Equities, playing defense - Consumer staples, an embedded free "partial crash" put option

"Defense is a definite part of the game, and a great part of defense is learning to play it without fouling." - John Wooden, American coach

In continuation to previous conversations discussing the relationship between equity versus credit we would like to point out the downward protection offered by Consumer Staples and its recent relationship with High Yield since the financial crisis of 2008/2009. We will also look at the "greatest anomaly" namely that you get superior long term returns from low volatility equities.

As indicated by a very interesting note from Societe Generale from the 26th of March from their Global Quantitative Research team entitled - Consumer Staples outperformance solely attributable to market crash protection where they indicated the following relationship with the high yield bond market:

"Over recent years, the Global Consumer Staple sector has performed more in line with the high yield bond market than the broader equity market – or indeed, the MSCI high dividend yield index. This market-beating performance has been attributed to the clamor for quality yield but we’re not convinced. Here we show that the outperformance was wholly driven, not by yield, but the ability to limit losses during periods of acute market weakness. Essentially, fund managers are not seeking yield but buying downside protection, and in a world where market shocks are more common, the resulting premium is perfectly understandable." - source Societe Generale

Consumer Staples, or how to play defense when capital preservation dominates performance:

"The chart below plots the performance of the Global Consumer Staples sector versus high yield bonds, high yield equity and the overall global equity market. As the chart shows, in recent years, whilst ‘high dividend yield’ has largely tracked the equity market, the Consumer Staples sector has more closely mirrored the high yield bond market. Not only are total returns similar, but drawdown (peak to trough losses) have also been around 35%." - source Societe Generale

"From the chart above it seems that the outperformance of high yield bonds and the Consumer Staples sector has been fairly consistent, but the relative performance versus MSCI World reveals that the bulk of outperformance came during the financial crisis of 2008/09 and the Eurozone crisis in the summer of 2011." -  source Societe Generale

"Capital preservation is a concept that many investors understand but perhaps underestimate. No doubt this is because major market declines tend to happen suddenly and on a relatively infrequent basis. This is also why market bears – as we know from experience – tend to look completely stupid most of the time. To demonstrate the importance of loss avoidance, we have taken the often quoted Consumer Staples sector as our example and we aim to demonstrate that the premium afforded to this sector and its outperformance in recent years is courtesy of downside protection." - source Societe Generale

On another note, Gary Shilling in a Bloomberg column on the 30th of January entitled - Where to Invest While Markets Remain "Risk On" also seems to favor Consumer Staples as part of an overall investment strategy:

"Consumer Staples and Food:

Items such as laundry detergent, bread and toothpaste are essentials that are purchased in good times and bad. Their producers’ equities will remain attractive. The Standard &Poor’s Consumer Staples Sector Index was up 10.8 percent last year, after a 14 percent gain in 2011. Among retailers of consumer staples, the winners may continue to be discounters, such as Family Dollar Stores Inc. U.S. used-merchandise stores have been thriving. Producers of national brands will need to continue to adapt to weak consumer incomes and high unemployment by emphasizing cheaper “value” products."

But moving back to the downside protection offered by Consumer Staples, Societe General offers some an interesting analysis on the downside premium offered by this sector:

"Firstly, we devise a strategy that invests mainly in Consumer Staples but we switch into the equity market rather than the staying in the sector during periods of major market declines. By doing this we effectively remove the drawdown protection from the sector by being totally invested in equities instead of lower-beta Consumer Staples during market pullbacks. 

So, with perfect foresight, we identify the months when the MSCI World index lost more than 3%. Then, rather than stay invested in Consumer Staples (as you should), we invested (mistakenly) in the equity market instead. The purpose here is to understand just how important capital preservation is in driving overall returns from the Consumer Staples sector versus the market by replacing the best months of relative performance with the market return. By investing in the market, and not the sector, during those periods when the market was down 3% or more effectively kills the outperformance of the sector, to the extent that the sector goes from outperforming by nearly 50% to underperforming by 20%. This in part starts to demonstrate just how important the downside protection is in driving the performance of this sector.

