Episode 96, Meb Faber, "Investing in America: The Rise of the 250-year Bull Market," host Rick Ferri

27:14So we managed to get through the 1820s and we got to the 1830s. And here are the rise of the railroads and the bank wars. We'll talk a little bit about that. Yeah. There's a lot of fun little tidbits. You know, one of which we included in the book was that, you know, the currencies didn't used to say, in God we trust. It actually used to say, mind your business. And a little bit before that, as time is short, mind your business, which I would love to see back on the currency. I love that. I think it's great. you know if you look at the 19th century it was certainly a time of kind of panics booms and busts you got to remember people like there's no cars there's no airplanes like you're you're chatting with telegraph like telephones being invented all these you know conventions we take for granted today i was just with my son recently we saw a telephone booth and i was trying to explain to him how it worked you know he's like never seen one he's like well why would you need it anyway So it's easy to take for granted where we are today and looking back at kind of these turbulent decades of the past.

28:20And I was like, think about disruption. I was like early in the period of our republic, firewood was a quarter of GDP. So looking back at this period, I mean, you have this giant industrial engine coming online. So very much a buildup, right? This is the industrialization of America. And the rate of return during the 1880 period, first half of the 1880s, a good return relative to the inflation rate. And then over the next 50 years, from 1850 through 1900, we're looking at a rate of return after inflation of about 7.7 percent from stocks. Now, that is just right in line with the risk premium that you would think for an emerging market.

29:07Maybe not for a developed market, but for an emerging market. One of the comments I did want to make real quick was Elroy Dimson, who wrote Triumph of the Optimist, really my favorite investing book, picture book over the years. I always go back to a default rule of thumb on equities where I'm like globally, historically, they've been somewhat around 5 % real. And the U.S. has been one of the best, right? If you look at the distribution, like U.S. has been one of the best performers, ex-U.S., not quite as good for the last 100, 200 years. But there's also 200 years of history before the U.S. And trying to put it in perspective of, you know, hey, that sector you talked about, the chart of the U.S.

29:50being an emerging market, you know, it's now 25 % of world GDP, but two-thirds of world market cap. and you've had this just massive run, which is in the subtitle of the book, 250 year bull market, but also putting that a little bit in context and saying, okay, well, were we the outlier? Can we expect us to outperform everything in the future forever? Maybe not always, maybe at some points, but going back in these periods, I think gives us some humility. As we know, like you look through these periods and try to walk through, what was it like to invest in these periods, like try to just picture.

30:28And I think that's a useful exercise. It's not quite the same as losing half your money in the real world, but at least stepping through, you know, this concept I think is really important. There's one decade that I want to highlight and I got this wrong. If you would have asked me, what did stocks do when the Civil War broke out and that period when the civil war was going on what you know what did the stock market do i would have said well obviously the whole country is in flames i mean it went it must have gone down well boy would i have been wrong in fact during that period of time the stock market doubled in value which kind of opened my eyes to oh yeah well war is actually good for companies And I found that over and over again as I looked at World War II and Vietnam and that war causes more bull markets than bear markets.

31:31Maybe not initially, maybe when the first shots are fired, but shortly thereafter, the government starts spending money and the stock market reacts to that. So during that period of time, the stock market, the year of the decade of the Civil War, the market gave us an annualized return of 12 % annualized nominally, which was inflation adjusted a little over seven. We had high inflation during that period of time during the war years. Going forward over the next 50 years, the return of the market after that was a 7 % compounded return, again, getting right back to that kind of emerging market real return number.

32:13And then we move on to the rest of the 1800s. We had a period of time in the late 1870s where the market literally doubled in value again over a period of three years, basically from 1878 to 1880. And I couldn't find anywhere where, you know, what was the cause of that? Well, there was a giant panic in the 1870s. And we recently did a chat with Leaquat Ahmed, who wrote Lords of Finance and recently just published a book. I think it's out, maybe not out yet, 1873, which he calls the first truly global crisis. And it didn't quite affect the U.S. as much. You mentioned some of the returns here, but Europe was, you know, a big speculative boom and then kind of bust that went on during this period.

