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EVEN AFTER BEAR markets in 2020 and 2022, investors’ appetite for stocks remains as robust as ever. But what if stocks had not just a rough year or two, but a dismal stretch that lasted more than a decade? Below is an excerpt from the second edition of my book The Four Pillars of Investing, which was published earlier this month.
In August 1979, BusinessWeek ran a cover story with the headline “The Death of Equities,” and few had trouble believing it. The Dow Jones Industrial Average, which had toyed with the 1,000 level in January 1973, was now trading at 875 six-and-a-half years later. Worse, inflation was running at almost 9%. A dollar invested in the stock market in 1973 purchased just 71 cents of consumer goods, even allowing for reinvested dividends.
According to the article, “The masses long ago switched from stocks to investments having higher yields and more protection from inflation. Now the pension funds—the market’s last hope—have won permission to quit stocks and bonds for real estate, futures, gold, and even diamonds. The death of equities looks like an almost permanent condition—reversible someday, but not soon.”
Contrast today’s universal acceptance of stock investing with the sentiment described in the BusinessWeek article, when diamonds, gold and real estate were all the rage. The price of the yellow metal had risen from $35 an ounce in 1968 to more than $500 in 1979 and would peak at more than $800 the following year, equal to roughly $3,000 in today’s dollars. Still, there are similarities between the 1970s and today. Now the wise and lucky own houses in cities with desirable real estate. Back then, those who had purchased their houses for a song in the 1950s and 1960s were by 1980 sitting on real capital wealth beyond their wildest dreams. Stocks and bonds? “Paper assets,” sneered the conventional wisdom.
The article continued: “At least 7 million shareholders have defected from the stock market since 1970, leaving equities more than ever the province of giant institutional investors. And now the institutions have been given the go-ahead to shift more of their money from stocks—and bonds—into other investments. If the institutions, who control the bulk of the nation’s wealth, now withdraw billions from both the stock and bond markets, the implications for the U.S. economy could not be worse. Says Robert S. Salomon Jr., a general partner in Salomon Brothers: ‘We are running the risk of immobilizing a substantial portion of the world’s wealth in someone’s stamp collection.’”
In the late 1960s, more than 30% of households owned stock. But by the 1970s and early 1980s, that number was only 15%.
Next, the article attacked the very idea that stocks might themselves be a wise investment: “Further, this ‘death of equity’ can no longer be seen as something a stock market rally—however strong—will check. It has persisted for more than 10 years through market rallies, business cycles, recession, recoveries, and booms. The problem is not merely that there are 7 million fewer shareholders than there were in 1970. Younger investors, in particular, are avoiding stocks. Between 1970 and 1975, the number of investors declined in every age group but one: individuals 65 and older. While the number of investors under 65 dropped by about 25%, the number of investors over 65 jumped by more than 30%. Only the elderly who have not understood the changes in the nation’s financial markets, or who are unable to adjust to them, are sticking with stocks.”
Did the older people stick with stocks in 1979 because they were out of step, inattentive or senile? Hardly—they were the only ones who still remembered how to value stocks by traditional criteria, which told them that stocks were cheap, cheap, cheap. They were the only investors with experience enough to know that severe bear markets are usually followed by powerful bull markets. A few, like my father, even remembered the depths of 1932, when our very capitalist system seemed threatened and some stocks yielded steady 10% dividends.
The BusinessWeek article ended by adding insult to injury: “Today, the old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared. Says a young U.S. executive: ‘Have you been to an American stockholders’ meeting lately? They’re all old fogies. The stock market is just not where the action’s at.'”
The BusinessWeek article shows just how markets can go to extremes—a valuable lesson in and of itself—as well as a demonstration of several more salient points. First, it is human nature to be unduly influenced by the last 10 or even 20 years’ returns. It was just as hard to imagine that U.S. stocks were a good investment in 1979 as it is to imagine that they might not be as good now.
This is doubly true for bonds. Before the bond market carnage of 2022, investors had gotten used to the nearly relentless four-decades-long fall in rates and thought of bond prices as a one-way bet. They forgot that the four decades between 1941 and 1980 saw, in economist John Maynard Keynes’s famous phrase, “the euthanasia of the rentier.” (Rentier is an archaic term for bondholder.)
