Roger Ibbotson - Why Isn’t Everyone Rich? | #651

Roger Ibbotson (0:00)

Yes, $1 completely reinvested, actually did grow to $14,751.

So yes, it did grow to a tremendous amount. The answer is most people don't reinvest, they actually consume. It was 20% drop in one day, but actually for the year, the total return in 1987 was a slightly positive number. Most people in their lifetime are going to get hit badly at some point in these markets. They forgot about the risk after the 1920s, and then they got hit by the 1930s. The CAPE ratios would basically say the markets are way overvalued today. But they also said that in the mid-90s, I definitely recommend young people go 100% in stocks on their investment portfolio.

Meb Faber (0:42)

What's up, everybody? My guest today built the numbers, the entire industry quotes for long-term returns, data going back to 1926

My guest is none other than Roger Ibbotson, finance professor at the Yale Bulldogs for four decades, founder of Ibbotson Associates, Chairman of Zebra Capital. Roger, welcome to the show.

Roger Ibbotson (1:03)

Great to be here.

Meb Faber (1:04)

I love the title to this book because it's something that it's hard for humans, especially young people, to think out in terms of decades and think of these very large numbers. But, you know, we talk about a dollar a hundred years ago worth 15,000 in large caps, another 32,000 in small caps. But the natural question is, why isn't everyone rich?

It seems so easy to do, just save a little money, make a little money, save a little money, invest, put it away, voila.

Roger Ibbotson (1:34)

The book I have is exponential wealth, Centuries of Stock and Bond Returns. It's one dollar without any taxes or fees or anything and completely reinvested. It actually did grow to 14,751. So yes, it did grow to a tremendous amount. But there are several reasons why everybody is not rich here. First of all, most people don't reinvest, they actually consume.

So if you consume part of this, you're going to get this same exponential here. It's going to be a much lower number. Then of course, there are taxes to be paid, and fees to be paid and transaction costs and so forth. So this is actually quite difficult to obtain. But I will say, there's no alpha in here. We're just talking about buying the whole market. We're not talking about trying to pick the great stocks or anything.

I guess you're buying all the stocks here. So it's achievable in that sense.

Meb Faber (2:36)

One of the things I wanted to mention, you know, small caps, over the full history, there is that little out performance. For the better part of, I don't know, this last cycle, they've kind of been in the background. But here we are again, 2026 We're getting a little small cap mojo. What was kind of the main takeaway as you were thinking about building this 50 years ago, extending it today, thinking about these different assets, because you have that most iconic chart, right?

It's large cap stocks, small caps, bonds, bills, inflation.

Roger Ibbotson (3:11)

Essentially, you can see the dark blue line. A dollar invested in large cap stocks had 10.1% return, growing to that 14,751.

Small caps did even better. And just a little extra, it's less than 1% better, actually, it turns out. But that makes a big difference exponentially. A lot of the big money at the end is created at the end. You'll note, and of course, in your charts too, in your book, these are logarithmic. We have logs on the side. That's a log scale. Anytime you look at a long period of time, you really have to look at a log scale because otherwise, it just looks like a graph that runs along the bottom and shoots up way at the end. But once you put it in log scale, the slope is the return. We did this in total returns.

By the way, the notion of total returns is pretty new because people were not reporting total returns. Even when I first did this in the 1970s, and it first really started to measuring total returns with the Fisher-Lorry studies that were also at the University of Chicago, and they were the ones who actually set up the Center for Research and Security Prices originally. And so recognizing that this is what corporations are actually earning, that's what they're actually supplying effectively, total returns. It's true that we as individuals are going to consume part of this. So we're not going to get the full total return unless we reinvest all of it and keep our costs very, very low.

Meb Faber (4:49)

When you were talking about this 50 years ago, what were the biggest kind of media practitioner academic reactions as people kind of digested this information that might have been a little new? Because you got to remember the start of this study, people would talk about the Dow, they were talking about it in price terms. Like what a strange way to do an index. And here you are talking about total returns, talking about real returns, on and on.