303: Professor Jeremy Siegel’s Advice for Managing Money and Emotions in a Recession
Today, I’m speaking with Professor Jeremy Siegel. Jeremy was the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania for many years and now is the Senior Investment Strategy Advisor to WisdomTree. He makes regular appearances to share his expertise on the state of our economy and financial markets. You’ve likely seen him on CNN and CNBC, or perhaps you’ve read his columns for Kiplinger’s Personal Finance or Yahoo! Finance.
Jeremy has been called one of the best stock watchers alive by a number of major media outlets. With interest rates and inflation seemingly out of control right now, Jeremy’s expertise has been in great demand, and I’m thrilled to have the opportunity to have the man who identified what we now know as Siegel’s paradox on the podcast.
In this episode, you’ll hear his thoughts on how we should be consuming the information that we see on TV and read online to make better decisions, the circumstances that have put us in what he defines as a “mild recession,” and the moves he’s making at WisdomTree, where he’s been managing funds for almost twenty years and so much more!
In this podcast interview, you’ll learn:
- Why Jeremy doesn’t believe the markets are anywhere near as overvalued as they were at the height of the 2000-era dot com bubble.
- How to consume information about the markets to make better investment decisions.
- Why markets overreact to both upturns and downturns in our economy.
- Why so many mutual funds underperform against the index–and how to seek out passive and low-cost growth opportunities.
- Why real estate has historically been much more volatile than it looks right now and may be a poor choice for diversification.
- "The tendency of human beings and institutions is if they make a mistake in one direction, then the pendulum swings and they act in the other direction too much." - Jeremy Siegel
- "You've never lost having bought in a bear market." - Jeremy Siegel
- "Stocks are the most volatile asset class in the short run but the most stable asset class in the long run." - Jeremy Siegel
DisclosureOffer valid in the 50 United States and the District of Columbia, to first-time requestors. During the offer period, receive one (1) in-stock book per request. Limit (1) book per week per household. Limit three (3) books total each calendar year, between January 1 and December 31. Offer valid while supplies last. Howard Bailey Financial, Inc. reserves the right to cancel, terminate or modify this offer at any time. Void where restricted or otherwise prohibited.
Casey Weade: Professor Siegel, welcome to the podcast.
Jeremy Siegel: Happy to be here, Casey.
Casey Weade: Well, Professor, I am so excited to have you here. I have literally been watching you for decades. This is one of the most exciting interviews that I've had the opportunity to do here on the podcast, especially right now with everything that's going on in the economy and the stock market with interest rates and inflation. This is a topic that's on everyone's mind, and that's probably why I'm seeing you almost every day on TV right now because they want the expert to be right there with them. And, Jeremy, you have been said to be one of the best stock watchers alive, "one of the best stock watchers alive." And I just wanted to get a little insight from you. What's it take to get that accolade? What's it take to become one of the best stock watchers alive? Is that experience, education, intuition? Because there are others out there that think they're the best stock watcher alive but no major media outlet has ever called them such or they aspire to be that. What is your secret?
Jeremy Siegel: Well, again, when you say stock watchers, I'm not one that picks individual stocks. I try to look at the trends and look at the broad macro trends. My training is in economics. My training is in monetary theory and policy, which is when I got my Ph.D. in MIT and what I followed in my teachings. So, I'm not really a stock picker but I've been fascinated by the market all my life since I was ten years old so we're talking about 60, 65 years, my goodness. And, you know, sometimes I get a feeling in my bones after watching the markets so long, "Oh, yeah, I've seen this movie before." Of course, the movies are never really exactly the same. There are always twists so you have to realize that. I guess, you know, one of my biggest calls was right before the dot-com meltdown in March of 2000, I wrote the lead op-ed piece in March of 2000 saying, "A big cap tech stocks are a sucker's bet," and boy, that was strong and I got a lot of emails. Oh, my God. But that was the peak of Nasdaq and it crashed after that.
Some people blame me for crashing but I don't think so. I think it was just gross overvaluation in the market. It was also very bullish at the bottom 2009. You know, I didn't pick anything. I have to admit. I remember I was on CNBC once and Joe Kernan said, "Jeremy, you have been amazing but what do you look back on then? Anything you regret?" And I said, "I did not see the financial crisis coming. That peak I didn't know so much bad paper and bonds was in the portfolios of so many of the big investment banks." And so, that was one I did not warn about but I got most of the others, if not certainly to the day of the month, certainly in the trend of what was happened.
Casey Weade: 65 years of passion for the markets and the economy. What created that in you? Was there something in your childhood that created this passion to continue to do what you do today?
Jeremy Siegel: Well, that's a very good point. None of my family is in the financial markets. But one thing that really fascinated me was graphs of things that were happening and the daily graphs of the stock market. Remember, every day in The Wall Street Journal, the back page you would have I would look at that and say, "Why is it up? Why is it down? Are there movements here that we can predict? What's motivating that movement?" That just fascinated me as a child and I think I spent most of my life trying to say, "What is the cause of up and down in the markets?" And I think that formed the basis of my interest.
