Narratives Podcast Episode 9: The Rate of Return on Everything

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Hosted by
Will Jarvis

This week on the podcast, we review a working paper entitled “The Rate of Return on Everything.” We answer the question, which assets tend to have the highest rates of return over time? What is secular stagnation? Why is economic growth important for a large democracy like the United States, and what we can do to improve growth in a decadent society? Are there tradeoffs between growth and inequality? We also talk about Jack Bogle, modern index investing, and how investing in equities contrasts with investing in real estate.

Show notes/transcript:

1. Scott Sumner-Univ. Of Wisconsin, Madison Economist

2. What happened in 1970? Low Growth

3. Capital in the 21st Century-Thomas Piketty

4.  Robert Nozick-Wilt Chamberlain Experiment

5. John Rawls-Veil of ignorance

6. Secular stagnation

7. Hedonic adaptation

8. “Zero to One”-Peter Thiel

9, “Enough”-Jack Bogle

10. Vanguard


it’s been a while since we’ve sat down has been a bit yeah and we’ve got an interesting subject today yes a bit ambitious yes it’s a it’s a paper by the san francisco federal reserve bank called the rate of return of everything the rate of return of everything not just some things not the most important things but everything everything that’s right and it’s also got the board of governors of the federal reserve system on their their names on it too yeah it does so tell us this uh tell us what the federal reserve is federal reserve is a interestingly it’s a private bank but it’s set up to maintain the stability of the us economy maintain full employment prevent you know runaway inflation and bank runs so it’s it was actually um it’s chairman is appointed by the president confirmed by the senate i want to say um and it’s like a quasi federal government institution it’s supposed to be independent and it’s supposed to just like make sure things run well in the economy uh and so there’s four major functions of the federal reserve uh the first one is it controls the money supply that sounds important that is important yes so that’s important because the supply of money affects all kinds of different things so during the great depression there’s a big uh money supply shock so it was like actually this is my view a little bit but there’s a great economist called scott sumner at the university of wisconsin-madison that talks about this a lot um there’s like a big deflationary shock and they should have actually injected more liquidity into the economy but they didn’t and the depression ended up just as bad as it was so maintaining the money supply and making sure there’s enough money flowing around is really important for a functioning economy so another uh obstacle the federal reserve wrestled with was the um downturn in 2007 2008. that’s right that’s right and so they must have had an idea that they need to inject the liquidity into the market did they uh yeah yeah so there’s they should have they should have done it faster and they didn’t do it aggressively enough actually in 2008 and that actually contributed to a lot of the problems we had yeah and if you listen to uh because the next big uh obstacle would have been the pandemic and and when you listen to them on the podcast and in the news where the representatives federal reserve appeared um they’ll they’ll say that they realize they needed not only to inject money they need to inject it fast speed was a problem 2007-2008 yeah hilariously they’re kind of solving for the right crisis so i think the response was perfect for um 2008 crisis like the response towards the pandemic would be it would have been perfect in 2007-2008 in terms of speed and volume and size i think hilariously it probably wasn’t exactly what we needed here but you know they’re they’re doing what they can and in reality all the money we threw at the problem and this is more on the fiscal side not on the fed side which is monetary policy on the fiscal side all the money should have gone towards containing the virus and getting rid of that because there wasn’t like a problem in the real economy other than the fact that there’s this crazy virus running around it it does seem like that the speed thing was that was if it wasn’t perfectly done it was probably better done because they realized that you couldn’t vet everyone fast enough and decide who need the money you just need to get the money out there to as many people as you can and then try to sort out some of the other problems later so yeah that’s on the fiscal side towards uh the big stimulus package um that’s different this is a little bit different than what the fed did that’s not the fed that’s like the federal government like spending wise they did get money out the door although the fed did a ton of emergency lending overnight lending to make sure everyone had liquidity when things you know when the i remember the market sitting on my couch and durham was kind of cold and the market’s going handle down handle down handle down which is like you know whenever the market goes down five percent they like shut it off a little bit and it’s just like oh no we’re shutting it off again and again and again like whoops yeah so uh they but they were quick to act um you know kind of like tony montana i think i tweeted out this is uh jerome powell’s the head of the fed jay powell and uh fed chairman and he was kind of like going tony montana on top of the pile of coke at the end of scarface with all the liquidity injections like everything he had kind of going nuts okay another function one of the major functions is of the fed is to regulate financial institutions yeah they do that too they give them rules yes try to make them behave yep follow the rules um they also manage uh check clearing uh procedures that’s right that’s interesting in itself another big banking function um