If we repeat the exercise but this time for a threshold of -5% or more (which happened 12% of the time), we find that the sector performs in-line with the market. This suggests to us that the value of the put option offered by the Consumer Staples sector protects investors from monthly declines of 5% or more i.e. you can generate market performance and be insulated to a degree from major market shocks." - source Societe Generale

"Let’s explain things a little differently. Imagine a strategy where one invested in the market most of the time but (with perfect foresight) switched into the Consumer Staples sector during months when the market fell by 3% or more. By comparing this strategy to the performance of Consumer Staples sector we can measure the protection being offered and, as we show below, see that this strategy outperforms the Consumer Staples sector, implying that the better performance of the sector is not sufficient to compensate the investor when markets decline by 3% or more. But what happens if we switch to investing in the sector during months when the market fell by 5% or more?

While our strategy invests in the market 88% of the time and in the sector just 12% of the time, its performance almost perfectly matches the overall performance of the Consumer Staples sector. Hence our assertion that the sector is primarily a market index with a put option attached, much in the same way we describe another quality measures such as Merton’s balance sheet model and Piotroski’s F-score." 

Societe Generale concluded their note with the following important point relating to the limitation of the protection offered by Consumer Staples:

"Of course the Consumer Staples sector does not fully protect the investor as it too can fall, but historically by only 60% of the market fall. Valuing our put option is difficult. But with the incidence of months when the market fell by 5% or more being twice as common in the last 15 years than in the previous 25 (see below), this put option has become more important to investors. As we have stated on numerous occasions, understanding drawdown risk and capital preservation qualities is paramount to understanding what an asset is worth. With the events in Cyprus still ringing in our ears, that has never been more relevant than today." - source Societe Generale

The downward protection from Consumer Staples can be illustrated from the following Bloomberg graph highlighting the performance of Consumer Staples versus Consumer Discretionary and Financials since October 2007 until October 2012:

Another way in protecting a portfolio is investing on ETFs such as the PowerShares S&P Low Volatility Portfolio for protection from stock-market swings as indicated by Charles Stein in his Bloomberg article from the 20th of March - ETF Beating Markets With Gains Less Price Swings:

"Investors who bought PowerShares S&P 500 Low Volatility Portfolio for protection from stock-
market swings when it debuted almost two years ago got an unexpected bonus: They also made more money.
The $4.1 billion exchange-traded fund, which owns the 100 stocks in the Standard & Poor’s 500 Index with the lowest volatility, gained 30 percent since its inception on May 5, 2011, compared with 21 percent for the benchmark U.S. index. The ETF, the largest of its kind, achieved that performance with about 70 percent of the volatility in the index, giving it a risk-adjusted return double that of the market, according to the BLOOMBERG RISKLESS RETURN RANKING." - source Bloomberg

Of course, no real surprise looking at the composition of the index detailed in the article and the "defensive theme" of its components:

"In the low-volatility index, utilities represented 31 percent of the portfolio, compared with 3.4 percent in the regular U.S. benchmark, and consumer staples accounted for 24 percent, versus the index’s 11 percent at the end of February, according data from Standard & Poor’s. Information technology, which represents 18 percent of the S&P 500, made up 3.6 percent of the low-volatility portfolio.
Among the biggest individual holdings in the PowerShares ETF are Johnson & Johnson and PepsiCo Inc., the two stocks in the S&P 500 with the lowest volatility over the past year --10.1 and 10.4, respectively. Johnson & Johnson, based in New Brunswick, New Jersey, advanced 21 percent in the 12 months ended March 15, and Purchase, New York-based PepsiCo climbed 18 percent." - source Bloomberg.

In terms of top contributors to the performance, in continuation to our "defensive them" the article indicated Consumer Staples as the top performers:

"The biggest contributor to the ETF’s performance over the past year include H.J. Heinz Co., the Pittsburgh-based ketchup maker being acquired by Warren Buffett’s Berkshire Hathaway Inc. and 3G Capital Inc., portfolio data compiled by Bloomberg show. Hershey Co., the Hershey, Pennsylvania-based candy company, was the second-biggest." - source Bloomberg

We indicated early in our conversation we would look at the "greatest anomaly" namely that low volatility stocks have provided the best long-term returns. In addition to Societe Generale's point on the defensive features of low-volatility stocks such as Consumer Staples, they also provide the best returns as indicated in the same Bloomberg article from Charles Stein:

“The long-term outperformance of low-risk portfolios is perhaps the greatest anomaly in finance,” Harvard Business School Professor Malcolm Baker wrote in a 2011 paper in Financial Analysts Journal.

When S&P designed the low-volatility product, it traced the history of the index back to 1990 in a process known as backtesting. The numbers showed that over three, five years and 10 years, the low-volatility index had a higher total return than the S&P 500.

