Wharton professor Jeremy Siegel has received a lot of attention for his scathing criticism of the Federal Reserve recently, but that’s not why he’s famous. His 1994 book, “Stocks for the Long Run,” chronicles nearly 200 years of investing in stocks and bonds, and contains groundbreaking research into the long-term performance of stocks versus stocks. bonds and the effect of inflation on both of those investments. Siegel’s work is one of the few books in the last 30 years (including “A Random Walk Down Wall Street” by Burton Malkiel, “Winning the Losers’ Game” by Charles Ellis and “Italy” mutual fund” by Jack Bogle) has become an investment classic. Professor Siegel is back with the 6th edition of his book, completely updated with new data on the long-term performance of stocks and bonds, and brand new chapters on real estate returns. (considering fifty-year REITS), factor and ESG investing, indexing versus active investing, and optimal stock/bond allocation. The book is co-authored with Jeremy Schwartz, global chief investment officer at WisdomTree. I spoke with Professor Siegel from his home in Philadelphia. The excerpts below have been edited for length and clarity. See the full interview above. It’s been eight years since the last publication of “Stocks for the Long Distance”. Why do you feel the need to update the book? Why well, think about how much has happened. I mean, the great bull market since the financial crisis… I wrote my last post just a few years after the crisis… A lot of questions popped up. And this is the biggest revision I have. There are five new chapters in it. There are many additions of elements. I added real estate profits. talking about bitcoin, just to mention some of the new entries in the book. As in previous versions, you conclude that real (inflation adjusted) returns on stocks remain at 6.7% a year, about 10% or so excluding inflation. adjust. I think the bottom line here is that in the long run, stocks tend to outpace inflation. Sure. Despite all the ups and downs, and the bear market we’ve been through over the past 30 years, the actual returns on stocks are exactly the same, which is truly remarkable. And second, as you pointed out, not only do stocks tend to outpace inflation in the long run, but they also outpace inflation entirely. They have a hard time when the Fed is tightening. We see that now. But once that tightening is in place, once the normalization returns, they make up the lost ground and go back to that long-term trend. The problem here right now is that inflation is suddenly so high as it was in the 1970s. Stocks can underperform during periods of sudden inflation. And how do you overcome that? What do you do about that? Well, actually when the Fed tightens and raises real interest rates, all assets fall in price. Looking at bonds, stocks, real estate started to go down. No question about that. And in fact, many items are now going down. I mean, the fundamental theorem of finance is that the value of any asset is the present value of all its cash flows, discounted by the interest rate. When the Fed raises interest rates, all those assets go down. So unless you can time the market, there’s nowhere to hide. And this moves on to the next question of indexing and maintaining low-cost index funds. Would you say the evidence is as compelling as ever? A recent S&P SPIVA study concluded that 90% of large-cap managers are underperforming by their standards 10 years on. Bob, not only is the evidence still there, it’s more convincing than when I wrote the first edition of the book. The percentage of funds that can beat the S&P 500 has dwindled over time. Some pick better stocks, but when fees are included, indexing is better than ever. Why so? What accounts for this persistent poor performance? Charlie Ellis once said it’s not because active managers are stupid. They are really good. They are just competing with other active managers and they have no informational advantage. That is a very important reason. But the other is the cost. I mean, now that you can get an index fund that charges three or four basis points, an active fund can be 60 to 100 basis points. When expenses are deducted, you are behind the index fund. What about style or investment factor? Academic research has suggested that some investment styles such as small cap, value or momentum perform better in the long run. What is your conclusion? There are literally dozens of elements that people have found. But one thing that strikes me as a surprise, and is not in the literature, is that almost all of those factors stopped working in 2006, just before the Financial Crisis. What about growth versus value? There seem to be 25-year cycles when growth actually outperforms value, and I think we’ve just been through one of them. Amazon, Microsoft, Apple, of course, but we see that in the long run, those stocks don’t keep up the momentum. Has something happened since 2006 that caused this problem? I think a couple of things happened, first of all the Financial Crisis that crashed the banks and they’re value stocks. And of course, what we’ve seen over the last 15 years is unprecedented growth in big tech stocks. We’ve never seen a period in history where stocks that didn’t even exist 10 to 15 years ago suddenly became the biggest market cap stocks. How about ESG: Environment, Society and Governance. What do you think of it as an investment style? The first thing I did was compare them to Milton Friedman fifty years ago, who said that what CEOs should do is make the most money and ignore society. Well, what we found is that if you do it well, you can do it too. For example, you can charge more for organically grown food and make a profit. It doesn’t necessarily contradict that by doing well. Certainly things like diversity and the social part of that become hard to define. I share some doubts about everyone trying to be diverse or managing society in exactly the right way to fit the model. But the truth of the matter is that investing in ESG doesn’t necessarily mean you’ll underperform the market. What about the optimal stock/bond allocation? Last year at this time everyone said the 60/40 stock/bond allocation was dead forever. Now bond yields are rising. My feeling is that you should switch to a 75/25 or 80/20 stock/bond portfolio. There has been a very pronounced drop in international real (inflation-adjusted) yields, meaning you won’t get the post-inflation rate of return on bonds that you used to. Still, stock valuations are much more stable. Now, I know yields have risen sharply. And some people have said, “My goodness is 4% yield on bonds (2 years), does that sound good?” Remember that’s 4% before inflation, let’s take that and compare it to the stock’s real long-term return, which is 6.7% after inflation. Tell me where you want to be. Is there any reason to expect that returns over the next decade or so may be lower? Stanley Druckenmiller said he wouldn’t be surprised if Dow Industrials remained the same 10 years from now. I don’t think 10 years from now the Dow won’t change. I mean, we could go through a recession. I talked about the big currency explosion [that the Fed created] but that basically increases the price of everything. And as we said at the beginning of this interview, stock is a claim to real property, a claim to land and capital, intellectual property, copyright, plant equipment. Those will increase with inflation. Really, I think the Dow will stay the same 10 years from now. You have a new chapter on new real estate data, looking back 50 years. I will have real estate in my portfolio. I will definitely have a REIT and as you know, S&P added that it is the 11th sector of the market. What about home ownership? You should own your home… But don’t forget the real estate market and all commercial real estate. One reason REITs have been doing really well since the pandemic is because they don’t have large ownership rights to some of those commercial buildings. Lots of hot warehouse datacenters, stuff like that, they did very, very well. Professor, thanks for joining us on CNBC Pro.