Second, when recent returns for a given asset class have been very high or very low, put your faith in the longest data series you can find—not just the most recent data. For example, if the BusinessWeek article had explored the historical record, it would have found that between 1900 and 1979, stocks had returned an inflation-adjusted 6%.
In addition, make a habit of estimating expected future returns. At the time that the article was written, stocks were yielding more than 5% and earnings were continuing to grow at an inflation-adjusted rate of 2% per year. Anyone able to add could have calculated a 7% expected real return from these two numbers. Between the article’s publication and the end of 2022, the S&P 500 actually returned 8% after inflation, the additional 1% coming from the increase of valuations typical of recoveries from bear markets.
While it’s easy to imagine buying at the bottom, when the time comes you will be faced with three formidable roadblocks. First, there’s human empathy, which, at least financially, is one expensive emotion, since channeling the fear and greed of others often comes dear. The corollary to human empathy is our evolutionarily derived tendency to imitate those around us, particularly if they all seem to be getting rich with tech stocks and cryptocurrency.
My own unscientific sampling of friends and colleagues suggests that the most empathetic tend to be the worst investors. Empathy is an extraordinarily difficult quality to self-assess, and it might be worthwhile to ask your most intimate and trusted family and friends where you fit on its scale. To use a Yiddish word, the more of a mensch you are, the more likely you are to lose your critical faculties during a bubble and to lose your discipline during a bear market.
Second, there’s the “rat hole problem.” It’s impossible to know where the “bottom” really is until it’s far in the rearview mirror. Let’s say that your bear market strategy is to purchase more stocks every time the S&P 500 falls by 20%. The S&P closed at 1,565 on Oct. 9, 2007, so you would have purchased stocks at 1,253, again at 1,002, and a third time at 802 (1,002 × 0.8).
Would you really have had the moxie to make that last purchase, having suffered severe losses on your first two? The S&P fell even further after that last purchase, finally bottoming on March 9, 2009, at 677.
Performing the same exercise with the Dow Jones Industrial Average from the market peak in September 1929 at 378 yielded no fewer than nine successive purchases, just barely missing a tenth one on the July 9, 1932, low of 42.
In 1931, Benjamin Roth, a small town attorney, recorded in his diary that while it was easy to see that stocks were cheap, “The difficulty is that no one has the cash to buy.” Or as Benjamin Graham said, “Those with the enterprise haven’t the money, and those with the money haven’t the enterprise, to buy stocks when they are cheap.”
Third, stocks don’t get cheap in a vacuum. Alarming narratives always accompany dramatic price declines. In both the 1930s and in 2008–09, the entire economy seized up and appeared to be plunging off a cliff. After Senator Richard Burr was briefed by Treasury Secretary Hank Paulson and Federal Reserve Chair Ben Bernanke about the parlous state of the banking system, he told his wife to withdraw as much cash as possible from their bank.
During the 1970s, Americans saw their savings corroded on almost a daily basis by inflation. The 1979 BusinessWeek article described how only seemingly addled old folks owned stocks, and bonds were widely deemed to be “certificates of confiscation.” In March 2020, it was easy to imagine a world economy devastated by a lethal pandemic for which a vaccine seemed somewhere between distant and impossible.
Do not underestimate the courage it takes to hold stocks during the worst of times, let alone to purchase more. Holding and buying assets that everyone else is running from takes more fortitude than many investors can manage.
It helps to realize that not only are humans the apes that imitate, but we are also the apes that tell stories. Humans understand the world, first and foremost, through narratives, not data and facts. Narratives often evolve into a societal contagion that can prove expensive to the unwary investor.
