bonds?

• Is it because stocks are riskier than bonds?

 Under what definition of risk?  Are stocks really riskier than bonds?

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Appendix

5

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

USA – Nominal Returns – 1900‐2009

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

USA – 1900‐2009

Time to double purchasing power? Approximation

6

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Compounding Power (Nominal)

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Compounding Power (Real)

Back

7

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Global Markets – 1900‐2009

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Global Markets – 1900‐2009

8

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Global Markets – 1900‐2009

Back