and they supervise the fdic that’s right for commercial banks yes that’s the bank run prevention kind of so if you have less than a quarter million dollars in a bank um then it’s backed by the federal direct insurance so what is it corporation deposit insurance federal deposit i would have to look that up yeah i can’t quite remember the acronym but you see it on all the stickers when you they’re all on the doors on the sticker on the banks and you know that’s what’s protects your money up to a quarter million dollars yeah yeah so the federal government will guarantee the deposit up to that amount which is you know not all banks have that across the world it’s important to remember yeah okay that that’s to prevent um in panics so you know we both personally know someone who showed up at a at a bank and withdrew all their cash during 2008 you know and like it’s prevent that from happening from happening um the central bank of the united states that’s what the federal reserve system is it’s the it’s the central bank of the united states yes so that in itself should tell us how important big it is yes right so that’s who who wrote this paper of this treatise on the rate of return of everything yep it’s a paper um it’s quite interesting it details uh what what returns um over time that each asset class is average so they covered um t-bills is that correct uh treasury bills that’s right and then bonds real estate and equities equities and equities are equities are pieces of companies stocks i think stocks yeah and uh the scope of this is they studied 16 advanced economies from 1870 to 2015 just about 150 years that’s right so it’s limited data set of what they could kind of get their hands on always important to remember when setting off on these ventures you know it’s there’s limitations of what you can actually look at and what’s available it’s like australia a bunch of other advanced oecd countries i’d say from 1870 to today what are o e d c countries um advanced developed countries essentially okay um so it covered those four classes um and and surprising to me the one that they had the most trouble digging out was uh information historically about housing and the other thing that surprised me is about that is that housing is about 50 of the national wealth in a typical economy that really surprised me yeah it’s interesting i guess the habitats where people live uh make up quite a bit of economic activity in general yeah and it tells you a lot like when there’s a housing crisis while the whole economy and the world shakes yeah it’s on the margin it can really matter yeah that’s it that’s really important okay um


you want to talk a little bit because this comes up one of the things they really studied intently uh well secular stagnation you want to talk about secular stagnation sure so secular stagnation secular stagnation is the idea that essentially since 1970 or so there’s a great website i’ll have to put a link in the description um called what happened in 1970 and it’s all about how in 1970 uh growth rates started slowing down and we’ve been stuck in kind of this uh this funk of low growth for a very long time um there’s a number of reasons why this may be happening um i’ve got my own thoughts a bunch of people have their different their own thoughts and and whether or not it’s a fixable problem is is interesting i think it’s always good to look at western europe as kind of maybe 20 years ahead of where we are in certain spec aspects along these lines um and i think it it’s important because economic growth has really slowed down over the past you know 40 50 years and that has direct consequences on our political life our day-to-day life um how we approach the world in ways that i think people really don’t realize so for example on the political front there’s some sense in which things have gotten really weird partisan crazy um going all the time now right like so you see like this crazy partisanship everybody’s at each other’s throats and i think this is actually a symptom not a cause i’m a big believer on the fact that this is a symptom not a cause a lot of people even academics will say well this is like a cause not a symptom and i think that’s like this huge mistake like it doesn’t make logical sense to me although i do tend to i do have this bias i think people are like kind of trying to do the best they can and or just get incentivized into these weird things there are bad people but that’s on the margin um so why do i think this is a a symptom of of low growth so i think democracy is especially a huge democracy like the united states you know we’re probably we’re the biggest democracy i would say correct probably trying to think yeah you know you can almost kind of bunch europe together now but it’s kind of a different thing but even then i think they’d be slightly smaller so with 350 million people all kinds of different people from different places you know america is not a very homogeneous place compared to most countries right like so most countries are small in terms of numbers they usually um have one ethnic group so like in denmark most people are danes things like that they tend to like more of the same things america is like super varied like you go to new orleans and then you go to like you know raleigh and they feel like different places um all this is less true in big city cities nowadays but you know there’s a lot there’s a lot more variation in people preferences attitudes etc so why is that important well if you’re trying to run this this country and keep everybody together democracies really work well with the pies growing so if the pie is growing each year we can all sit down at the table and we can all split it up in different ways and everybody gets more than last year and even though sometimes it might not be exactly equal everybody’s getting more than last year so we’re kind of happy um as the pie gets bigger more slowly um there’s less to divide up amongst us and that to me is what’s really going on is that there’s less to divide up and so people are uh more desperate to kind of claim their share of the pie so that’s one of the things the paper um they they looked at was that the growth rate of the economy is relative to the rate of return of capital and the reason that that’s important is because it affects wealth affects income and effect affects inequality so um that growth rate and rate of return when that we say that this this this is really important the rate of return of everything it it’s not only um important because um it affects somebody that wants to make some money on it on some capital they have it affects people because if uh if they’re looking at their retirements they were saving for that or if they are retired they can’t make money money on their capital so they can support themselves yes although although super important um uh distinction here there’s difference between um the rate of return of these asset classes and the rate of return um like the growth rate of the real economy these are two separate things and so also the paper talks about um the rate of return of these asset classes may be higher than like the rate of return to labor so capital is like let’s just describe capital quickly so capital is anything that you you know makes you money so land there’s human capital capital if you have a machine that spits out apples you can sell it’s capital um and then labor is like doing things yourself right like so going out and shoveling would be labor um