Casey Weade: Yeah. And you talked about that big call you made back in 2000. And many today are calling this the next tech bubble popping. Now, what do you see? Do you see it as the same thing that we experienced in 2000? We're seeing crypto markets fall apart. You know, Nasdaq's taking nosedives it seems like day after day. Comparing and contrasting what happened during the tech bubble and now, what do you see there?
Jeremy Siegel: Well, I see nothing as serious as 2000. 2000, we had the Nasdaq selling at around 80 to 100 times earnings. At its peak, Nasdaq was probably selling last November at 35, 40 times earnings. So, there's certainly a big difference. Now, the crackup also that we've seen now, you know, Nasdaq was certainly down 35%, S&P just down around 20. Now, we're speaking of now. Nasdaq fell 80% from top to bottom from 2000 to 2001, almost 80%. We're not going to have that now. You know, no one can say if we put the bottom in exactly. But 30%, 35%, I mean, even a major bear market is, by the way, that is called 40%. So, we're not quite at that level and it's really been what I call the hypergrowth stocks. Maybe you would call them the pandemic favorites, the Pelotons, the Zooms, the DocuSigns. I mean, we all know those names. I mean, those are the ones that fell apart. Those were the ones that really were selling at crazy multiples of sales with no earnings. Of course, that's what happened to those Internet stocks back then. But they were not, again, they weren't even in the S&P 500.
You have to have four quarters of earnings to even be in the S&P 500. So, again, those were speculative stocks. They've taken a crash similar to some of the dot-com, although interestingly enough, the dot-com index and there was of all stocks from 2000, 2022 fell 90%. So far, most of those speculative stocks, 70, maybe 80. We haven't gotten that washed out yet. And if you just move up from those crazy ones, the fall has been much less so there are similarities but nothing as severe as what we had then.
Casey Weade: You know, right now, with as much as we see some of these large-cap names being depressed, especially in the Nasdaq, Netflix, and Amazon, it's really hard not to be a stock picker right now. I know when I look at some of these names, you go, "Oh, yeah, I want to buy that." But I go, "I'm not a stock picker." I used to be. I used to do that. I go, "You know, that's not the way I invest anymore." You say you're not a stock picker but right now it's so tempting. What do you say to individual investors that are looking at some of these names and should they be trading individual stocks? Should they be trying to pick up some of these names that are greatly depressed? Can the individual investor, the average investor get ahead by doing some of that today?
Jeremy Siegel: Well, you know, I'm going to be very honest. With all my skills, I've never been a good individual stock picker. And that's why I basically moved to index and trying to move to the class of stocks that I think, you know, if times look rough ahead, I move more and more conservative stocks. I'll go more in when I think we're really at a bottom like we were in March 2009, when we were during the pandemic. I'm not really a timer. I mean, I'm talking about shifts that are marginal. I'm a long-term investor with dividend reinvestment and let my portfolio grow. I know there's a lot of fun that a lot of people have picking stocks. And if you want to put 20% of your portfolio in individual stocks that you pick, fine. But when you try to go 100% unless you stated pretty conservative ones, I find that those are the ones that often really fall behind. It is really hard to just pick those individual stocks. So, the serious money you have, let that be in a broadly diversified. And then if you want to try to do your own on 20%, 25%, I mean, it depends on your own risk preferences.
You know, I say go right ahead but I find people who are just picking individual stocks, boy, and they're the ones that have probably suffered those 50% losses, 60% losses and feel get discouraged and get out of the market. The market rallies. They don't get back in, in time. You got to have that long-term philosophy and tenaciousness to stay in the market.
Casey Weade: Well, I want to dive deeper into some of your philosophy around that and how you manage indexes at WisdomTree, and how you're really allocating today. But I want to get back to the bigger picture, too. And before we dive into an economic outlook-type conversation, I want to talk about all the noise that we have right now and say every time you turn on the TV, everybody has an opinion. Everybody has an opinion. You know, are we in recession? Are we not in recession? We're going to have the Great Depression. We're going to have a rampant inflation. They're going to get inflation under control. Everybody has a different opinion. And I think for investors, it's really hard right now to figure out which way is up. How should investors, not just today. You know, let's look at it from today's perspective but also a broader perspective. How should we be consuming economic information, economic outlooks? How should we be consuming the things that we see in the news, on TV, in writing, and leveraging those things to help us make better decisions?
Jeremy Siegel: Well, it's a very good question, Casey. One of the chapters in my book, Stocks for the Long Run, is can you time the business cycle? And if you knew four months ahead of recessions and the bottoms, the tops and the bottoms, as they're called by the National Bureau of Economic Research, you would make money by getting out of stocks four months before getting out. But no one has been able to do that. In fact, one has to realize that, and I think many of your listeners do, the National Bureau doesn't call bottoms and tops until months, sometimes years after they take place when all the data is in. And there's tremendous disagreement even about where the tops are. And interestingly enough, even if you knew the top, if you switched into other stocks, you're already too late in most cases. You don't beat the market even if you knew them, and most people don't know them at that time. So, it really shows how really foolish it is to say, "I'm going to try to time the business cycle with my stock/bond allocation to beat the market." And that was the topic of one of my chapters. I was surprised myself and it was actually a published article in one of the journals, and I was surprised myself about how much in advance you really needed to know to make money off the business cycle.