As the BusinessWeek article and subsequent history demonstrated, cheap stocks excite only the dispassionate, the analytical and the long-lived. If you can manage two of those three, you should be well rewarded. Keep these three points in mind:
Bill Bernstein is a recovering neurologist, author and co-founder of Efficient Frontier Advisors. He’s contributed to peer-reviewed finance journals and has written for national publications, including Money magazine and The Wall Street Journal. Bill has produced several finance books and also four volumes of history, the latest of which is The Delusions of Crowds. The new edition of The Four Pillars of Investing includes a foreword by Jonathan Clements, HumbleDollar’s editor. Bill’s life’s goal is to convey a suitcase full of books and a laptop to Provence for six months—and call it “work.” His previous article for HumbleDollar was When Cash Is King.
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I started reading the second edition and it’s off to a great start! I have a couple of questions regarding RLE and LMP:
RLE: Does RLE have to account for effective or marginal federal and state income taxes? I presume yes since taxes are paid from withdrawals.
LMP: Can ETFs like VGSH, VTIP, and SPTI serve as an effective proxy instead of TIPS, plain vanilla treasuries, or CDs?
Thank you.
One thing I have learned through many years of investing is that people do not truly know their risk tolerance until they are in the middle of a bear market. The 2008 great recession was that for me. I had weathered previous bear markets, like the 2001 dot.com bubble, but this one was different. I was planning to retire at the end of 2008. I stayed in the market for a long time, but finally did a substantial reduction in my equity position right before the market began to rally.
The market narratives were all negative and it was hard to see a turnaround any time soon. In fact, it seemed like the probability of the markets dropping further was much greater than a turnaround.
Fortunately, I was able to delay my retirement until 2010 and recover most of my losses.
I look forward to the 7/25 download release of your updated book to my tablet.
Update – Arrived today, the reading has begun.
I remember reading “if you’ve won the game, why keep playing”. When i retired, I reduced my 100% equity holdings to 60% or so. I may go up to 70% because I have enough to survive a bear market in ‘safe’ investments (money markets now paying 4-5%). I just cannot go mostly into cash or bonds (even short term bonds went down the last few years). The stocks are for my kids and even if I did want to sell them, the capital gains are too large. They can inherit them tax free with stepped up cost basis.
Yet another excellent posting on Humble Dollar!
This is now my #1 investing website and articles like this one are the reason why!!
For the answer to that, see this piece from several months ago:
https://www.advisorperspectives.com/articles/2023/03/20/riskless-at-age-104
Thank you for the link to another interesting article!
Thanks for your words of advice. Since you are a mensch (a person of integrity and honor) where do you put your safe assets?
Thanks so much for all the kind words. They make my day. Heck, my month! And please let me know about any typos in this first printing! You can reach me at the email link at the bottom of this page:
http://efficientfrontier.com/t4poi/t4poi-new.html
Thank you Dr. Bernstein for a well-written excerpt and I eagerly look forward to reading the second edition!
One of the Bibles on investing. It taught me to cash in some chips when I won the game. Nick Murray in his book suggests 100% through retirement but a very good read; Simple Wealth, Inevitable wealth
Mr. Bernstein, you were the first author on investing I read back in my early 40’s (the 4 pillars). That book drove my investments for future years at Vanguard, and even after the financial toll of divorce, I still accumulated what I considered “enough”, (no, not a million) given my temperament and pursuits, to retire, shy of 59. Now 63, having read Wade Pfau’s 1st edition of Retirement Planning when it first came out, I’m living on 3 annuities, initiated at two different times. I have a FIA, a variable annuity and a SPIA, to cover my income floor plus a little extra. I’m holding on taking Soc. Sec. until later and planning on a Reverse Mortgage line of credit on my paid off home for funding any need for in-home or other care. I could not afford the LTC insurance premiums and saw the cost skyrocket for those who could. I’m no longer losing sleep with the vicissitudes of the markets or the rising costs of healthcare.
The 3 annuities satisfied my innate curiosity over which would turn out to be better: all 3 appear to have their merits in the fluctuating financial environment I’ve lived through, and have allowed my IRA and ROTH to weather the markets and grow.