33:14Really fun read. You know, you get all sorts of intertwining themes of that time. the Rothschilds, anti-Semitism, you know, really starting to take root in Europe, all these different threads. And it reads like a thriller where it's really just, you know, finance history book. But this period, if you actually, you know, 1873 was actually a big panic. But again, like this lesson, we just keep hammering into, you know, our brains is despite the geopolitical news, despite something terrible happening, stocks withstood and actually went up in the period. Kind of a surprise to a lot of people. A lot of famous names from this period, Jay Gold and others.

33:56But it affected the U.S. less, I think, than the rest of the world. This was the time of John D. Rockefeller, Andrew Carnegie, and the birth of America's great corporate giants all happened coming out of this crisis. And part of this late 19th century period was also the advent of some of the first stock-based indices where Charles Dow, who started the Wall Street Journal, started the industrial average as a way to track kind of what was going on with the market. And we all know it's a little curious today, we try to, you know, laugh and, and poke elbows about it being a price-based index. But even at the time, you know, at least like that was one way to be able to track what's going on in this ticker tape world.

34:47In the last 20 years of the 1800s, we had the rise of the mass consumer market and big technology breakthroughs and electricity, the telephone, The market reacted to that very positively. And during the 1880s, again, went up during that period of time, compounded at about 6 % return, but inflation adjusted also 6%. So there was no inflation during that period of time. And again, looking forward over the next 50 years, 7.25 % return over the next 50 years. So that's quite amazing. The last decade of the 1800s, we had a compounded return of 9 % nominally and basically 9 % inflation adjusted. Looking forward, 50 years after that, it was 6 % inflation adjusted.

35:45And lots of things going on. You know, the Spanish-American War begins. And again, you would think, oh, the market's going to go down. And it surged when the Spanish-American War started. And so you just so many misconceptions we have about what must have happened in the market when things occurred. And then you actually look at the data and you find out that you were wrong and that the opposite happened. All you got to do, Rick, is just ignore all the bad news. You know, if we just had a special magical, you know, teleportation that Elon's coming up with 50 years from now, we just get that 50 percent, 50 year annualized return.

36:20And the hardest part, as we all know, even, I mean, it's worse today is being able to zoom out and say, how do I withstand these downturns? The path matters, you know, for many people is that you got a mortgage, you got kids, you got college. And all of a sudden the market goes down 30. How many people do you know in 2009 said, I sold everything. I couldn't take it anymore. Yeah, I know. I know people who did that. Yep. 20, 2010, 2012, 2014 said I never got back in. I just, I was waiting for the right time. I never got back in. And it's heartbreaking. because it's easy to look at these charts and say, oh, yeah, you know, you're 20 or 30 or 40 or 50 or 60 years old, you know, and it's the reality is much, much tougher.

37:01So let's get into the 1900s. Oh, baby, here we are. Beginning of the 1900s, we have some sort of monetary policy going on with the Gold Standard Act, trying to get our fiscal house in order. And that started out well, perhaps, but then led to a crisis, the panic of 1907, a real bad bear market. But despite this, the first 10 years of the 1900s, we had a 10.7 % annualized return from stocks. Inflation adjusted, that was 8%. So again, a lot of volatility, but still good returns. and then going forward from there over the next 50 years, again, 7.6. Keep going back to that number, 7%. Real return long-term from equity, at least during this period when we were emerging.

37:56But you know what number, you know what that number is not, you don't see in the book, is 15 % returns, which is what we've experienced since 2009, which is great. You know, we say this to listeners, put this in perspective. And this chapter may have my favorite sidebar called This Market is the Worst. And I said, look, there's been four times in the past 100 years where U.S. stocks on a 10-year rolling basis have done 15 % for an extended period. It was the 1920s, which we'll get to in a minute, the nifty 50 period, the internet bubble, and then today. And the point is not that the market has to crash.

38:30It has to go down. The point is, hey, just pat yourself on the back and just put this in terms of history. Maybe you shouldn't expect 15 % return. and even looking back you know every investor always loves to talk about how hard they've had it right like oh i had to live through gfc i had to live through the dot-com bus whatever it may be and i say the beauty of history in the sidebar we use from 1900 is my grandfather was named mevin and i said just imagine what this person had to live through right like in the world events that happened during this this period right by the time you're 14 hey it's world war one the first truly global conflict.