Harvard’s Baker said market data going back to the 1930s show that low-volatility stocks have delivered about the same returns as market indexes, a result that contradicts the notion that higher risks translate to higher rewards. “In this case you are taking less risk, but not giving up any return,” he said in a telephone interview.

Investor Behavior

Other studies have come to similar conclusions, according to Joel Dickson, a senior investment strategist at Valley Forge, Pennsylvania-based Vanguard Group Inc., who said finance scholars have a hard time explaining the mismatch. Most theories attempting to explain it revolve around investor behavior.

Because people are overly smitten with fast-growing, glamorous companies, they bid up the prices of those stocks to the point where future returns suffer, said Dickson.

Dickson offers a caveat. When stocks soar as they did in the 1990s, low-volatility holdings can underperform for long stretches, said Dickson, a senior investment strategist at Valley Forge, Pennsylvania-based Vanguard Group Inc. “As an investor you have to be willing to stomach periods

when this strategy gets killed,” Dickson said in a telephone interview.

In the nine years ended Dec 31, 1999, a period in which stocks gained 21 percent a year, the S&P 500 Index returned more than twice as much as its low-volatility counterpart, according to data compiled by Bloomberg. It also outperformed after accounting for price swings, with a risk-adjusted return of 32 percent, compared with 20 percent for the low-volatility index." - source Bloomberg

We therefore disagree with Gary Shilling, Consumer Staples are not purely a "Risk-On" strategy given that as indicated by Bloomberg:

"In the nine years ended Dec 31, 1999, a period in which stocks gained 21 percent a year, the S&P 500 Index returned more than twice as much as its low-volatility counterpart, according to data compiled by Bloomberg. It also outperformed after accounting for price swings, with a risk-adjusted return of 32 percent, compared with 20 percent for the low-volatility index." - source Bloomberg

But, Consumer Staples are mostly a defensive play that can outperform during phases of "Risk-Off" which we have been experiencing on numerous occasions since the financial crisis of 2008:

"The low-volatility index did best in times when stocks fell, such as 2000 to 2002, and in 2008, according to S&P data. In 2008 the low-volatility index fell 21 percent compared with 37 percent for the S&P 500." - source Bloomberg.

On a final note, in relation to the differences between equity and as posited by our good friend Paul Buigues, Head of Research at Rcube Global Macro Research in his post "Long-Term Corporate Credit Returns":

"Equity is an infinite claim on the free cash flows generated by a company. Due to the inherent uncertainty of future cash flows, relying on a pure valuation framework to predict equity returns is often a disappointing experience, for both specific companies and equity as an asset class.

Corporate debt, on the other hand, is generally a finite claim on a predetermined stream of cash flows (coupons + principal repayment)."

Corporate credit is a much simpler bet than equity, especially for investors that hold credit instruments until maturity. For instance in High Yield as indicated by our friend Paul "initial spreads explain nearly half of 5yr forward returns" (even for a rolling investor (whose returns are also driven by mark-to-market spread moves). 

When it comes to yield the PowerShares ETF has a dividend yield of 2.78 percent compared to 2.13 for the S&P 500 Index, according to data compiled by Bloomberg, so could it be that after all Consumer Staples in  the equity space are a much more simpler bet, in similar fashion to corporate credit? One has to wonder...

"Right is its own defense." - Bertolt Brecht

Stay tuned!

LBO? No problemo!

"No problemo" is a slang expression used in North American English to indicate that a given situation does not pose a problem. It has roughly the same meaning as the expression "no problem," but is rarely heard as a response to "I'm sorry." - source Wikipedia

While looking at the quick succession in LBOs (Dell, Heinz), a subject we have tackled with Dell recently in our conversation "The return of LBOs - For whom the Dell tolls", as a credit investor, the "sucker punch" capacity of inflicting serious pain to the investment grade bondholder is reminiscent of the hay days leading to the burst of the credit bubble in 2007.