Casey Weade: Sure. Well, let's talk about that business cycle. Let's have you bring out that crystal ball after we just said, "You can't do it." Let's take a look at some of the things.
Jeremy Siegel: Well, let me tell you what I think. I mean, yeah, first of all, I think right now we are in a mild recession. Let me explain that. We just got, by the way, the third or final reading of first-quarter GDP, and it's decidedly negative, minus 1.6. It won't be until the end of July that we're going to get the first reading on the second quarter but we got a lot of data so far and it looks like it's pretty close to zero. So, when that something really starts picking up and looking at the data, this quarter ends in a couple of days, we're going to have a negative first half. Now, the technical definition of recession is two consecutive quarters of negative GDP growth. We may not get this quarter to be negative but we're going to get the half to be negative. So, it is feeling recession-like, not a major one, a mild recession. We're actually, you know, could be in. I don't think at this point the Federal Reserve is going to, excuse me, the National Bureau is going to call it unless things get a lot worse from this point on. But it's almost certain that we're going to have negative real GDP growth in the first half of 2022.
Casey Weade: Well, you said I think in Pfizer back in May that you didn't see a recession in 2022.
Jeremy Siegel: Yeah.
Casey Weade: So, what changed?
Jeremy Siegel: Yeah. It did change very quickly. I saw the fallout of the data. And you're right. And I switched rather rapidly. When I looked at some of what's called the high-frequency data, which is data that's down there to saying, you know, we are in a recession-like. Now, again, I don't think we're going to get called a recession. And if we bounce back in the third quarter, then I don't think that the National Bureau will call it but it's really a slowdown that we had. Now, of course, we know the pandemic was the shortest recession in US history. It only really lasted a few months before we bounced back with all the stimulus we have. But this is mainly caused by the inflation. Spending is good but once, don't forget, recessions are defined as real GDP. That means after inflation. And although we're paying more and dollar value is going up, it's on a smaller level of quantities than we have. And that's what a recession actually is. It's hard to predict third and fourth quarter.
As you know, we can talk about the Fed. I've been very hawkish on the Fed way back in 2020, 2021. I said, they're way behind the curve, which they are. They should have started raising interest rates much, much earlier. Now, they're going in and I'm now, believe it or not, a bit worried that they may go too far in the other direction. I actually appeared on CNBC a couple of weeks ago, two or three weeks ago, saying maybe with this slowdown, we have to worry about going in the other direction. Don't forget, the tendency of human beings and institutions is if they make a mistake in one direction, then the pendulum swings and they act in the other direction too much. Now, I'm not saying they're doing too much so far. They've got to start tightening and they should have done it much earlier. But we are going to have bad inflation data, Casey, for months to come because of the way that the Bureau of Labor Statistics collects the inflation data. It's very lagged in the housing sector, which is a big sector. So, the big increase in housing prices and we know housing price is up 20% and 30%, it only shows them this is up 6 because it just dribbles in and will be dribbling in over the next 12 to 18 months. And I don't want the Fed to say, "Oh, my goodness, look at the inflation data. It's still bad," because that's something they can't do anything about. But that's baked. They've got to look at sensitive commodities.
We do have oil coming back a bit. Other sensitive commodities, lumber back way bit, housing market softening, housing prices for the first time since the pandemic softening. They've got to look at those and they have to keep up with the tightening. But they can't say, "Oh, we got to just," you know, "Oh, slam on the brakes." I don't want us to go through the windshield as the expression goes. We need to slow down and we need to hike rates and we're going to have inflation in the pipeline. But I think it would be a mistake on the other side for them to just keep on raising 75 and then finding itself in a real recession in the second half.
Casey Weade: I saw that a couple of weeks ago. You said the Fed needed to conduct a 100-point rate hike in order to medicate inflation.
Jeremy Siegel: I did. And you know why? Because they needed to catch attention that they're serious.
Casey Weade: And you think they've done that or are you kind of backing off?
Jeremy Siegel: And they went 75 but they're, you know, I think now everyone agrees they're serious. I wanted them to say, "Listen." I also honestly want Jay Powell to admit, I mean, he did admit he was wrong but really say we should have been tightening earlier and we are planning on a tightening now. However, a lot of inflation has already occurred. As I said, the official statistics show 8.5% inflation. If you properly put housing inflation in, both on the rental side and on home prices, we had 12% inflation. So, we've actually had a lot more information that has come out that will come through the statistics in the next 12 months. I think now that he's gotten the attention. So, at this particular point, I want him to look at all the data. And you know, the next meeting at the end of this July we'll see, is he going to see a tremendous slowdown? We know consumer sentiment is rock bottom. It's at the levels that we haven't seen the pandemic since. I mean, people are really depressed. And it is, you know, that inflation, unfortunately, there's not a lot that can we do about inflation that's already happened.
