6, Bill Gross from PIMCO (Pacific InvestmentManagement Company, Newport Beach, Calif.) also used this analysis to predict “Dow 5000” inSeptember 2002.8Robert Arnott and Cliff Asness disputed the claim that higher retained earnings means higher dividend growth and issued a pessimistic forecast in “Surprise! Higher Dividends = Higher EarningsGrowth,” Financial Analysts Journal, January/February 2003, pp. 70–87.9A simple example will illustrate the point. If the P-E ratio of the market is 15, then the earningsyield is 6.8 percent, which is also a prediction of its real return. If the dividend yield is set at 5 percent, then the accumulation of retained earnings will allow the rate of growth of real earnings pershare to be 1.8 percent per year. If the dividend yield is set at 2 percent, then the increase in per sharereal earnings will be 4.8 percent per year.
CHAPTER 8 The Impact of Economic Growth on Market Valuation and the Coming Age Wave
129
Factors That Impact Expected ReturnsWe have shown in Chapter 5 that the reduction in taxes on equity returndue to the reduction in marginal and capital gains tax rates and inflationhave added more than 2 percentage points to the return over the last halfcentury. This is substantially more than the increase in the after-tax return on fixed-income assets.But there has been a second significant factor increasing expectedreturn on stocks—the reduction in transactions costs. Chapter 1 confirmed that the real return on equity as measured by stock indexes was near7 percent in the nineteenth and twentieth centuries. But over the nineteenth century and the early part of the twentieth century, it was extremely difficult, if not impossible, for an investor to replicate the stockreturns calculated from these stock indexes.Charles Jones of Columbia University has documented stock trading costs over the last century.10 These costs include both the fees paid tobrokers and the “bid-asked spread,” or the difference between the buying and selling costs for stocks. His analysis shows that the average oneway cost to either buy or sell a stock has dropped from over 1 percent ofvalue traded as late as 1975 (before the deregulation of brokerage fees) tounder 0.18 percent today.The fall in transactions costs suggests that the price of obtainingand maintaining a diversified portfolio of common stocks, which is necessary to replicate index returns, could have easily cost from 1 to 2 percent per year over much of the nineteenth and twentieth centuries.Because of these costs, investors in earlier years purchased fewer stocksthan in an index and were less diversified, thereby assuming more riskthan implied by stock indexes. Alternatively, if investors attempted tobuy all the stocks, their real returns could have been as low as 5 percentper year after deducting transactions costs.The collapse of transactions costs over the past two decades meansthat stockholders can now acquire and hold a completely diversifiedportfolio at an extremely low cost.11 It has been well established that liquid securities—that is, those assets that can be sold quickly and at littlecost on short notice in the public market—command a premium overilliquid securities. Through most of the past two centuries, stocks werefar less liquid than today, and therefore they were sold at a significant10
Charles M. Jones, “A Century of Stock Market Liquidity and Trading Costs,” working paper, May23, 2002.11The cost of some index funds for even small investors is only 0.1 percent per year. See Chapter 20.