In similar fashion to the Dell transaction, the Heinz effect was rather more sanguine than ketchup, and probably as spicy as tabasco when it comes to spicing things up a bit in the CDS space - source Bloomberg:

From 50 bps to 200 bps, given Buffett's new found love for the ketchup is transforming H.J. Heinz into the most leveraged food maker in America as reported by Mary Childs in her Bloomberg article on the 21st of February - Buffett’s Ketchup Fancy Plies Heinz With Junk:
"Buffett’s Berkshire Hathaway Inc. and 3G Capital Inc.’s $23 billion acquisition of Heinz may double the company’s total debt to five times earnings before interest, taxes, depreciation and amortization, according to Fitch Ratings, the highest of any comparable food company. The cost to protect Heinz’s debt from losses soared to a record after the announcement. While Buffett has used takeovers to build Berkshire into a $249 billion company and burnish his reputation as the world’s most successful investor, financing the deal with $14.1 billion in debt threatens to strip Heinz of the investment-grade rating that it’s had for four decades. Fitch cut Heinz to junk on Feb. 15 and credit-default swaps imply a Ba1 rating, according to Moody’s Corp.’s capital markets research group. That’s two steps lower than its Baa2 rating from Moody’s Investors Service and three below its BBB+ grade from Standard & Poor’s. The trading “underscores the hazards of high-grade bonds in an active M&A environment,” said Martin Fridson, chief executive officer of research firm FridsonVision LLC. Investors should be aware of the “inherent danger now that leveraged buyouts as well as strategic acquisitions are once again prominent in the financial landscape,” he said." - source Bloomberg.

The cheap credit environment is indeed sufficiently friendly for shareholders in this on-going releveraging process and arguably very unfriendly and painful, to say the least, for the investment grade portfolio manager, given that the LBO story is clearly more favorable to equity investors than credit investors facing multiple downgrades and Profit and Loss hits.

In a recent note by CITI entitled "Ever Been a Better Time for a LBO?" published on the 22nd of February 2013, they argue that the current cheap credit environment makes the pursuit of shareholder-friendly activity quite compelling relative to historical norms:
"Question: If you could buy the exact same company for $75 today (sale price) or for $100 tomorrow (full price), which would you chose?

Answer: Depends. Paying full price may very well be better than paying the sale price if borrowing costs for the two are different. Price is one part of the “package.”

When considering re-leveraging activity, our sense is that many market participants tend to overlook the “package effect,” and as a result under-appreciate the extent to which corporate managers could favor shareholders. In fact, in a sum-of-the-parts context the argument for LBOs may look as compelling as it ever has." - source CITI

As we have also argued in our conversation "Bold Banking", when one looks at the return of Cov-lite loans to the fore front, no doubt to us we are entering, once again bubble territory in the credit space. In May 2012, we specifically discussed this return in our conversation "The return of Cov-Lite loans and all that Jazz...":

"Unintended consequences" of low rates environment have led to a flurry of issuance of Cov-lite loans again in the market."

"Low borrowing costs: Current borrowing costs are hovering near all-time lows. For example, a typical LBOed company is likely to carry a single-B rating, and Figure 2 (previous page) shows that the yield for the average single-B issuer is almost 4% below the historical norm (5.9% vs. 9.8%). Also noteworthy is that moving from single-A — the typical rating of an “un- LBOed” company — to single-B (likely post-LBO rating) is fairly cheap as well. Figure 3 (previous page) shows that the yield difference between the two is now only 3.4%, vs. the long-term average of 4.7%. And there are other lending features in the current environment that in practice cheapen borrowing costs as well, such as the relative lack of covenants (Figure 4). It really doesn’t seem to cost that much to move down the quality now." - source CITI

The "unintended" consequences of ZIRP courtesy of the Fed is favoring releveraging of corporates' balance sheets:

"Reasonable valuations: So an LBOed company in the current environment can be expected to provide a high income stream due to low interest expense, and equity stakeholders may now have an above average chance of collecting this income stream. But in addition, one also doesn’t have to pay all that much for these advantages; the PE ratio for the typical IG name is currently 12.8 (based on our sample universe as explained below), compared to the historical norm of 16.4 (Figure 6)." - source CITI

CITI goes further in their note displaying a real world example for the sake of the demonstration:

"Based on our sample universe, the typical “un-LBOed” company currently has $3.8 bn in total debt outstanding, current market cap of $13.8 bn, and earnings before interest of $1.8 bn (Figure 7). Given our assumptions, after an LBO this company’s equity value will decline by $9.6 bn and total debt will increase by the same amount." - source CITI

"Impact of low borrowing costs: If we consider an LBO scenario in a historical context borrowing cost rises from 5.1% (long-term average yield of the typical single-A issuer) to 9.8% (average single-B). Higher borrowing cost means that net income would fall from $1.58 bn to $0.45 bn for the typical name (albeit divided among fewer shareholders, of course; Figure 8). But currently all-in yields are low and the yield difference between the average single-A and single-B is only 3.4%, which means that interest expense rises by a fairly small amount (Figure 8, previous page). As a result, net income is not pressured by higher borrowing costs anywhere close to normal, and post-LBO net income is far higher than usual ($0.98 bn)." - source CITI