this is uh the theme of a big book that came out in 2015 2016 somewhere where i long been called capital and capital in the 21st century i believe was the capital between may just be capital i can’t quite remember by pick i’m eddie to butcher the french here he’s a french economist and his idea was that the returns on capital are higher than the returns on labor and maybe this is getting worse and that’s a big problem for inequality so the people that own capital keep getting richer and the people that just have their labor are kind of like stuck or stagnant or maybe heading backwards and you see this in like real wage growth over the past since 1970 it’s fairly stagnant and um you know in inflation’s like a weird metric right so if you lump like tvs together with essential goods like healthcare and um education you could like draw this trendline you know tvs getting like super cheap they’re getting a lot cheaper cars are like maybe getting a little bit cheaper but then the essential goods people need like so education which is the proxy for mobility in our society it’s getting much more expensive and healthcare is getting much more expensive as well keeping people alive so when you look at those two things it kind of paints a bit of a grim picture at the end of the day so that’s kind of the distinction between you know growth rate um in the real economy and then the rate of return to these capital to to capital which we’re talking about so the second asset classes what is what is the impact on rate of return of capital for inequality i mean does it mean that the top gets pushed forward faster than the bottom is that with it increases inequality yes so if the rate of return of capital is higher on average um that will make the rich richer and and make inequality worse now if that’s true does it mean that the relative position of the bottom sinks slower or just doesn’t improve as quickly so yeah it’s tough so like there’s all these trade-offs um there’s always trade-offs that’s the important thing to remember so

there’s um it’s a great thought experiment by robert nozick it’s and it’s uh it’s a wilt chamberlain it’s it’s like called the wilt chamberlain example i think or something but it involves wilt chamberlain so you imagine we had like a group of 500 people so who’s your favorite basketball player we’ll summon wilt chamberlain michael jordan so michael jordan and michael jordan is in the audience um and we all want to see michael jordan play but michael jordan he’s really tired of playing basketball doesn’t really want to do it so we all chip in you know a dollar and so there’s a hundred of us so michael jordan gets 99 to um let’s say we all had one dollar just like this last spirit we all had one dollar even michael so michael gets 99 dollars now he’s got a hundred dollars um and he goes plays basketball and all like well we get to see it and it’s like so excited he dunks the basketball sticks his tongue out it’s awesome um so like he’s got all this money now and it’s vastly unequal right because everyone else has no money but we all get this like utility from seeing michael jordan play basketball and we wanted it because we voluntarily gave them the dollar we didn’t have to do it so you know voluntary exchange can create unequal outcomes that make sense in different ways even though we’re all better off which is important to think about there’s also this uh trade-off between

the size of the pie and how much we grow the pie and how equal the pie is so we you can get more growth and uh but the people that at the top will be much richer than the people at the bottom um even though you can have this it’s called a something being paredo optimal soprito optimal means we can both gain like so we do a transaction and we both gain um which is important so like economists love burrito out like outcomes because um we both gain even though you might gain a lot more than i do um so it could be so it’s probably the case that you can have higher growth rates and um but the trade-off is that it’s more unequal now the people at the bottom are absolutely much better well off and and some of this is like a preference peer preference thing so i like to ask this question would you rather be you know a middle class person today in america or would you rather be cornelius vanderbilt i would rather be a middle-class american today so yeah you can tell a lot about how people like think about inequality and how much they value it how they answer that question so i would like to be a middle class person because i think you’re much better off in terms of just raw health care like entertainment i think is a lot better i think some people value positional like this is their inbuilt preference they value positional status a lot more than like raw and like that probably pans out on like political beliefs too then we’re all like well-being so i think like being a middle-class person would be much more enjoyable than um being cornelius vanderbilt and like not having like ibuprofen and crap like that like you know like these things are worth a lot to me but some people really value status and positional status and would much rather be cornelius vanderbilt and i think people that would rather be vanderbilt and have the biltmore estate and like all this stuff tend to um be more concerned about the inequality question because you know all things being equal not everybody can be coordinated built but we can get a lot more people to the middle class standard of living uh theoretically than than so you know what’s achievable and my thought is you know if you answer you’d rather be a middle-class person well that’s like man this growth is good and the inequality we’ve experienced because cornelius vanderbilt you know it was much less unequal then like he was a rich person but he was not like bill gates or warren buffett rich relatively like people get are are much richer now jeff bezos like on paper his wealth is so much more than cornelius vanderbilt could ever dream about um so like there’s these trade-offs right there’s trade-offs between inequality and growth i tend to think growth is much more important because one i don’t think our democracy really works without it two i think there’s all these other gains you get um such as ibuprofen you know ibuprofen hadn’t been invented like it’s a huge benefit to me and it did create you know some unequal outcomes for the guy who invented it but we did end up better off in the long run so what you’re telling me is the more important question seems to be growth in inequality well i personally believe that but i could see how someone would be more concerned about inequality because uh you know people that care more about positional status than i do would be more concerned about inequality we probably don’t make the point when we say that we don’t mean that we’re unconcerned with the people at the bottom that those the ones i actually think are the most important consideration because everybody else can kind of fend for themselves you can worry about your position and whether you’re driving a chevrolet or mercedes-benz i’m really worried about the guy that might be riding not even have a bicycle it’s very rawzine of you explain that so uh it’s very well seen so john rawls had this experiment called a thought experiment called the veil of ignorance so the idea behind the veil of ignorance was that whenever you evaluate like a certain policy you’re trying to think about what we should do you should always imagine that you’re um go behind the quote-unquote fail of ignorance and imagine you are the least well-off person in society and evaluate it like that so a lot of people think like this and the answer would be what matters more is it the absolute position or is it the relative position that’s absolutely relative so like relatively to like a the poorest person today compared to jeff bezos is much farther off than you know probably the poor poorest person was when cornelius vanderbilt was alive and uh cornelius vanderbilter you know jp morgan someone like that however the poorest person or let’s say the lowest quartile it’s easier to think about is probably significant is significantly better off than in absolute terms than the person in 1900 um so just trade-offs again it’s like trade-offs between these two i tend to think you know the absolute position is much more important but there are a lot of people who who care a lot more about it i i think i like to think about it like this and i think this may help you rock something so let’s say you and i are walking down the street you know we both spot a 20 belt one at the same time i pick it up i give you one cent i keep 19.99 how would you feel