Mr. Bernstein, this is my VERY large “THANK YOU!” for your first “Pillar” book, and now, your follow-up book. The first book supported what is to me a “KISS” approach (keep it simple, stupid!). I’m patiently waiting while my small-town library fulfills my request for your second edition:)
I extend my appreciation as well to Jonathan and all the writers on Humble Dollar: you never know who you’ll be helping with your articles. Perhaps you’ll change the financial course of a reader’s life with your writing, as Mr. Bernstein did mine, and make retirement a daily joy, instead of a worrisome and unattainable goal. So keep the keyboard clacking, and many, many thanks for your contributions, all of you!
i was in high school in the late ‘70s, but I have some specific money memories from that time that have stuck with me. I’m sure they continue to influence my thinking today. It’s great to see an update to a great book. In addition, my teenage daughter recommends Bill’s book on the history of trade for an interesting read on one of the big influences in our lives.
I read the originally and was profoundly influenced by it. I am grateful for the clear, logical and dispassionate writing.
Now I know what I am giving each of my children for Christmas this year. I tried to teach them the pillars over family dinner, but its time for them to read and learn themselves. (They are all doing well, but haven’t had to navigate through crises of the magnitude that I have, and as much wisdom as they now think their father has, hearing it from Bill will be better.)
I despise these devices sometimes. I just wrote an intensely researched reply yet more than likely the time it took me to do it, maybe 2hrs, its disappeared with a swipe. I do not doubt Apple will also some day. I’ve seen its stores with lines around the block, people buying up all they could and shipping it out.
Little doubt. Not so much today, nearly 20 yrs later. As you say Bill, humans are either unnecessarily euphoric, remotely moving along, or bleakly in fear of tomorrows turns. This is not a swipe at Apple.co.
I was first introduced to your book The Four Pillars of Investing, at Taylor Larimores suggestion, at a luncheon he had regularly in 03/09 as a regularity in that decade. I hope your well, your initial paragraph says recovering neurologist. I hope thats a play on articulations derivitives. I was once treated by a cutting edge Harvard neurologist fresh out of school at MGH. I’d anticipated cutting edge new age medical insights. I was advised a wheelchair and cane would be in my near future. Now some such 20yrs later I was lucky enough to only deal with such confines briefly. Health is paramount to all.
Have you seen all the life’s thats recently been uncovered beneath the planets poles in search of other incentives from Capt. Byrds quick exit in late 40s from N.Pole iirc to todays open minded E.Musk funded explorations. The human animal is a conundrum no question. My best to you on the updated edition of The Four Pillars of Investing second edition release. I hope alls well, no doubt in your position as an initial MDs neurologist position you’d have explored more health options as medical science has progressed.
Any of us can look back on the period discussed in this article and draw his or her own conclusions. Hell, I lived through it myself! A gifted historian can look at the same data and facts available to anyone, and craft an easily understood story which helps me to better grasp what happened and why, than I would have been able to figure out myself. I look forward to receiving the second edition of this book next week. As for the advice to “stop playing the game” once you have accumulated enough, and start shifting into safe assets, your final sentence hammers home why such an approach makes sense!
If it weren’t for human nature we’d all probably be rich…
On October 17, 2008, Warren Buffett published an op-ed piece in the New York Times. He pointed out the financial world was in terrible shape and that things didn’t look very rosy at all. He then went on to say he was buying American stocks in his own personal investment account. He had been holding bonds there, but went into stock because of this axiom which he has repeated many times over the years: “Be fearful when others are greedy, and be greedy when others are fearful.”
You didn’t even have to any math. Just read Buffett’s comments and dive in.
Great article from an investing legend. My favorite passage is the final one:
Safe assets can be thought of as a concentrate of courage. Despite their low yield, in the long run the fortitude they supply make them arguably the highest-returning assets in your portfolio.
A tour de force on long-term stock market investing. When I read The Four Pillars 20 years ago, I was too cocky and too arrogant to appreciate it. I get it now.
Excellent article! A very valuable reminder that equities can perform terribly for many years. That may work out well during the accumulation phase but possibly wreak havoc on retirement years. I think recency bias has too many retirees with a significant equity allocation that is based on a relatively quick bounce back. In my mid 60’s, I don’t have 10-20 years (possibly gut-wrenching years of continued declines) to wait for a recovery. These current healthy years are way too precious for that.