I mean, I was on CNBC just recently saying, "Look at the renters. The homeowners are okay." You got home equity that built up in the last 12, 18 months. Well, what if you're a renter? Leases are turning over 20% to 25% higher. We're going to have default. We may have to have a federal program or state programs that actually help renters through the experience. Because I'll tell you, the rents are not going down. They may level off but they're 20% to 25% high. And people's wages are not that way. This is something that really could start biting. I know we talk a lot about gasoline prices and they're important and, oh, my goodness, I paid $5.50 at the pump and all that. But we haven't talked to renters who are being shocked at the rental increases that they're getting. And they're getting it because demand is huge, because cost to realtors have gone up. It's not a gouging question. It's cost going up and demand that's going up. And in many cases, they don't have home equity. That's why they're renting. This is going to be a source for that group that is going to slow down consumption. The Fed has to be sensitive to all these groups in it. I think the tightening path, maybe another 75 at the end of July but if it falls off the cliff, maybe only 50.
You know, I think the market jumped ahead. Oh, my goodness. They're going to be really tough. And I actually think that the long-term interest rate, which is what, 3.5 right now, is actually not going to go much higher. I think that that's probably the peak. Because I think they see a slowdown ahead. I think if the Fed goes way too much, it's going to invert the curve. I'm not terribly frightened about it. I know everyone thinks about that is recession but I'm saying that we don't have to boost interest rates to levels that existed 10, 20, 30 years ago. People are talking about Volcker levels. We're in a different world of much lower interest rates. We don't need to tighten that much before we get a slowdown.
Casey Weade: So, you don't see what happened in the 70s happening again? You don't see an extended period of inflation and rising rates?
Jeremy Siegel: You know, we had 15 years where the inflation rate was averaging 7%, 8% a year, and some years over ten, almost 15 years. Now, we've had one year, one-and-a-half years. And I do think we're going to have another inflation through the pipeline. Now, let me just mention to you, back then in the 70s, they didn't do the housing inflation the way they do it today. It came in immediately in prices of houses and they changed the methodology. I won't go into the technicals. It actually made sense, although I think the procedural. There were procedural problems. They should update it more. But nonetheless, the change in methodology, if they use old methodology today, we would have had 10%, 12% inflation in the last year-and-a-half. So, we did have way too much money growth in 2020 and 2021 this year. Let me just mention because I'm a student of Milton Friedman. I studied monetary theory. That one's it. We have actually had virtually no money growth since the beginning of the year, which is an amazing slowdown actually in the month of. We just got amazed at a tiny increase yesterday. April's data showed a decline, the second-largest percentage decline in 60 years in the money supply. That set off warning signals to me that the potential of over-tightening was there. And I just want the Fed to be very alert to the signals that are going on.
Casey Weade: You're hearing, and investors are hearing about inflation and interest rates, all these things, recession. There's the economy and then there's the stock market. These are two different things. And last November, when you were interviewed by Advisor Perspectives, you predicted the S&P would be at 5,000 by the end of 2022. So, let's tie together some of these economic outlooks and fears and concerns and just this general feel that you have around the economy today into that prediction and the stock market moving forward. But maybe you can lead us into this by explaining the difference between the economy and the market.
Jeremy Siegel: Yeah. You know, one of my mentors when I went to MIT, Paul Samuelson, said the stock market has predicted nine out of the last five recessions. It tends to overreact both on the upside and on the downside. It is a very sensitive indicator. It can give false alarms. There have been many 20% declines, which we define as a bear market that have not been followed by actual recessions. You know, the mood of the public, pessimism, optimism. Look at the 1987 stock crash, which you talk about a lot in my book, Stocks for the Long Run. There was no economic slowdown that followed and was the single worst day in the stock market, October 19, 1987, in the whole 110-year history of the Dow. No recession. Economy grew strongly, and so did corporate profits. So, emotions can send markets deviating sharply from the reality. That said, there's never been a recession where we haven't had a decline in the stock market that preceded it. So, it is sensitive and it will react that way but it often will tend to overreact.
Now, about getting to 5,000, what are we right now? As I take a look at S&P, 38 out of, well, that would be a big increase, wouldn't it? 12. We're talking here about a 30%, 35% increase. I think the stock market is undervalued. I think we should be selling more at 20 times earnings rather than 16 times earnings. I would say probably given the inflation, what we see, 4,700, 4,800. Will it get there by year-end? I think second half is going to be much better than the first half. Will it actually get to 5,000 and above? It could but given the damage done to psychology, which is so important to the market, I certainly would say that 5,000 is not likely by year-end.