if you saw it first i just i would feel like that’s just you that’s we both saw it saw it at the same time if we saw the same time well then i think you ought to split it with me if everything being equal everything being equal but how would you feel if uh i took 19.99 it gave you a cent then that wouldn’t feel like that’s not fair exactly even though you’re better off yes you are in absolute terms better off so i think that this is important in understanding people’s psychology about why um they are concerned about it is because like it’s that example right there it’s like if i give you a penny yes you are better off but it’s taken as a slight because there’s like kind of like an almost internal kind of fairness clock and it’s inbuilt to like they’ve done experiments with um like reese’s monkeys with this and like you give them like one monkey like one grape and another monkey like 20 grapes he’s like what the heck are you doing like so this is somehow like super inbuilt to primate psychology um and it’s left over and so like it’s some kind of moral like um

what’s the word it’s moral foundation like jonathan height would say it’s kind of a moral foundation okay now now that we’ve explored that explore this so i can remember in the 60s and 70s generally there was one person in the household that worked one that stayed home in families and one that stayed home with children and you had one car and you had a little ranch style house and and that’s what middle class was in life yeah and that’s one of my sort of global views of life is that if everybody had that then things would be just peachy yeah except for unless a 20 bill falls on the floor yeah then we got problems so now things have changed yes now we’ve got uh now we have uh two people working yes and we have two cars in the garage and you can’t have a little ranch anymore you got like big house bigger house yeah and um and so so we’ve got many many more people working yes and what’s been the impact of that with growth okay so

how to attack this important things to remember do you know what hedonic adaption is i do not so imagine like so i started coming in and every day i brought you this uh you know delicious cappuccino from starbucks you know it’s amazing if suddenly i was like well you can’t have a cappuccino anymore you know like so the first time you get like a lot of utility from like oh so good and you get less and less and less and less and less going on so if i gave you like instant coffee from star like little instant coffee pack you’d be like man this is gross like i’m used to like this really sucks but if you had no coffee and i gave you the instant coffee packet like wow this is yeah i’m coffee i like coffee i’m amped up you know good to go um so hedonic adaption is the fact that like and it’s always important to keep in mind in your own life is that whenever you know whenever you step up the hedonic um ladder to like a nicer car uh or something like that it’s like the effects are short run and then essentially they get built in soon after that so i think a lot of what’s been going on you know why people have this sense things are worse is because expectations are lower if that makes sense so instead of thinking you’ll be better off than your parents you’re going to be like the same or maybe worse off and that is like a big blow because you know you’re going back down the ladder if that makes sense and millennials you know we have a lot less money on average than uh boomers that are our age like it’s just this real fact is a large portion of that due to growth uh why is that the case or it yes how what is the impact of growth on that so the impact of growth so in real terms there hasn’t been very much growth that’s the answer to that it’s like there hasn’t been real growth very much real growth and that has caused that to be a problem there’s there’s more people and shrinking opportunities um and you can feel this just almost in the the ether on like college campuses it’s like the desperate it’s almost desperate the partying and drinking because there’s this knowledge there’s just less opportunity and fighting um more hard to just kind of stay in place one of the things that they uh they come across in the paper is that the natural rate of interest is decreased over the last 40 years and near zero yeah so i don’t think this is a new trend um you know there’s like a dr a rough trend line i i saw a graph once that showed the interest rates since like old testament times like you know like pre-jesus times and and it was heading south since then um and you know it’s like a messy it’s a messy graph right he’s going up and down up and down up and down like a uh electric cardiogram but it is heading um heading south and the answer is why is that um and karl marx had this idea that you know the capitalists are done once um once interest rates head below zero we’re head to zero and that’s where we are now it’s like essentially a zero interest rate negative interest rate environment in western europe i i and i think his critique is correct in maybe some sense i don’t think it’s like destiny but i do think it’s correct in the sense that it is an indication that people have less ideas like there’s less competition for money for projects to like do things like people just have less ideas in general less good ideas and and they’re less likely to take action to do things and so more competition or less competition for good ideas since we have fewer i think there’s very few good ideas so there’s more competition for them yes uh you can see this now especially in like the venture capital industry this is a shift over the past six years you know like you know now everyone wants to be working venture capital and they’re all competing for less and less good opportunities um where it seems like the real like twenty dollar bills in the sidewalk is building good companies like there’s just no one building good companies because and that’s emblematic of and and the question is is like these are a bunch of smart people so do they realize it’s just too hard now is it just too painful compared to watching game of thrones on netflix or whatever i don’t know but it’s a it’s a real effect and it’s worth thinking about so do you think that it’s harder to um to know how to do something like start a company like you you that’s one of the things you did is you’ve been involved with a startup is it harder to do that because you just don’t know how or is it just harder to have ideas what what’s causing that i think it’s hard to have good ideas i think there’s more knowledge about it’s like i okay i think the fact that thinking about startups is like in the culture and like entrepreneurship is in the culture or these these ideas is actually like a a red flag that it’s not really happening very much like so it used to just be in the ether like it just happened you know like you know people would always be starting things and it’s the lowest rate of new company formation like every year it keeps ticking off like there’s less and less and less um and i think like there’s a sense it’s too difficult or there’s no good ideas or all the frontiers have been used up but you know we can imagine all kinds of areas where this is like you know all kinds of good ideas we could be doing but we’re just not uh i think one of the things that’s true is risk plays into this like um you can think i’ll go to college because the statistics show that if you go to college you have over the course of a lifetime higher earnings and so this is sort of my golden ticket and so i what i just need to do is go work hard and study hard and i’ll get this degree and then i’ll be successful but then i whereas if you sort of strike out on your own and start something then um there’s greater risk because for one thing you just don’t show up and go to class every day you’ve got to create it yes i do think it’s maybe something like okay so what’s the alternative so i i think in a world with a lot of opportunity the risk for starting new things is lower because like the alternative as well i can just go find something pretty easily right i can go work at you know i don’t know the factory and make a solid living if things don’t work out i think now the real risk is slipping out of the middle class and i think that’s what you feel in college is like this really sense of foreboding like you know you’re like on the edge it’s understanding you’re on the edge of not making it and slipping down the mobility ladder is very scary for people and if things don’t work out the risk is much more existential than it used to be

