A study of long-range returns suggests that a global macro approach to investing will produce better returns, says Landon Whaley.
As a global macro guy, I’ve never understood the obsession with stocks. We trade currencies, commodities, bonds and stock indexes — short as well as long — all over the world. How cool is that!
Beyond being far more interesting than buying General Electric, these other asset classes offer far superior performance opportunity sets, as well as diversification. The leverage embedded in currencies and bond futures can offer gains that far surpass that provided by individual stocks. As for commodities, they have all the return juice one could ever hope for, just take a look at a crude oil chart from this past week.
But for those of you who’ve drunk the Old Institution Kool-Aid for too long and can’t seem to rid yourself of the “stocks are the only asset class that matter” belief, it’s time to keep it one hundred about equities.
Great Expectations
The long-running narrative is that U.S. stocks get you 9% to 10% a year, bonds return 5% to 6%, and cash brings in 2% to 3% each year. Based on the latest “Global Investment Returns Yearbook” by Credit Suisse, these are accurate return expectations, in nominal terms. However, if you evaluate these three U.S. asset classes from 1900 to today, and account for the fact that inflation exists, the real returns reset dramatically lower with stocks generating just 6.4% annually, bonds at 1.9%, and cash bringing up the rear with a 0.8% net return.
U.S. prices have increased 29-fold since 1900, which means not including an inflationary component to a return calculation is egregious.
Despite being much lower than nominal returns, these real returns don’t consider our humanness, which means they are most likely overstating the gains investors actually earn from these asset classes.
A recent study by Dalbar found that for the 20 years ending Dec. 31, 2015, the S&P 500 Index averaged +9.9% a year, while the average equity investor earned just + 5.2%. Humanness anyone?
I can hear the Old Institution (and many of you out there) saying “These statistics are for broader equity markets and include data from a long time ago. Markets are different now, and performance is greatly enhanced by stock picking.”
As my boy Lee Corso says, “Not so fast, my friend!”
Bottoms Up
Before we delve into the economic reality of individual stocks and their associated returns, Credit Suisse’s data shows that world stocks and bonds have earned nearly the same annual gain since 1969, and since 2000 world bonds have outperformed world stocks by 250 basis points each year. I’ll bet that’s a stat you won’t ever hear on CNBC.
Now, let’s take a look at stock stats depressing enough to shut down the entire bottom-up driven long-short equity hedge fund industry.
Researchers studied 62,000 global common stocks from 1990 to 2018 and found that 56% of U.S. stocks and 61% of non-US stocks underperformed one-month U.S. Treasury bills over those 28 years. Only 40% of global equities have outperformed cold hard cash over the last three decades!
Even more startling, just 1.3% of the companies studied accounted for the entire $44.7 trillion of wealth created in global stock markets since 1990. Bam! Think about that, 811 companies created all of the equity market wealth over the last 30 years, while the remaining 61,189 stocks delivered nothing, nada, zilch.
The Bottom Line
I’ve long said to earn outsized, high quality, risk-adjusted returns an investor must embrace a global macro style of investing. Look for opportunities, long and short, in all four major asset classes and across all investable economies worldwide. I have no idea where the opportunities will come from geographically over the next 10 years or which asset class(es) will deliver the best returns. However, I can tell you that navel-gazing U.S. equities with a perma-bullish perspective is not the approach to take if you want to side-step dangers no one else sees coming and position for opportunities most investors miss.
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