39:09Spanish flu then just knocked off 50 million people around the world. Guess what? Then you got World War II, right? The Holocaust, on and on. And then I was like, you know, but also imagine if you were trying to invest in Russia or China, guess what? Communists closed the stock markets, gone, right? Zeros. And so all these periods of kind of trying to walk through what it went like, and yet, you know, you can look at the zoom out on the chart, and you're like, wow, wow, this period was actually pretty good if you were an owner. If you owned the market, guess what? You did just fine. World War I starts in 1914, and the market goes up about 80%, and it's up about 80 % by the time the war ends that period.

39:54And then let's get to one of the most talked about periods in stock market history, which is the Roaring Twenties. And people like Ed Yardini are talking about the Roaring Twenties again, only this time it's 2020s. But here we are from 1920 to 1929. Technology and consumer revolution, post-World War I boom, the Roaring Twenties bull market, and then something terrible happened at the end. But I want to get to that in a minute. Let's get the lead up first. I mean, how fun would it have been? You know, I think I would have loved to have been around the 1920s. It looks like a big old party. It seems like it.

40:32Yeah, I want to mention a fun stat. Academic Hank Bessenbiner wrote a fun book called Do Stocks Outperform T-Bills, which really speaks to the whole Boglehead concept of investing in the broad market cap index is very few percentage of the broad market generates all the returns. So one way to capture that, of course, is to own everything. But also he wrote a fun paper later where he looked at all the best performing stocks. And there's a couple of takeaways. One, if you look at the top 10, a lot of investors may never even heard of some of these names. And the number one was Altria, which was formerly known as Philip Morris.

41:10But if you put$1 ,000 in this stock 100 years ago, it would be worth$2.5 billion today. Now, you couldn't spend those dividends. You couldn't go pay taxes, all those pesky things. But the point being, there's been like 100 stocks that have had a 500 ,000 % return. But the crazy part about this is you would, I think most listeners would assume that you would have had to have compounded at 20, 25, 30, 40 % per year. But the reality was most of these were stock market index like. It was like low teens, right? It wasn't like that they just were massive outperformers. It's that they compounded and existed, right?

41:51They didn't go away. and so that's part of the index sort of idea is that if you just put it to work that right tail by the time it gets to the later years is really steep and so during this period of course you know you had the the big haymaker the just massive lead up to the party ending and i want to read this quote because this is probably this might be my favorite quote of the book and you got to stick with me listeners for a second it's from adam smith not not the scottish economist but uh the pen name of a novelist in some really great books. If you haven't read any of his books, look them up on Amazon.

42:25And here's the quote, he says, and this is to really put this end of period in line, and maybe some rhymes today. He says, we're all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know by the rules that at some moment, the black horsemen will come shattering through the great terrace doors, wrecking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid. No one wants to leave while there's still time. So that everyone keeps asking, what time is it? What time is it? But none of the clocks have hands.

42:58And so this is kind of really talking about this period of euphoria and, you know, the 1920s, this boom. And eventually, you know, the party ends. You can't really talk about the 1920s without then talking about the 1930s. 1929, bad year, but not bad. I mean, actually, if you would have invested your money at the end of 1928, by the end of 1929, you would have had the same amount of money. What happened was it ran way up and then it came right down, at least in 1929. The real damage actually occurred 1930, 1931, and into 1932. That's when the damage occurred. The market lost all of its value then.

43:43It wasn't 1929. But still, you know, in the 1920s, for the whole entire decade, the after inflation returns compounded at 15%. It was a very good decade, similar to 2010 to 2020 that we'll get to in a minute here. And the future returns from there, even though it went sky high, okay, sky high, and it hadn't come down much. compounded over the next 50 years was 5.4 % over the inflation rate. So even if you invested at the peak or close to the peak, over the next 50 years, you still would have gotten over 5 % inflation adjusted, which is amazing from 1929. 1930s were not so good, but still, strangely, if you held on to stocks for the entire decade after inflation, You still compounded at a 3.7 % compounded return during that decade.