um explain that so like it used to be if you’re a grand vision for the world making the world future different didn’t work out your alternative was well you could definitely go get a job immediately that was dignified and high-paying now i think it’s like if you didn’t follow that track and didn’t make it it’s like you’re off the wagon buddy you better like you’re done does that make sense like you will your mobility social mobility will suffer so um now explore um it seems that in the relatively recent past there was uh there was an uh it became a popular idea that if you were involved with stem like you were sort of like more golden if you were in the humanities track in which case you would be an art historian and you would have the future yes so so i think uh yeah so the the grand illusion i would say here is that um that stem is the savior right in reality i i i know i personally benefited from the fact that like i knew the humanities would not you know there’s no salvation which is somehow very like a very valuable lesson early seeing the world as it really is whereas stem like you know there’s still this hubris that like oh like it’s salvation right you just do it you’re fine but the truth is like no you still have to work just as hard maybe les maybe slightly less hard it’s unclear but that is really important to understand like you know if you look at the engineering fields like

other than computer science and like probably oil and gas petroleum engineering you know there has been a good engineering field to go into maybe electrical you know i don’t know but in the past like 20 years like you you wouldn’t make any money going anywhere else and that that’s a that’s a good example that you know it’s like there’s just fewer and fewer opportunities and and uh that makes things difficult for everyone so if you do take the gambit assume the risk i think of elon musk and he’s always he’s willing to risk it all he just he astounds me and like he’ll just invest everything because he feels like it’s a good idea yeah a guy with good ideas um what is it about is that the difference is it that people that are willing to risk i mean you you went in with a startup and and there was a good chance of failure maybe a dominating chance of failure and what did you learn about uh through the thus having survived a lot of that the company survived a lot of that and uh it seems to be tracking well what did you learn about i mean was it smooth all the way and you just sort of go in and have your coffee in the morning work along and head home at five or it’s different than that yeah so a co-worker friend and i i think we talked about this in a previous episode you know we counted 12 independent times where we thought there’s a greater than 75 percent chance probability would we would not be there the next week like we would not be around um you know like

i really hesitate to give advice i think you should generally be quite skeptical of advice unless someone who’s like really close to you and even then you know and this is a piece of advice right so it’s like yeah take it as a will right but you should generally be skeptical of advice um i i think there’s like

you know elon can do that there’s great book zero to one that describes it’s called notes on startups i highly recommend it anyone but there’s like this this reading of zero to one it’s like wow like i really should not go into startups like that’s probably that is probably the correct reading of zero to one it’s like really like i should i should not start anything um which is like counter-intuitive right but like

when you’re talking to people like that like who should be starting these things like well it’s people like at google it’s like the engineer at google is making half a million dollars a year and sitting around on the bing back chair eating m ms like that’s who should be doing these things right this is super capable people who are not doing it otherwise um you need to understand like where you are and like does your life have kind of product market fit with um startups and things like that because you know it’s not it’s not for everybody and i and people take that the wrong way as it’s something like attractive and and sexy and like cool to do and like yes but you need to understand like it’s it’s it’s a pretty serious undertaking and if you’re going to go for it you need to you need to understand all of it critically evaluate you know all of life and is a pretty serious undertaking it was being able to measure things and quantify them and say you know okay i’m going to give this a whirl and i’m going to give i’m going to invest this whether it’s time or money or whatever it is and yeah and uh and and trot yep i think yeah then you’ve got to be able to risk not succeeding and if it doesn’t succeed what are you going to do you have to some plans about that but yeah i’m going to circle back around and pick back up on equity housing bonds and bills and so what uh the rate of return of everything said was that um equities and housing returned more than anything else that’s right and by significant margin like ten to one or five to one or something like that that’s right that’s right and uh for the sec go after elon we’re not uh this is an investment advice like you have bigger fish to fry so uh do your own research um i want to yeah so always important to remember there’s risk and there’s in risk and reward and people are fairly rational so um especially when evaluating things like this so