Given the pressure on CEOs to increase ROEs, the LBO can indeed justify the recourse in leveraging the balance sheet as indicated by the below table from CITI's note indicative of the potential increase of ROE that can be achieved via a typical LBO for an investment grade company:

"Pay less for more! One could normally expect the ROE for a typical company to be more or less flat post LBO (Figure 10). This is not all that surprising, as sponsors get paid to shift through the details. The multiple one has to pay for flat performance is normally 16.4x. But now the increase in ROE is over 11% in a post-LBO scenario (from 12.2% to 23.4%). And to get the relatively high ROE the multiple one must pay is lower than normal, not higher (12.8x vs. 16.4x)." - source CITI

As a reminder, in 2008, about one quarter of the 86 S&P-rated companies that defaulted on debt were private equity backed, but , as CreditSights put it in in their 29th of July 2008 report entitled LBO Analysis - It is more than Just Financial Metrics:

"Creating value by adding leverage is, in essence, an arbitrage strategy. And, like any arbitrage return, it will ultimately be arbitraged away as participants increase. 

Despite the favorable lending terms during 2005-2006 credit bubble, it stands that there is even less ability to create value simply from leverage.

LBO management can enhance value by exploiting knowledge of a competitor's play book when on the offense and by taking more financially productive responses when on defense." - source CreditSights

We could not agree more.

"What counts is what you do with your money, not where it came from" - Merton Miller 

Stay tuned!

Guest post - US Equities' Long Term Real Returns

"The three great essentials to achieve anything worth while are: Hard work, Stick-to-itiveness, and Common sense." - Thomas A. Edison 

Courtesy of our good friends at Rcube Global Macro Research, please find enclosed their recent note focusing on US Equities' Long Term Real Returns. Enjoy!

Our research generally focuses on tactical investment horizons (3‐6 months). In this paper, however, we consider long‐term real returns for US equities, for which we have reliable data since 1871.

Nota bene:

By real returns, we mean total returns (i.e. dividend included) divided by the CPI. We chose to analyze the US market as it has longest and most accurate historical data. Our data originates from Shiller’s website: http://www.econ.yale.edu/~shiller/data.htm. Earlier data exists (as early as 1802), but is plagued with survivorship bias.

When we look at price alone (as many observers do), we see no evidence of a long term trend. Rather, we have two distinct 70‐year periods: pre‐WW2: +1.0% annual  price appreciation; and post‐WW2: +7.4% annual price appreciation.

However, as we know, price appreciation is insufficient to quantify returns, especially when we consider long investment periods.

Indeed, a rational long‐term investor should look at (and hope to maximize) real total returns, which take into account dividends and inflation.

When we look at the S and P 500’s real total return, the picture looks very different:

Taking into account dividends and inflation, we can admire the remarkable stationarity of S and P 500’s real returns around a long‐term trend (6.5% per year). Even the 1929 crash and the 1970s’ stagflation represent small deviations from the overall trend. 

A long‐term trend of around 6.5% essentially means that an equity investor’s purchasing power doubles every 11 years, which is in itself the strongest argument for permabulls and buy‐and‐hold proponents. 

That being said, many believe that the 6.5% real return – which is also known as “Siegel’s Constant” – is a historical freak and is unlikely to continue further. 

In a controversial Investment Outlook published last August, Bill Gross compared this 6.5% long‐term real return to long‐term real GDP growth (around 3.5%), and concluded that the stock market was a “Ponzi scheme”, with stockholders having been "skimming 3% off the top each and every year, at the expense of lenders, laborers and the government”. In a comment that reminisced Business Week’s famous 1979 cover, the “Bond King” then proclaimed that the “cult of equity was dying”. 

It appears to us that this analysis is flawed (and indeed, it was immediately rebutted by Dr. Jeremy Siegel, as well as other academics). Although it is true that the market value of equities cannot grow above GDP forever, Bill Gross seems to have ignored the fact that around half of stock returns originate from distribution to shareholders, in the form of dividends and share buybacks. 

There is therefore nothing wrong in the fact that equity real returns are higher than real GDP growth. Even in a zero‐growth economy, companies would still have earnings that can be used to distribute dividends or buy back shares, which would lead to higher than zero real returns for equities.