130
PART 2 Valuation, Style Investing, and Global Markets
discount to such safe and liquid assets as government bonds. As stocksbecome more liquid, their valuation relative to earnings and dividendsshould rise.12
The Equity Risk PremiumOver the past 200 years the average compound rate of return on stocksin comparison to safe long-term government bonds—the equity premium—has been between 3 and 31⁄2 percent.13 In 1985, economists RajnishMehra and Edward Prescott published a paper entitled “The Equity Premium: A Puzzle.”14 In their work they showed that given the standardmodels of risk and return that economists had developed over the years,one could not explain the large gap between the returns on equities andfixed-income assets found in the historical data. They claimed that economic models predicted that either the rate of return on stocks should belower, or the rate of return on fixed-income assets should be higher, orboth. In fact, according to their studies, an equity premium as low as 1percent or less could be justified.15Mehra and Prescott were not the first to believe that the equity premium derived from historical returns was too large. Fifty years earlierProfessor Chelcie Bosland of Brown University had stated that one ofthe consequences of the spread of knowledge of superior stock returnsin the 1920s as a result of Edgar Lawrence Smith’s contributions wouldbe a narrowing of the equity premium:Paradoxical though it may seem, there is considerable truth in the statement that widespread knowledge of the profitability of common stocks,gained from the studies that have been made, tends to diminish the likelihood that correspondingly large profits can be gained from stocks in thefuture. The competitive bidding for stocks which results from this knowledge causes prices at the time of purchase to be high, with the attendantsmaller possibilities of gain in the principal and high yield. The discountprocess may do away with a large share of the gains from common stock12John B. Carlson and Eduard A. Pelz, “Investor Expectations and Fundamentals: DisappointmentAhead?” Federal Reserve Bank of Cleveland, Economic Commentary, May 1, 2000.13This is based on the difference in compound, or geometric, average rates of return. The premium ishigher based on arithmetic average returns.14Rajnish Mehra and Edward C. Prescott, “The Equity Premium: A Puzzle,” Journal of Monetary Economics, vol. 15 (March 1985), pp. 145–162.15Mehra and Prescott used the Cowles Foundation data going back to 1872. In their research, theydid not even mention the mean reversion characteristics of stock that would have shrunk the equitypremium even more.
CHAPTER 8 The Impact of Economic Growth on Market Valuation and the Coming Age Wave
131
investment and returns to stockholders and investors in other securitiesmay tend to become equalized.16
More Stable EconomyThere is much literature that attempts to justify the 3 to 31⁄2 percent riskpremium found in the historical data in the context of standard macroeconomic models.17 Some of these are based on very high aversion by individuals to lowering their consumption. Others are based on themyopic behavior of those who dislike taking short-term losses on theirinvestments even when they have substantial long-run gains.Even if we assume that the historical level of the equity risk premium is justified, there is a reason why that premium might narrow inthe future: increasing stability of the real economy.Examine Figure 8-2, which displays the changes in U.S. industrialproduction since 1884. One can see a major reduction in economicvolatility over time, particularly after the Great Depression and againfollowing 1980. Furthermore, by examining industrial production alone,one may underestimate the reduced volatility of the entire economy because of the increase in the importance of the more stable service sector.The swings in the GDP have also become more muted. Recessionshave become shorter and milder and expansions longer. The last economic expansion in the United States lasted a record 10 years fromMarch 1991 to March 2001. Economic expansions in Europe have lastedeven longer: the last recession in the United Kingdom ended in 1995 andmuch of the Eurozone has been recession free for more than a decade.Economists call this trend toward greater macroeconomic stability“The Great Moderation.”18 The moderation has been attributed to bettermonetary policy; a larger service sector, which is inherently more stablethan the goods sectors; and better inventory and production control, enabled in part by the information revolution.Whatever the reasons, greater macroeconomic stability should leadto greater stability of earnings and a lower equity premium. The lower16
Chelcie C. Bosland, The Common Stock Theory of Investment, New York: Ronald Press, 1937, p. 132.See Jeremy Siegel, “Perspectives on the Equity Risk Premium,” Financial Analysts Journal, vol. 61,no. 1 (November/December 2005), pp. 61–73. Reprinted in Rodney N. Sullivan, ed., Bold Thinkingon Investment Management, The FAJ 60th Anniversary Anthology, Charlottesville, Va.: CFA Institute,2005, pp. 202–217.18James H. Stock and Mark W. Watson, “Has the Business Cycle Changed and Why?” NBER Macroeconomics Annual, 2002, pp. 159–218.17
132
PART 2 Valuation, Style Investing, and Global Markets
FIGURE
8–2
Monthly Percentage Change in Industrial Production, 1884 through December 2006
the equity premium, the higher will be the valuation of stocks relative toeconomic fundamentals, such as earnings and dividends. In this morestable economic environment, firms may wish to boost their earnings byincreasing their leverage, using lower-cost debt to substitute for highercost equity.19
New Justified P-E RatiosWhat do all these favorable developments mean for the stock market?First, they mean that the average historical P-E ratio of 15 may no19
Lower economic volatility also means that labor income has become more predictable and workers can be persuaded to put a larger share of their savings in riskier assets such as equities. This isbecause workers will not need to accumulate as many fixed-income assets to protect themselves incase unemployment arises, which will also have a favorable impact on equity prices. See JohnHeaton and Deborah Lucas, “Portfolio Choice in the Presence of Background Risk,” Economic Journal, vol. 110 (January), pp. 1–26.