equities where did you want me to go with that well i think risk and reward is that’s sort of the whole that’s a big part of the entire question so if we start with housing what i would say about housing real estate is that um

the risk is you know you can’t create you can’t diversify well like the the the three primary considerations in real estate it’s one of those sort of truisms is location location location right right so uh you’re gonna pick something but you can only you know it’s gonna be hard to pick more than one that’s right initially and then maybe you can grow it and maybe over time you could grow in to a number of them but even when you grow into a number of them they’re likely to be in the same community so that’s right so get gaining diversity is very difficult with housing real estate yeah and and just talking about my personal bias i like i tend to like equities more i believe equities um you know they have so real estate does outperform um like in this paper that’s what they talk about real estate outperforms equities by small margin although there are there’s this trade-off where transaction costs are much higher for houses so you you can just go buy um equities super you know like for not you know vanguard you go you pay point zero one percent you know fees a year to buy and have them manage you know most of their index funds and then you you look at houses and you’re like well i can buy one house at a time in one location and i have to pay property taxes and upkeep and maintenance and you know it is interesting that this paper found that result because it you know what i’ve always heard and seen is that you know housing really does not outperform um well real estate housing kind of two separate things but it doesn’t outperform inflation and i think there’s the there is the truth that there’s uh land that’s one thing and then your house which is a wearing good that’s important it’s like buying a car a car and a house are much more similar than people would like to understand like to believe um as a consumption good you know it’s something you consume over the life cycle so that’s the big dirty secret about a lot of houses they’re meant to last like 30 years till the end of a 30-year mortgage and they kind of fall apart right you know i don’t know like not like by design but that’s just how they’re built um and i think in that sense yeah they probably it’s more a commodity but real estate is is a bit different in that it it does seem to perform similar to equities or maybe a bit better yeah that was that’s a one of the points we should raise is we said a lot of this is a measure of risk versus reward and the big hedge is diversification with risk so if you can like own all the houses in your state or maybe in the nation or a portion of them in a small very small portion yeah then you’d be well diversified and the chances that you would do well would be greatly increased because um if there’s an earthquake somewhere there’s a fire or something happened to one house that’s just a very small part of your holdings right but if it happens to be the house you own it’s a disaster catastrophe it’s a big big problem so diversification is really important and that leads us directly into talking about equities which you sort of brushed up against in that it’s really now because of bogle really easy you might talk about jack bogle just a little bit historically to diversify yeah yeah so uh it is it’s much easier to diversify in equities like you can go you can buy there’s like a fun vt which is vanguard total world stock index and it’s you can buy for 75 bucks you can buy a tiny sliver of every single publicly traded company that an american essentially has access to it’s not quite the case but it’s pretty close um and so wow that’s pretty easy it’s like 75 bucks and go crazy housing you know there are similar equivalents called reits which are like real estate investment trusts but they don’t have every house in america and they don’t have every house in the world and it’s like usually select and like the southeast or something and um that could be okay but it’s definitely not as easy and there’s also more management fees because it’s it’s more difficult to administer than uh housing and was that bogle’s idea as a graduate student is an index fund where you would literally own a sliver of every company or representative sample of every company in the country and yeah so jack bogle’s idea um so at princeton his senior thesis was the idea of an index fund uh his idea he essentially saw a paper similar to this one the rate of return of everything’s like well if you look at the average return of the entire index um it’s like well it’s like 10 and if you just took the fees off of that you know that’s a lot of money over 10 years um and just kind of going back on on how people don’t do big things anymore it feels like you know jack bogle this is his senior thesis in college i mean think about that that’s pretty weird isn’t it like you have the senior thesis idea and he’s probably saved you know given more money back to investors than anyone else i mean i can’t imagine how many billions of dollars in value have been given to retirees and you know all these pension funds that use uh vogels uh you know vanguard and just all the other uh index funds that have popped up afterwards you know you talk about good ideas he didn’t only come up with the and apparently he’s largely responsible for index so he’s large so people could kind of done it before but he’s he popularized popularized uh index fund investing and then the the other thing i know him for is uh low fees and saying if you could reduce management fees you could you could your yield the amount of money you made would just over time would be much much greater yeah so standard investment funds usually charge two and twenty that means two percent of um the amount you have invested every year and then 20 of the returns and so like you know you’d have to outperform the index so brilliantly to make money after 2 and 20 that it’s just like really not possible there’s a couple people that can do it you know they in weird ways but they have secrets and it’s not it’s not something you can really replicate that’s one of those things that in that random walk theory is that you the market is random and you can’t select the winners and it’s in all that stuff sort of in vain i mean that’s the idea in any event uh so that’s more so the efficient eugene fama the efficient market hypothesis it’s the idea so um you know if you got two people if you got 100 people and they’re all measuring the number of m ms in a jar you know the average is really close to the number um it’s very similar like if all of the information is public and we all can see that information and everyone is rational the price will be just about what it should be now big asterisk asterisks here you know so we if we all see the public financials for apple and we all make our own decision like on average like the the price that in apple is is fairly efficient so like why do you get this equity premium then um so you get this equity risk premium because it’s volatile so people you know they need money in the short term so not willing to always invest it in in more volatile assets like equities because they need to spend it tomorrow that’s one thing um the other way you can make money is uh inside information like so that’s illegal right but you know if you knew there was special information if you were a lot smarter than everyone else and everyone missed something that’s another way or you know like so some people can make money beating the market and there’s people that you know there has to be has to be someone to make the market right too to make it efficient so all the people you know there’s like a lot of professional people who spend so if you spent like all your time and you’re super smart you could probably um beat the market but you will also probably you know like it’s efficient in that it’ll kind of just pay for the time you spent doing it does that make sense um it’s hard to just like critically evaluate other than it being just random and get a higher return if that makes sense so it’s really hard to um it’s it’s hard to do anything other than and then get the market average which you’ve got a very reasonable chance to do if you bought mine yeah yeah you just you do have a much more reasonable chance um and well the important thing to remember it’s like it’s super competitive to price it correctly right so you’ve got like all these smart people who have this financial incentive to be correct and that’s what you’re going up against and like you have to be like really good to beat that and that’s that’s what uh which most people miss yeah and but so that’s very difficult but trying to get the market average is is straightforward really straight yeah yeah so you just you’re just counting on the equity risk premium and um yeah that that’s much especially over the long term it’s a much easier strategy to follow and that’s what bogle has sort of brought to main street is that you can do that with the index funds and you can get you can get low fees by cutting out all the man a lot of the management right in the indexes you do those two things and then then main street can have can have stocks that’s right that’s right equities equities that’s right and we’ve talked about this at least as on an aside it’s like there’s there might be two reasons that stock market is where it is even today during the pandemic and it’s bounced back significantly that’s right one of them is money pressure which i think of is like water pressure there’s yeah the money’s got to go somewhere to be invested go somewhere yep and we haven’t i don’t know if we we haven’t gone much to bonds and bills yet but they have very low yields because interest rates are low yes so historically like oh do you have the paper pulled up by any chance uh don’t do you have the what the rate of return for bills and bonds has been on average i don’t not at my fingertips okay talk for a second i’ll pull it up okay then what what i will say is that um because the rates of return have been low at banks then that tends to cause pressure to put money elsewhere and because housing isn’t it’s much more difficult to invest in that puts more money pressure on the market which tends to prop it up uh during bad times and i think the other thing is is that uh bogle uh made main street aware that uh by holding and and and realize the market goes up and down that you would be able to do well uh in the long term so main street’s not prone to sell off things and they’re industry holds a lot now individual investors hold a lot of the stock market yeah especially you know 401ks you like incentivize not to sell and you pay penalties and to withdraw so i did find the yeah the average unweighted returns for bonds or in real terms are 2.6 percent and what’s inflation these days well that’s real returns that’s adjusted that’s real terms now now compared to what’s the real return for bonds now it’s probably it’s less than that it’s probably less than that because like uh they would have to return four percent right now to you’d struggle to get a bond that returns that over time and then you got to pay taxes on the gain yeah then you have transaction fees and transaction fees yep so it’s uh it does create a lot of money pressure on the stock market yeah searching for returns searching for returns yep yep so that that explains a lot about uh and one of the things i say is that one of the riskiest places long term put your monies in the bank everybody runs to the bank your grandmother was like this your grandfather was like this and their generation was like this because they lived through the depression so they put their money in the bank because it was safe well that was true in a sense especially with fdic and the fed and all that stuff but over long term uh inflation and taxes chipped away at it that’s right yeah you know you’re losing two percent a year on inflation and you know yeah and what did the banks do with it for savings accounts they put it in t-bills so bills so you know they borrow for the federal government and then they take some cut and then they give you that percentage so right so that’s one of the riskier investments long term whereas if you get in the stock market and you hold through the ups and the downs and at some point in the future you may elect to take some of it out well yeah so i yeah it does come back to like what do you mean by risk do you mean volatility do you mean how much does it go up and down so for example houses like they seem like really low volatility right because you buy it and then you don’t know what price it is reality houses probably have similar volatility to equities um just judging on their returns they probably have similar volatility it’s just like you don’t have this ticker like paying you don’t know constantly yeah you don’t have it pinging away and that on the nightly news they never go and your housing value today it went down five thousand dollars ah handle down it went handle down today five percent down oh my god yeah no you never hear that which is different okay um