44:47Piece of cake, Rick. We just closed our eyes. You and I will be in our hundreds. Again, that's the hard part. If we could all just put it in a lockbox, lock the key, say, you can't mess with this. You'll be spectacularly rich. You know, at a 10 % return after 25 years, you 10x your money. And after 50, you 100x. and trying to put that into young people's heads and say, look, that$1 ,000 you're about to spend is$100 ,000 in 50 years. And if you can save$10 ,000, hey, you're probably going to be a millionaire. You just got to put it away. And that, to me, is kind of the main point of this whole story is you need a long hill, as Buffett says.

45:29Long perspective. Now, I'm not in the 10 % range. I mean, obviously, that would be nominal return. I'm more in the range of, let's call it 5 % real return after whatever the inflation rate is. So if inflation is 2.5 and you add 5 to it, you're at 7.5. And you double your money every 10 years at 7.5%. You're touching on the real key of all investing and really life, Rick, is just set low expectations. Just say, hey, I expect 5 % nominal. Fine. And anything above that gravy, great. That's what my wife tells me all the time. She set low expectations, so we've been married for 43 years. There we go.

46:10World War II, oh, bad time, right? War begins. Japanese attack Pearl Harbor. Terrible time. Between the time World War II began and the time it ended in September 1945, the stock market literally doubled in value during that period of time. Again, another period where you wouldn't think it, but it did. And the real after-tax return during that decade, 3.3 % due to higher inflation from the war. While the future real return after that for the next 50 years was 9.5. So we had a couple of periods in the 1930s and 1940s where market returns were not that high, but we made up for it over the next 50 years.

46:56Just try to imagine listeners living through that period of atomic bombs, right? You know, these just terrible stories coming out of Europe at the depths of like the Holocaust. And this is coming off the Great Depression, where there's a great book called The Great Depression, a diary where you can read about what it was like to live through this period. And it's almost unfathomable how foreign it feels to, I think, a lot of people today. but studying that period and then still having the mental optimism to say okay yeah but i'm gonna invest like that takes quite a bit more i think fortitude than it is when you're at all-time highs which you know we we are today but at some point that your your metal will be tested with i don't know it could be aliens that could be bullish i don't know aliens might be bullish well let's go to the 1950s because this was an unbelievable decade for equity investors.

47:54It was also the decade of mutual funds starting to come around and be accepted, more people coming into the equity markets. But during the 10-year period of time between 1950 and 1959, that 10-year period, stocks compounded at almost 19 % nominally. Lord have mercy. 16 % after inflation. And then going forward after that, over the next 50 years, we got a little over 5 % inflation adjusted return, but it was just an incredible period of time. And that was, again, we started out with the Korean War. Didn't seem to make any difference. The market almost went up about 50 % during the Korean War. Let me make a quick comment there, too, that I think ties it back to today.

48:41You know, Korean War happens. Imagine being in that country. Country gets chopped in half. You know, you've got North Korea, South Korea now. And imagine talking to South Koreans at that point and saying, you know what? In about 70 years, so your grandchildren, your stock market, so not even the whole country, just half of it, is going to be bigger than the U.K. And they would say, what are you talking about? The UK, like the great world power? Like, what do you mean? You know, why would this tiny little half of this island be bigger? And here we are today in 2026. The South Korean stock market, driven by some very large tech companies, is currently bigger than the entire UK stock market, which is astonishing in many ways.

49:27My goodness, it sounds unbelievable. During the 1960s, we again continued with the bull run, the Vietnam War. Cuban Missile Crisis and then the Vietnam War, and finally ending with the moon landing in 1969. But we had another good decade. Stocks returned about 7.8 percent, compounded after inflation, 5 percent. Over the next 50 years, the returns were about 6.5 percent, real inflation-adjusted returns. Now, we had some things occur in the early 1970s which were negative for the stock market. It caused a lot of volatility. But still, during the 70s, stocks still did okay, but not after inflation.