I am an absolute contrarian, and even I couldn’t bear to buy stocks on March 9, 2009.
However, even as markets start to recover, there are still good buys. I bought stocks in the second half of 2009, in 2010, and 2011. The valuations were still very favorable.
In the not too distant past, the SPY (iShares S&P 500 ETF) was at approximately $154 on 9/1/2000. After a long drop, it returned to 157 on or about 10/1/07, or 7 years later. Then the Great Recession/Panic of 2008, and another huge drop until it got back to 157 on or about 4/1/13. Thus, 13 years with zero returns for the buy and hold investor. Ever since, arguably because of almost zero interest rates, the market has gone up inexorably. For the dollar cost averager throughout those 13 difficult years, well, they made out like bandits.
On the other hand, a person who retired in 2000 and spent down SPY got savaged by DCA in reverse.
William Bernstein remains my favorite personal finance author. I preordered and read his new superb edition of The Four Pillars of Investing which updates his 20 year old classic. His historic knowledge is wide ranging and he dramatizes the implications of hitting a bad sequence of returns for far longer than we typically can anticipate. Dr. Bernstein’s quantitative background and instructional skills are impressive. In my opinion, no one better explains and demonstrates,(number geeks – read his The Intelligent Asset Allocator), the value and importance of diversification.
He appreciates the clear benefits of stock ownership (reward) despite the risks, and he emphasizes why some stock ownership is essential in an inflationary world. But in his latest edition, he feels compelled to emphasize how the worst 2% scenarios can overturn an entire lifetime investment plan if not prepared. Bill Bernstein explains why those who are approaching or have taken retirement, face the additional hurdle of little or no human capital to buffer extended equity losses. He brilliantly summarizes our future investment challenge at various life stages:
The main hazards on the “highway of riches,” the road that conveys wealth from your present self to your future self—you’ll need patience, cash and courage, and in that order.
Creating and sticking to an appropriate portfolio is his prescription, which he stresses can be easier said than done.
Thank you Dr. Bernstein for sharing this wise and wonderfully-written excerpt from the revised edition of your classic and essential book.
My courage to keep invested in stocks is due to having my retirement assets set up per Harold Evensky’s bucket portfolio. I have 10 years worth of portfolio withdrawals set up with two years of cash and eight years of bonds (mostly short term). Following his precepts I have ten years worth of courage set aside to allow any market decline to recover. If the markets at some point fail to recover within that timeframe I’ll find out what amount of true investing courage I have.
Buy This Book! As a fee-only investment advisor, I read the first edition of The Four Pillars of Investing, and realized it was the best investment book ever written for the individual investor. We bought a copy for all of our clients and highly recommended that they read it. I look forward to seeing what additional pearls of wisdom are in the second edition.
My father invested all during the 60s thru his death a few years ago. He proudly showed me his stock book with all the winners and losers. A buy and hold guy (except Apple!! :() He did ok. I had no idea the 70s were so rough for holding stocks. Unfortunately he lost his investment sense and put all his money in BAC and lost most of it in the 08 crash. Not sure how to evaluate all of this except the latter move. Thanks for a great article !
Jonathan, thanks for publishing this article. It’s a great reminder to investors to take the long term view, and prepare yourself for the inevitable downturns.
I (just barely) came of age in the 70s. I was slightly aware of how bad that decade was to investors, and how it negatively impacted my father’s health and wealth. Circumstances prevented him from taking advantage of the ensuing boom. I look forward to reading the new edition.
Excellent article to help us keep a long term perspective. It also reminded me of my own investing journey which began in 1976 when I graduated with a BS in Computer Science. My courses had included business economics and finance which introduced me to some investing concepts, the most influential to me being the power of compound interest over long time periods. My early experience with investing taught me many lessons. Fortunately I wised up fairly quickly and by the mid-1980’s was using mutual funds. One of those was Fidelity Magellan led by Peter Lynch which was a fortuitous selection. It was also in those early days that American Association of Individual Investors (AAII) came on the scene and I became a long-term subscriber to what proved to be a great source for investment education. Thanks for the stroll down memory lane.