so uh we’ve uh uh unpacked a lot of this yeah um would you would you like to summarize some of your thoughts about the rate of return of everything and what you think it means yeah so i i think the the big takeaway from the rate of return of everything um was kind of confirming my biases a little bit about equities being you know especially for someone like me a younger person that’s the place you want to go this is the place you want to be thinking about if you um if volatility does not bother you so if you don’t so if it drops in half like if that doesn’t bother you a lot of people psychologically it’s it you know investing is mostly a psychological gain and whether you can handle losses and a lot of people have a lot of trouble with that i think it’s inbuilt to human nature you know most people would much rather avoid losing than winning um i think that’s like a that’s the truth about human nature that’s important to keep in mind and incorporate to keep in mind about yourself in investing equities it’s interesting the most surprising thing to me in the paper was real estate actually outperforming equities that that was i did not expect that um i agree about that and um and they’re very similar there might be a small edge to housing but yes it’s not very large and one of the points i should make and probably is people are familiar with this and some may not be is that you’ve never lost anything in the stock market until you sell it so if the stock market and it has during my lifetime it’s gone down half yeah and which is it it will get your attention when it does that but it also lets you know that the one thing you can’t do is realize your loss you can’t sell then yeah well it is it is important to remember though so if you buy a basket of equities like you’ll tend to get something maybe you’ll get something similar to the returns i think returns will be lower just because interest rates are lower that’s so important to keep in mind lower than what you know is stated in the paper which is like what 10 some odd percent i think they’ll be much lower than that i think equities will still remain higher than bonds and bills for the foreseeable future just due to the current interest rate environment and that seems to be like a solid trend you could count on knock on microphone stand