50:14So why don't you talk about the interesting things that happened during the 1970s? You know, you have this period where you just had this romping party in the 50s. And, you know, it's hard to always get the timing, but the good times following the bad and vice versa is a story as long as, you know, old as time in markets. Anywhere around the world, any asset class, doesn't matter if it's gold, bonds, stocks, it doesn't always just go straight up to the moon. And in the 50s, I mean, 20 % a year almost, my goodness. But you started to have something happen in the 60s and then the 1970s. And you mentioned that the coming off the gold standard in the modern fiat era, you know, to those people experiencing that for the first time and watching bond yields tick up, watch inflation tick up.

51:03and all of a sudden people are saying, oh, actually your currency is not backed by anything anymore. Imagine living through that and being like, wait, what are you talking about? What am I going to do? This hasn't been something we've experienced before. How do we behave? And yet, the 70s were one of the hardest decades ever to be an investor. The 60s, you had good returns, and all of a sudden this optimism, moon landing, this 70s, you had this big energy crisis, right? And so some assets did okay, commodities, like to the extent you can't really invest in them, but energy stocks, energy stocks, this is a fun factoid to look back through history and just putting into perspective today.

51:49Energy as a percentage of the S &P today is less than 5%, which to me is an astonishing amount to have that sector be so low. But at one point, it was almost a third of the S &P. And so even if you just bought US stocks, you got a partial hedge during some of these periods to energy sort of, you know, commodity based inflation problems, whereas today you don't, right? And it sort of oscillates with tech stocks. So the 1970s, you know, was a brutally tough period and really illustrates something that you talk about that 99 % of the investing world doesn't talk about because it's harder, which is that nominal to real spread.

52:31And real is all that matters. And Rick, we almost wrote this book only in real terms. But I said, I don't want to confuse the hell out of a bunch of people. But the after inflation return in the 70s was a 7 % spread, right? The nominal return looked okay, but that was an illusion. And in reality, you ended up losing money over that decade. Now, so interesting, the 1970s were really the first decade that I came across where the inflation adjusted return was negative. Wasn't that much negative? It was like 0.5 % annualized negative, but it was negative because of high inflation. Even though the nominal compounded return annualized was almost 7%, inflation was higher than that.

53:20However, coming out of that, we have Paul Volcker putting the kibosh on inflation, and the 1980s reacted with a bull run that some people, like me, might say is still going on. We have annualized returns from 1980 to 1989 of 17%. I mean, the beauty of this, Rick, is that you think back to the early 80s, the death of equities cover on Businessweek, P-E ratio in the stock market was like five, right? You had all these setups to where, you know, the sentiment's horrible, all these things going on. And yet, you know, it sets the stage for this just massive secular boom for 20 years, 50 years. Right.

54:14It just was astonishing time to be an investor. And what 80s is, is one of my favorite decades, because the way we do the book listeners, if you buy it, is that it zooms in on every decade and shows how crazy it was in 1987. you see this 20 % drop, you know, but then you zoom out. You can't even find the 1980s crash on the chart, right? You can see 2000, 2009, 1920s, 30s, but you can't even find 1980s. Stocks actually are up on the year. Well, you know, what's funny was they were up 5 % in 1987, the year of the crash. But what happened was the beginning of the year, they went up a lot and then they came crashing down.

54:55But by the end of the year, they were still up 5%, even with the quote-unquote crash. If you were a long-term investor and had been putting money in the market that whole decade, you didn't even feel it, or you shouldn't have felt it. We got to get to the decade of the 1990s. I mean, this was the best decade in the U.S. stock market of almost 20 percent compounded annual returns, 19.9 percent. And inflation had come way down. So we got a real return of almost 16 and a half percent during this fabulous decade of the 1990s. I mean, what a fun period, though. So, I mean, if you look back, but even putting in, you're in the 1980s, great decade for stock returns.

55:47And yet, at the end of the 1980s, everyone in America was having a full-on panic about Japan. Japan was the largest stock market in the world at the end of the 1980s, right? So this is during our lifetime. This wasn't 100 years ago. And that set the stage for, I mean, what, three decades of terrible Japanese stock returns. I think they look absolutely amazing now. But you had this situation where arguably the biggest equity bubble at size we've seen. In the world, yeah, anywhere. In the world globally. And you could argue various parts in time, but this just massive sentiment. Anyway, 1990s, absolutely monster period for U.S.