CHAPTER 8 The Impact of Economic Growth on Market Valuation and the Coming Age Wave
133
longer be appropriate in today’s market. If the real risk-free rate of interest on long-term TIPS bonds is 2 percent, then a 3 percent equity premium will yield a 5 percent real return on equities, equivalent to aprice-to-earnings ratio of 20. If the equity premium shrinks to 2 percent,then the price-to-earnings ratio can rise to 25 to yield a 4 percent real,forward-looking return on equities. If the real risk-free rate rises to 3percent, the real return on equities will be 5 percent with a 2 percent riskpremium, implying a P-E ratio of 20. Therefore, if inflation stays low,the tax policy remains favorable for equities, and the business cycle remains muted, one can justify price-to-earnings ratios in the low 20s forthe equity market.
THE AGE WAVEInflation, tax policy, macroeconomic stability, and the drop in transactions costs are important factors influencing the valuation of equities.But looking into the future, there is one factor that is apt to be even moreimportant: the age wave.The reality is that the United States and the rest of the developedworld stand at a precipice. Over the next two decades, nearly a quarterbillion Americans, Europeans, and Japanese—members of the prosperous baby-boom generation that was born following World War II—willleave the labor force. Many are expecting a long and comfortable retirement by relying on government and private pension plans as well as taxsupported medical services.But unless we can exploit the dramatic demographic and economics changes that lie before us, our future may be much poorer. Instead ofstepping into an easy retirement, many retirees will tumble into a retirement marked by bankrupt government social programs and decliningasset values that will quickly deplete their cherished nest eggs.This forecast is not based on an unpredictable future but on eventsthat have already transpired. Aside from immigration, we know almostexactly how many people over the next 20 years are going to reach theworking age of 20 and the retirement age of 65. “Demography,” as thegreat management sage Peter Drucker once remarked, “is the future thathas already happened.”20
20
This quote was the title of Peter F. Drucker’s Harvard Business Review (HBR) article published inHBR’s September 1997 edition marking its seventy-fifth anniversary year. Drucker’s article waspart of the journal segment “Looking Ahead: Implications of the Present.”
134
PART 2 Valuation, Style Investing, and Global Markets
Demography Is DestinyThe latest data from the U.N. Demographic Commission, displayed inFigure 8-3, show clearly the aging of the developed world. In the UnitedStates in 1950 there were seven people of working age (20 to 65) forevery retiree, and even today, there are almost five. But by 2030, whenthe last of the baby-boom generation retires, that ratio will fall by nearlyone-half, down below three to one.The aging of the population in Europe and Japan is even more extreme than in the United States. In Japan by midcentury, the ratio ofworkers aged 20 to 65 to retirees will fall to just over one for one. At thattime the most populated five-year age segment in Japan will be thoseaged 75 to 80, and the same will be true in such European countries suchas Italy. The demands of the retirees from Europe and Japan will raisethe prices of goods bought and sold in international markets, so there isno way the United States, despite its younger population, can shield itself from the demands arising from the aging populations abroad.
FIGURE
8–3
Ratio of Population Aged 20 to 65 to Population Aged 65 and Over10987
PAST
FUTURE
6United States
54
Europe32.72Japan21.801.2911950
1960
1970
1980
1990
2000
2010
SOURCE: Data obtained from the U.N. Demographic Commission.