but that’s just something to keep in mind is just you know you never want to invest more than you can afford to lose and and and what you would need in the short run because in the short run lots of crazy things going to happen i think that’s that’s a a couple of things about that i agree with is uh if you’re in equities you’re in for the long run yes that’s important remember entire paper is about the long run and that’s what we’re talking about so you don’t buy a house and sell it next week or next month or even next year everybody would know that would be a risky proposition and you and i wouldn’t be willing to go into the stock market with that kind of time when either that time whether so going in when you’re young and having plenty of time to learn and study and observe and watch your money grow uh seems to be really key and one of the things i really encourage young people to do is because you need that large time that long time with it the long run yeah time matters more than almost anything else time fees matter more than anything else um and so we talked about one more thing we talked about returns and this is the raw returns real returns that does not include fees um and you know i encourage everyone to go out there and just look at your 401k and see the fees i remember you know i ca there’s a there’s a formula you can use we won’t talk about it today to calculate expected returns based on the dividend yield and a couple other things jack bugle used it i think it’s a useful tool i wouldn’t use it for its predictive power but i think it’s good to think about you know um i think right now like a 401k that i use has fees that are equivalent to probably a quarter of the returns expected returns year over year right and that’s pretty standard in the industry and that is a massive amount i want people to understand one percent of fees is huge yes it’s huge because if you’re only getting let’s say you get you know nowadays six percent real four percent real returns say four percent that’s a quarter of your returns which you know it’s a lot of money it’s a lot of money and what you know people often spend more time um mowing their grass during the week than they do reviewing their retirement portfolio or their financial situation and it doesn’t take a lot of time and you certainly don’t have to be a rocket scientist or a brain surgeon yeah you know i think that one of the beauties that bogle and vanguard brought and we’ve mentioned them several times and it’s because it it’s easy to understand and very helpful um one of the beauties of the what they’ve recommended is uh it’s something that you can understand it’s something you can appreciate it’s something you can be involved with and take advantage of and that’s what they brought to main street in america yeah i think it’s quite good and it’s a very elegant idea it’s like what if you could capture the returns in this paper like that’s all we want to do like and um he he wrote a book right before he died called enough i love this book it’s called enough he’s like well you know jack boggle he’s pretty wealthy person by the time he died just like worth probably 80 million dollars like you know he’s like i’ve flown in first class and it was nice but you know it’s not that much you know 10 returns like that’s enough and it’s a lot you know he’s gonna make like he’s like i’ve got 80 million dollars and you know in terms of visionaries that captured a percentage of their uh their value created bogle is way down there like it didn’t capture very much so their big rivals fidelity and for the fidelity family um i can’t remember the the name of the owners but you know they’re all super wealthy and that’s always a sign right you know if you’ve got a super well you know if your financial manager is really wealthy you know you should be curious about that yes just keep your eyes open because he got part of it by putting his hand in your pocket yeah somebody’s pocket exactly exactly and so that’s how much the finance industry makes money or has made money in the past people are much wiser now but it’s in selling um securities and taking a writer and like two percent of of um management fees sound small but in reality you make a ton of money even one percent you mentioned these 401ks one percent um is is huge and and will really your returns um this also reminds me automated investment systems are better because removing the psychological and human helmet like things that automatically invest are much better than you have me think about it because i think you know it’s easy to get rattled and have questions yes yes and you know there’s that’s a good point about if you turn on the tv and you see some investment product well it ain’t cheap to buy that tv tom so yes you should always ye you should always be skeptical about people’s investment advice because generally you know people have incentives to occlude and and generally you know like if someone’s giving you investment advice on like emma whatever the what is the msnbc invest business channel you should be very skeptical because you know unless it’s jack bogle because he’s you know he created a trillion dollar company he’s only worth 80 million dollars they manage a trillion dollars and he’s only worth 80 million dollars he’s a smart person well that’s not telling you he’s given that money to someone else and that’s that’s you know yeah that and you know for those interested in the podcast and in this subject that’s a great place to start reading it’s because of just what you said as somebody that has that much under management but realized i mean 80 million dollars anybody would love to have that but when the comparison is compared to like the other people in the field it’s nothing and he you know i would i would actually even before i looked at vanguard i would look at vogel’s books yeah that’s great advice yep great okay well it’s good to see you again it’s good to be here on the podcast thanks for joining us and we’ll see you next time on narratives thanks

Well that’s our show for today i’m will jarvis and i’m will’s dad join us next week for more narratives

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