Casey Weade: There's something that you said there that I have a question about that has come up in the past in conversations with investors that are trying to understand PE ratios and price-to-earnings ratios and just what that means. And they look at that and they go, "Okay. So, you said it should be trading at 20 times earnings. Okay. Well, that's basically buying a business for $2 million that's earning $100,000 a year, right, about 20 times earnings." So, 2 million is what I'm paying for a business that's earning 100,000 a year. Nobody would go out in the private sector. I wouldn't go out and buy a business that's trading at 20 times earnings. But we do that all the time when it comes to the stock market. How can we buy the market at 20 times earnings and expect to get a return? We do. You know, I'm playing devil's advocate here. It just seems very wild to many people.
Jeremy Siegel: Well, it's true. See, if you invest in a private business, you're putting all your wealth and a lot of your eggs in one basket and things didn't really go back. That's why we have public markets, so you can diversify out. And once you diversify, you find out that you value stocks higher. And that's why a lot of firms go public, is that people can diversify that individual risk. It's not, I mean, you buy one store, I could go bankrupt. But if I buy a thousand stores in different locations, then I can diversify that particular risk. Now, I say the PE should be 20. Historically, it's averaged 16. I've actually been on record and I've written about the fact that the ability to index the market at very cheap cost, which was not available in the 19th and first half of the 20th century, is one of the reasons why you want to pay more for stock. They're more liquid. You know, listen, you can buy an S&P for what? Five basis points. That didn't exist during most of its existence. You couldn't divert to the - trading class were much higher, brokerage costs were much higher, bid-ask spreads were much higher. It probably cost you 1.5 percentage points a year if you wanted to maintain an S&P 500 cap-weighted portfolio. Today, it's costless.
So, as a result of the greater liquidity, you can pay more. More liquid assets get a higher price. So, that's one reason why the PE has been trending upward and I think normal PE is closer to 20. Now, some may argue it's 18 to 20. I sometimes say 20 to 22. So, I think right now selling at 16 times projection, I think the market is undervalued in relative and that the forward-looking real returns are going to be higher than 5%, which is a 20 PE ratio that are probably going to be 6% to 7%. But when you buy an individual business, first of all, you've got to get real tough accounting, gap accounting then survey by investors. There's always a possibility of fraud but once you get into the public markets, it's much worse possible. You know, Theranos never hit the public markets, right? And what have gotten the scrutiny, I think, and the fraud would have been discovered an awful lot earlier. So, when you're buying a private business, you've got to worry about things that you don't have to worry about when you have a public business that's been vetted not only by SEC requirements, the Standard & Poor if it's in the index, but also other investors.
Casey Weade: Which demands a higher price.
Jeremy Siegel: Campus say that there couldn't be, listen, we remember the Enron scandal. There have been scandals in publicly traded stocks, to be sure, but you will have a lot less of those types of things in publicly traded stocks than you will in the private market.
Casey Weade: Sure. Less risk demanding a higher price. Fair enough. You said the emotions deviate markets and Warren Buffett famously said, "Be fearful when others are greedy. Greedy when others are fearful." Fear is at arguably an all-time high right now with consumer sentiment on all-time lows. Do you think now is a time for us to be greedy as investors? Do we always adhere to that? Because there's been times when, well, maybe we shouldn't adhere to this whole philosophy about greed and fear.
Jeremy Siegel: No, but in general it's true. I mean, all the data, you know, we have investor’s intelligence, the bull-bear data. Stock market is going up and soaring and hitting new highs. Bull sentiment is really high. When the market is in a bear market, bull sentiment is very low and bear sentiment is high. I'm actually surprised how high bear sentiment is. Well, I think it's also consumer's confidence, which really is related to economics and the inflation data. It's actually crazy to have consumer confidence as low as it is with an unemployment rate of 3.5%. Normally, we have unemployment rates of 7%, 8%, 9%, 10% when we have consumer sentiment that low. But it's the inflation. People are saying, you know, "I'm not keeping up. My wages are not keeping up. I fear higher prices, my real situation down," and they see the portfolio is down. You know, they say the two biggest things that affect consumer sentiment are gasoline prices and stock prices. Well, that's not moving in the right direction, you know, a double whammy on that and that's sent consumer sentiment low and investor sentiment low.
But yeah, I mean, stocks are real assets. This is really important. There are claims on property, there are claims on plant equipment, land, copyrights, trademarks, intellectual property. These are assets that, as prices rise, will maintain value. It's not like a standard bond which promises to be $1,000, and they don't default on their bond, even if those $1,000 are worth $10 when they pay it off. When you have a claim on a stock, you have a claim on a real asset. And that real asset, in general, will go up with the stock. And in my research as well as everyone else and I point this out right away when I talk about long-term returns, as you know, Stock for the Long Run goes all the way back to the beginning of the 19th century, stocks, hedge, inflation in the long run. The only time they don't do well is when the Fed is in tightening mode like right now. But they sore before, as they did in 2021, they sore after once the inflation's under control and the net result is they make up every dime of loss to inflation.
Casey Weade: When you said, "Just in the last couple of days," your sense is today and tell me maybe I get this wrong, but that today investors are going to be very happy one year from now if they're deploying cash today.