2020
2030
2040
2050
CHAPTER 8 The Impact of Economic Growth on Market Valuation and the Coming Age Wave
135
The Bankruptcy of Government and Private Pension SystemsAlthough it is widely known that our Social Security and Medicare programs are threatened by these demographic trends, there are many whobelieve that they have accumulated sufficient private wealth to fundtheir retirement.But this may not be so. The same crisis that strikes the public pension programs can overwhelm private pensions as well. Since there willnot be enough workers earning income, there will not be enough savings generated to purchase the assets the retirees must sell to financetheir retirement.The reasons why retirees cannot turn their savings into consumption is because the assets of wealth can be transformed into goods andservices only if they are sold to those willing to defer their consumption.In a modern economy, wealth does not represent “stored consumption,”such as a cache of acorns that squirrels bury to bide them through a longwinter. You cannot consume your stock certificates but must sell them tosomeone else who wants a chance to consume at a later date. If there is ashortage of these savers, this may cause a long and painful bear marketin stocks, bonds, and real estate that will leave retirees with insufficientassets to enjoy retirement.There are some who maintain that so much wealth in stocks ispassed on through bequests that the lack of demand from future workers will not have much impact. But the heirs and foundations who arebequeathed these fortunes often spend their wealth far faster than didtheir wealthy benefactors, and this spending often requires the sale ofsubstantial stock. Furthermore, the large volume of bank accounts,bonds, and other fixed-income securities that must be liquidated to finance the retirements of ordinary retirees could sharply raise interestrates and depress equity prices.
Reversal of a Century-Long TrendWithout enough demand and too much supply, asset prices will sinkand the long-standing trend to an earlier retirement will be halted deadin its tracks. When Social Security was passed in 1935, the average retirement age was 69. That age fell to 67 by 1950, and to 62 today. In 2003,for the first time, more Americans chose the reduced Social Security benefits at age 62 than the full benefit that starts at 65. Despite improvinghealth, surveys indicate that the bulk of Americans and Europeans wantto retire earlier, not later.
136
PART 2 Valuation, Style Investing, and Global Markets
But that will not be possible. Because of our aging population, it ismost likely that future increases in the age of retirement will actually exceed the increase in the life expectancy and will cause—for the first timein history—an absolute reduction in the number of years in retirement.
The Global Solution: An Opportunity to Make a TradeThere is no easy solution. To be sure, rising productivity brings higherincome, but it also brings higher benefits in retirement since benefits arebased on income earned in the last several working years. Increased immigration of high-income workers would ease the situation, but thenumbers would need to be prodigious to keep the retirement age fromrising.Nevertheless, there is a solution that can help aging economies. Thedeveloping world has a much younger age profile than the developedworld. This difference in age establishes an opportunity to make a trade:goods produced by the younger developing world can be exchanged forassets of the older developed world.This trade is not new. The transfer of goods for assets has takenplace throughout history, first between family members (parents givingto children in exchange for old-age support), and then extending toclans, communities, and finally whole nations. Soon it can be done on aworldwide basis. The developing world has the capability of simultaneously providing us with goods and acquiring our assets, filling the gapleft by our aging workers.I call this the “Global Solution” to the age wave. How effective thissolution will be depends on two factors: the growth rate in the developing world and the degree to which world trade and capital markets arekept open. The average retirement and life expectancy in the UnitedStates since 1950 and projections that I have made to 2050 are shown inFigure 8-4. Note how crucial the growth rate of the developing world isto future retirees. If the growth in the developing world grinds to a halt,the lack of goods will force the retirement age up to 75, and it will shrinkthe time in retirement to less than 8 years from nearly 16 today. If thegrowth rate rises to 2 percent, which is slightly below the rate in the developed world, this will improve matters somewhat, but if growth canproceed at 4 percent or faster, the effect on the retirement age is dramatic.An overall average growth rate of the developing world of 4 percent is highly likely. China has been growing at 8 to 10 percent for morethan 20 years, and India is nearing that rate. Most certainly, as thesecountries grow richer, their growth rates will slow. Africa and the
CHAPTER 8 The Impact of Economic Growth on Market Valuation and the Coming Age Wave
FIGURE
137
8–4
Average Retirement and Life Expectancy in the United States Since 1950 and Projected to 2050
Mideast, outside of oil, have not been growing rapidly. If the entire developing world increases its growth to 6 or even 8 percent, then therewould be sufficient productivity in the rest of the world to provide thegoods that the baby boomers need and then buy the assets the boomerswill have to sell; the retirement age can remain at 62 or even decline, continuing its pattern over the past century.