56:38stocks. When you have these booms, I mentioned my professors trading stocks in class. Everyone, right? Like you go to the golf course, you go to the bar, you go to lunch, CNBC's. Barbershop. Yeah, everywhere. Irrational exuberance is what Greenspan called it. Yeah, but you remember that was in like 97 or 6. Like that wasn't 99. The market doubled from there. Yeah. But again, a fun period, you know, and I think a lot of lessons learned. But again, it sets the stage. It's kind of weird, Rick, how some of these just the timeline mark decade level, they get marked like Japan into the 80s, you know, the roaring 20s into the 20s, like the decade.

57:21There's something mental about humans that love to kind of mark the mark the pen. And we go into the early 2000s, the first decade. Now, a lot of people listening to this podcast were investing during that period of time, 25 years ago. But what you do not know is that was between 2000 and 2009, the end of 2009, was the worst period ever in the history of the stock market. we lost annualized after inflation of almost 5%. It was the worst decade that ever happened. Now, most people don't look at it that way. And they say, well, I got through the 2000 to 2010 timeframe okay. Well, if you got through that period okay, then where we are now, you should get through this okay.

58:15Well, I think that a big key takeaway for that period is that diversification really helped. You know, if you owned many other things other than just U.S. market cap index, you did fine. If you own small cap, if you own value, if you own REITs, if you own gold, if you own bonds. International stocks. All that stuff did okay that decade, which, you know, could be a similar setup today. Like we wrote a paper a couple years ago, one of my favorites, called the bear market and diversification, talking about this period where S &Ps just creamed everything. But who knows, the decade going forward, a lot of these assets might also help to diversify a traditional portfolio.

58:53Well, let's get into the last decade where you really cover, because we're not done with this decade yet. And that's the decade of 2010 to 2020, where stocks continue to boom. Annualized returns of 13.4 percent after inflation, 11.4. So two decades back to back. And so far this decade, U.S. stocks have done well, but now international stocks recently have started to outperform, say, over the last year and a half. You know, who knows what the future holds? We definitely talk about a global approach. We talk about diversification. We talk about being mindful of valuations. And I really wanted to include a postscript in notes chapter and be like, look, it's been an amazing 250 year run, but maybe just don't expect 15 % returns.

59:44And of course, we haven't talked about fees because even with 2020 hindsight in doing asset allocation, fees can degrade your returns significantly. If you said, I'm going to let Rick go back to 1970s, you get to pick the single best allocation, which is endowment style, which is mostly equities, which makes sense. But Rick, you have to implement it with the average mutual fund fee of 1.25%, not dollar weighted, but that's the average today. And you got to do it with a financial advisor that charges you 1%. That takes the best performing strategy and makes it worse than the worst performing strategy.

1:00:26I completely agree. I mean, you're talking bogleheads here. Your entire asset allocation decision is moot. Like it doesn't matter all the time you spend on the Fed, what's gold doing, are stocks expensive, how much I have in bonds. All totally irrelevant because you implemented it with high fee funds. And forget the financial advisor. If you just implemented it with the average mutual fund fee, I mean, way more expensive 50 years ago, it makes it almost as bad as the worst allocation. Well, I'm going to end it there because that's a great way to end, Meb. One more comment, Rick. All the proceeds from the book go to the Invest America charity funding young people's new investing accounts.

1:01:03Oh, cool. So don't get upset about the book being 76 bucks in honor of 1776. It's all going to end up going to the young folks in the charity as well. Wonderful job on the book. Great charitable cause. Thanks so much again for being on the show. It's been a blast, Blood. This concludes this episode of Bogleheads on Investing. Join us each month as we interview a new guest on a new topic. In the meantime, visit Boglecenter.net, Bogleheads.org, the Bogleheads Wiki, Bogleheads Twitter, the Bogleheads YouTube channel, Bogleheads Facebook, Bogleheads Reddit. Join one of your local Bogleheads chapters and get others to join.

1:01:42Thanks for listening.

1:01:48Thank you.