Jeremy Siegel: Well, you know, standard deviation of one year is still what? 18% to 20%. I was saying that if you got I think you're going to be happy a year from now but I think you're definitely more going to be happy 3 to 5 years from now having bought in a bear market. You've never lost having bought in a bear market. There's been very few like double bear markets where a bear market then went into bull and then bear again. I mean, we actually had a little bit of that in 2000. We went down 20%, rally back, and then went into a recession after, you know, that was kind of the tech bust plus 9/11 occurring and those two things brought it back down. And that was only briefly and then it went way up after that. So, in general, buying in bear markets has been a profitable longer-term proposition.
Casey Weade: Well, let's talk about what's happening at WisdomTree right now. We leverage a lot of the resources at WisdomTree for the families that depend on us. What kind of moves are you making at WisdomTree right now that really stand out?
Jeremy Siegel: Well, then let me also just give you a little bit of a philosophy at WisdomTree. I think it's important because Jonathan Steinberg, the CEO, called me up. Well, it's almost 20 years ago now. I think it was 2007, so 15 years ago. And I was getting disenchanted with capitalization-weighted indexes. I was working on a market hypothesis called the noisy market hypothesis. Instead of efficient markets, we have noisy markets. Now, we have noisy markets. It means that prices move away from fundamentals. Now, it's very hard to know which stock has moved away in which stock not. But why not just pick stocks who have low prices relative to fundamentals? And what I mean by fundamentals, I mean dividends. I mean earnings. That's what we concentrate on, those two. Others pick cash flows. Some people pick book value but that has some value in themselves. But if you just screen for that, low relative to that in the long run. My research which was done in 2004, '05, '06 showed really excellent risk-return.
Now, would not fate have it. We've had a 15-year period where that has underperformed growth stocks until the last six months. But we had the worst 10, 15-year period in a 100-year history of value stocks versus growth stocks, which are those that are low and we're well within fundamentals, but they're reinserting themselves. And I'm very encouraged. I think that mania that existed in so many of the growth stocks, they got overbought, over-own. And I think those stocks that sell low price to earnings, low price to dividends are going to be the winners over the next 6, 12, 18 months or 3 to 5 years if you want to take a longer-term perspective.
Casey Weade: So, does this put you in stark contrast to the Bogleheads? Where do you stand with the Bogleheads?
Jeremy Siegel: Well, you are right. You know, Jack and I, well, we knew each other. We were very friendly. He actually gave me an endorsement to Stocks for the Long Run. But I'll give you the truth here. When I deviated with WisdomTree and said that I think capitalization-weighted have biases, he kind of disowned me. He said, "Jeremy, you know, I think you're wrong." And he felt that was not the correct one. Certainly, capitalization-weighted have since that time. As I said, yes, that 10, 15-year period was the best for capitalization-weighted indexing in history. It certainly has faltered a bit in the last six months. We will see what history is. The value investors say we got to such crazy levels and some of them I know because I ended asking him if he had been on, you know, who's a value investor. He said, "Well, we're back to where we were in the dot-com and I don't think we're there yet." He said, "We're still crazy overvalued on growth and undervalued on value," and he sees still a long way to go. I still see a preference for that because I think people are going to be going after dividends that are inflation-protected which history has shown they are. They don't want to go to TIPS which are barely positive in real return. They would want to go to 2%, 3%, 4% dividend-paying stocks, which will surmount inflation as they do in the long run.
Casey Weade: Well, let me play dumb here for a little bit. When it comes to WisdomTree, you're not a nonbeliever when it comes to passive investing or index investing.
Jeremy Siegel: No.
Casey Weade: And we have index investing. Is WisdomTree, I think there's some confusion around that, is this an index fund? Is it a passive fund? Is it an active fund?
Yeah. It is an index.
Casey Weade: It's a modern alpha. So, let's talk about modern alpha and what that really means. How do you incorporate passive with active and get the best of both worlds?
Jeremy Siegel: This is very important.
Casey Weade: We might convert some Bogleheads here.
Jeremy Siegel: Maybe. We are not picking individual stocks. We're not looking at Apple. We're not looking at ExxonMobil. We're not picking. We just screen for stocks with low price-to-earnings ratios or price-to-dividend ratios, high dividend yields, or high earnings yields. If you pay a penny's worth of dividends, you are going to be at pennies worth valuation capital in our index. We don't have arbitrary value and growth. It's a continuum. That's what I like about this. What we do is we weigh the stocks in your portfolio by how much earnings your company contributes to the whole pot of earnings. Instead of just saying, "Well, whatever your price is, that's right. You know, you're selling for 200 times earnings, that must be right," we're saying, "Well, if you're saying 200 times earnings, we're not going to weight you 200 times in that. We may weight you five times or eight times, ten times. We're only going to weight you to what your earnings are relative to the market. And we use the same in our dividend weighing stocks." So, we still have hundreds and hundreds of thousands of stocks in the portfolio but we do not weight capitalization. We weight by fundamentals. It is still - that's what's called modern alpha. We're trying to tilt you towards a portfolio that will give you a risk-return outperformance in the long run.