We’ll return later to the question of the link between equity real returns and economic growth.

Regardless of the sustainability of 6.5% real returns in the future, nobody would dispute that it is hardly a“constant”, especially for short‐term horizons.

If we define 10 years as the lower range of what constitutes a long‐term investment horizon, the standard deviation of forward returns is still fairly wide (around 5.2%). This highlights the need to look for methods of predicting 10‐year forward returns.

One such method, introduced by Robert Shiller in his 2000 book Irrational Exuberance, involves using cyclically adjusted P/E ratios (CAPEs) to predict 10‐year forward returns. CAPEs are P/E ratios that use past 10‐year average earnings in order to smooth out cycles.

The S and P 500’s CAPE is currently around 21, which is substantially higher than its long‐term average (16.5). 

Although bearish observers use these figures as a sign of overvaluation, it is worth noting that 10‐year forward real returns would be around 4.4% according to the above regression equation.

In any case, the CAPE regression only explains around 25% of 10‐year forward returns. Moreover, this analysis is performed in‐sample, whereas an investor operating in real time during the sample period would not have access to the whole dataset.

If we remain in an in‐sample framework, we can obtain R2s that are much better than 25%.

First we can note that corporate profits as a proportion of GDP are one of the most mean‐reverting time series in economics. 

Nota bene:
Although total corporate profits and S and P 500 profits are not the same thing, their growth rate is rather similar over long time periods (3.23% per year for total corporate profits vs. 3.17% for S and P 500 profits between 1947 and 2008):

Low profits as a proportion of GDP lead to business failures, reduced competition, and therefore higher margins further down the road (and vice versa).

From this point of view, buying when earnings are high and selling when earnings are low (as suggested by PE‐based methods) does not seem such a great idea.

Rather than taking the 10‐year earnings average as the denominator, we could therefore use real GDP.

Incidentally, the total market cap / GDP ratio (which is a related concept) is Buffet’s favourite macro measure of value for stocks.

This time, we find a long‐term trend of around 3% for the ratio (i.e. the same 3% that stockholders

supposedly “skim off” at the expense of others, according to Bill Gross).

Although the S and P 500 real return / real GDP ratio looks rather trend‐stationary, it has had rather wild swings around the trend, which indicate potentially interesting opportunities to trade in and out of the market.

Indeed, we obtain a rather nice R2 of 57% when we regress the detrended ratio against 10‐year forward real returns.

Currently, we’re close to fair value, as the overshoot from the 90s (Greenspan’s “irrational exuberance”) finally seems to have been digested. This does not preclude another “undershoot”, such as the one we had in 2008, as investors revise their economic growth assumptions downwards, especially in deleveraging developed economies.

Nota bene:
Although there seems to be a long‐term elasticity of one between equity real returns and realized economic growth, changes in long‐term growth expectations and/or risk premia can have a huge impact on valuations. If we simply look at the Gordon‐Shapiro model and assume a denominator (expected rate of return – expected growth) of around 5%, a 1% decrease in long‐term expected growth decreases the value of equities by 20%. We believe that this explains much of equities’ “excess volatility puzzle”.

Again, this is an in‐sample analysis (just like the CAPE model). Although we still get an R2 of around 40% if we use a running regression instead of a fixed in‐sample regression (and use the first 40 years of the sample as a “learning period”), no one can assert that 3% long‐term returns above real GDP growth are an intangible law of nature.

To conclude, assuming long‐term forward equity real returns to be around 3% plus foreseeable economic growth provides us with a ballpark figure. It avoids making blatantly wrong assumptions about long‐term equity real returns (such as believing that they can be around 10%, like many investors still do).

Additionally, it is important to note that this brief study concerns only the United States, a country that won two world wars and avoided socialist experiments during the last century. It would be interesting to calculate the trend of the real equity return / real GDP ratio for other countries. Unfortunately, reliable data on long‐term real returns is hard to obtain for most countries, as they generally originate in the early 1970s (e.g. MSCI Indices).

We will however try to gather more data on this vast subject, as well as publish additional short studies about long‐term returns of other asset classes.

"Common sense is the most fairly distributed thing in the world, for each one thinks he is so well-endowed with it that even those who are hardest to satisfy in all other matters are not in the habit of desiring more of it than they already have." - Rene Descartes, French philosopher. 

Stay tuned!