Casey Weade: And there's a price to that. And so, Morningstar has done research saying that the number one determinant of long-term performance when it comes to ETF and mutual fund is going to be the cost of the fund, the price that you pay. So, we're paying a little bit more at WisdomTree. We're paying a little bit more for this modern alpha. What are your thoughts around those studies in that research?
Jeremy Siegel: Well, it's interesting. And then let me give you a personal anecdote. You know, I was a big fan and still am in Vanguard. I still hold a number of Vanguard funds and have the utmost respect for Bogle and what he did. I mean, it was pathbreaking. When Jonathan Steinberg called me and said he was thinking of forming a company and issuing ETFs based on that, the first thing I told him was, "Jono, it's got to be cheap. You know, you're not going to be charging 70, 80 basis points like others." You know, I say, "It's not going to be as cheap as Vanguard. There's a lot of work involved in proprietary knowledge and we have to do rebalancing, etcetera, but I want it to be cheap." And he said, "Jeremy, that what I want too." And we came out, we were by far the cheapest. Now, though, there's been a lot of competition since we came out but no one touched me. And let me just say to you and I won't name names, competitors told me privately, "Jeremy, you could charge more for here, ETFs. I think you know the return is going to compensate you for that." And I said, "Listen, we want to give a product that is fairly priced and it's going to give this better return to shareholders. We're going to keep it cheap. That was one of the philosophies of WisdomTree.
Casey Weade: So, and cost is relative to what you're getting and you feel that if those studies are true, that much of those or many of those high-priced funds out there aren't delivering the level of value they should for the price?
Jeremy Siegel: No. I mean, we fairly know active mutual funds under 80% underperformed the index. I mean, I have a whole chapter on funds in the index and we reviewed it again and it's overwhelming. And it's because of these. We found that the extra return you got was 120 basis points depending on what market you were in. Some were 150, some foreign markets were 200. So, if we charge 20 or 25 or 30 or whatever, we were just taking a tiny fraction of the outperformance that we found historically in these fundamentally weighted indexes.
Casey Weade: So, let's seek out those areas where we can find some outperformance but still take advantage of the passive and the low cost that we're able to pick up there. Good enough. Let's pass on some Bibles to the families that are listening here today and talk a little bit about stocks for the long run. It's in its sixth edition, about to release here in September, almost three decades after The Washington Post has named this one of the ten best investment books of all time. After three decades, it still remains a sound educational resource for investors. Why do you think it's been such a book that's had such longevity that still continues to be looked at as one of the best investment books in history with all the changes that we've had go on in the investment world over the last three decades?
Jeremy Siegel: Well, it's very interesting you should ask that, Casey. The first edition came out in 1994 and actually used data through December of 1992. So, 30 years, you know, December, all the data in the sixth edition goes up and even some of a little bit past December of 2022. The long-term real return on stocks that I calculated 30 years ago was 6.7%. Interestingly enough, if you updated including the bear market that we have today, the long-term real return is 6.7%. So, 30 years of a lot of volatility have not changed the long-run real return on equities. Amazing. And I think that that is one of the abiding theses of the book. There's over 500 pages. I've had five chapters to this book. I have four chapters on just value investing. I had a chapter on pandemic. I've added a chapter on ESG investing. I won't go into all the details. I'm really proud of it and excited about it. One person said, "Jeremy, Is there a way you could summarize your book in one sentence?" And it's pretty hard when you have 500 pages but let me tell you what I say. Stocks are the most volatile asset class in the short run but the most stable asset class in the long run. No other asset class over the 220 years of history we have, has such a stable run.
Casey Weade: You include real estate in that?
Jeremy Siegel: Real estate, now, we don't have as long a real history. And in fact, I'm glad you mentioned that because I had a whole section, not a whole chapter, but part of the chapter on real estate. Well, we, of course, had real estate but we can't calculate returns. We have prices but most of the return is net rental income and we don't have good data on net rental income. Now, REITs have been around 50 years. Now, let me give you an interesting statistic. Real estate investment trust, from the last 50 years, the return on REITs has been almost exactly the same as the S&P 500. It's done well. And that includes reinvested dividends. But let me tell you something else that might surprise people who say, "Oh, my God, I love that." Its volatility often has been greater. The drawdowns during bear markets and this is true of the financial crisis and of the bear market that we suffered during the pandemic were greater than the S&P 500. The only bear market where it served as a good hedge was the dot-com bust. That's when real estate actually REITs served as a hedge. In all other bear markets, including the one in 1994, etcetera, they actually went down more. So, you've gotten a good return but don't think, "Oh, I've got a great diversifier here in the markets." That has not been the case.
Casey Weade: Well, let's talk about diversification. You write about the ideal portfolio should have an equity holding of 50% in world index funds. That's 30% U.S. base, 20% non-U.S. base, and remaining 50% to strategies that'll enhance the return. Can you speak to that a little bit more? I want to talk about this one-third of an equity portfolio being international equities. Many seem to have an issue with that today. I know we have many families that are coming in saying, "I don't want anything but U.S. equities," and others saying, "I don't want anything to do with U.S. equities." Let's talk to a little bit about this one-third international allocation and what is this 50% just strategies that will enhance return?
Jeremy Siegel: Well, the 50% that enhance return would be those fundamentally weighted type of portfolios, which I think will enhance your return. You know, I start all my chapters with quotes from people. And in the international one, I added a quote by one analyst at the end of last year. He said, "Nobody can point to their international stock performance with pride in recent years." And that's true. It has not been good. US has really outperformed and I myself have been disappointed and I myself have been disappointed, honestly, with the emerging markets. But let me say the following. You can get Europe today for 11 times earnings. You can get emerging markets for anywhere from 8, 9 to 12, 13 times earnings. Given that, you know, the long-term history is 15, 16, you're getting in a world that interest rates are still low even though the Fed's hiking them. I think a long-term bargain. I know they've underperformed the last ten years. The reason why International has underperformed is very similar to the reason why value stocks have underperformed because believe it or not, there's not a lot of tech once you get out of the US, and that's been the big outperformer.
Europe is mostly a value shop. Something else that I think is very attractive for emerging markets, easy to get dividend yields of 3%, 4%, 5%, 6% in diversified portfolios. And if you want that cash and that cash, again, provides a hedge against inflation, the emerging markets are there. Yes, I know about the underperformance. I've suffered it. We've all suffered it and have gone through it. It's when times in the past have been the worst that they offered the best opportunities looking forward.
Casey Weade: Well, it's so much value here, Professor Siegel. Thank you for all this value. I'd really like to transition from all this technical stuff and ask you a couple of more philosophical wrap-up questions and just get to dig in a little bit deeper to some fun things. One of those things that I just have to ask someone like you, I mean, you've been doing this for so long, you're not retired, you're loving what you do and you're at the top of your game. What are some of the strangest, maybe one strange daily practice that you have? What's something that you do every morning or every day that you can't live without that really makes a big impact on you that maybe it's a little off?
Jeremy Siegel: Well, you know, also, I do want to say that I formally retired at Wharton after teaching 45 years last July. As you know, I wrote the book, Stock for the Long Run. I'm still involved in conferences and people see me on Bloomberg, on CNBC, and the media. And I love talking about, I love educating people about that. I've developed into a very early person and I wasn't when I was growing up. I didn't want to get up before noon but I get up at 5 a.m. I look over all the markets. Europe is open and I review everything and read the summary of the news. I do my best writing, I think, in the morning and a lot of my best thinking, a lot of it. In the afternoon, I take a more relaxed state of reading and watching, closing of the markets, and then try to enjoy myself. Looking at a series or movie with my wife in the evening. I have a fruit smoothie usually at 2:00 or 3:00 sort of my dessert and try to stay in shape. I try to do the treadmill or bike every day that I can.
Casey Weade: Well, I find that almost anyone that is at the top of their game at any age is still studying and learning. That's clearly what is one of the things that continues to drive you and what creates so much longevity in your life. Here's another one for you. What do you hope is ridiculous or is perceived as ridiculous 25 years from now?
Jeremy Siegel: Oh, wow. That we're doing today?
Casey Weade: Something acceptable today.
Jeremy Siegel: Yeah. You know, that's hard to say. I mean, I think and I don't think it'll change because I think it's human nature. We really just pay far too much attention to the short run and day-to-day fluctuations. I mean, I know when I get on these shows, they say, "Okay. Dr. Siegel, where are we going to close at the end of the week? At the end of the month?" You know, is that someone that is planning a long-term portfolio need to worry about? I mean, will there be a time when we'll say, "Why was I worried about that?" Isn't that crazy? I mean, we just keep catering to day traders. Are we trying to cater to serious investors where stocks offer the best opportunity for long-term investment? You know, I hope that we will shift away from our short-term focus to that long-term focus as years go on.
Casey Weade: Well, you're preaching to the choir. Thanks a lot for that. Let's wrap up with one last question that has to do with the title of the podcast you hear on Retire with Purpose. What does that phrase mean to you? What does retire with purpose mean to Professor Jeremy Siegel:?
Jeremy Siegel: Well, it means setting yourself up so you can do what you love to do and that you plan long-term for that accumulation. And I think, you know, I don't think I'll ever retire because I'll always be looking at the markets. But I also realize that as the world goes on, the best and the brightest, the young people, they're going to do much better analytics and new theories. But the wisdom that you gain through, as we talked about earlier, 60 years of looking at the markets, if I can still impart some of that wisdom to the public or to my students, I love doing that.
Casey Weade: You're making a monumental impact. You already have in the world. Thank you so much for passing that on to me and to our audience. This has been a real honor to have this time with you, Professor Siegel. Thank you so much. I hope to do it again in the future.
Jeremy Siegel: I hope so, too. Thank you, Casey.