Attraction of U.S. CapitalWhy would the developing world wish to acquire our capital when theircountries are expanding so rapidly? At the beginning of this chapter, welearned that the best returns are rarely found in countries that grow thefastest. Witness China’s dismal returns for so many years despite beingthe fastest-growing country in the last 20 years. Investors can often findbetter returns in slow-growing countries and industries.To that end, U.S. capital markets have many attractive attributes.Our country is still viewed as the fountainhead of innovation, discovery,invention, and entertainment, and our institutions of higher educationare second to none. Our capital markets are deep, easy to access, and
138
PART 2 Valuation, Style Investing, and Global Markets
willing to provide capital to those who wish to innovate. Equally important is that many U.S. brand names have great appeal worldwide so thegrowth of consumer markets abroad holds high promise for many U.S.firms.For these capital movements to occur, we must be viewed as receptive to international capital. Although there has already been a largenumber of cross-country mergers, there has also been increasing opposition, such as the Congressional rebuff of the Chinese National OffshoreOil Company’s (CNOOC) bid for Unocal and the Dubai Ports fiasco. Furthermore, some indicate that London is already replacing New York asthe world’s financial capital. The United States cannot rest; resisting theseglobalizing trends will lower our future returns and living standards.
CONCLUSIONIn this chapter we have shown that faster economic growth in no wayguarantees higher returns. In fact, based on the historical data, slowgrowing countries, because of their more reasonable valuations, havetended to have higher returns than fast-growing countries.Higher stock returns follow periods of low price-to-earnings ratios,and lower stock returns follow high price-to-earnings ratios. Althoughthe historical average price-to-earnings ratio is about 15, there are persuasive reasons why future valuation measures may be higher. Lowertransactions costs, lower taxes, and increased economic stability arguefor higher ratios in the future, although this will ultimately mean lowerfuture stock returns if share prices reach these higher levels. Althoughthese returns may be diminished from the past, there is overwhelmingreason to believe stocks will remain the best investment for all thoseseeking steady long-term gains.In the far future, the aging of the population is a critical issue impacting financial market returns. We cannot escape from our demographic realities. But we can take actions that will lead to a muchbrighter outcome. The integration of the world’s economies and capitalmarkets is the key to our future well-being. If we shun this path, our future will in no way be as bright as our past.
9
CHAPTER
OUTPERFORMING THE MARKETThe Importance of Size,Dividend Yields, andPrice-to-Earnings RatiosSecurity analysis cannot presume to lay down general rules as to the“proper value” of any given common stock. . . . The prices of commonstocks are not carefully thought out computations, but the resultantsof a welter of human reactions.B E N J A M I N G R A H A M A N D D AV I D D O D D , 1 9 4 0 1
STOCKS THAT OUTPERFORM THE MARKETWhat criteria can investors use to choose stocks with superior returnsthat will outperform the market? Earnings, dividends, cash flows, bookvalues, capitalization, and past performance, among others, have beenput forward as important factors for investors to consider.1
Benjamin Graham and David Dodd, “Price Earnings Ratios for Common Stocks,” Security Analysis, 2d ed., New York: McGraw-Hill, 1940, p. 530.139
Copyright © 2008, 2002, 1998, 1994 by Jeremy J. Siegel. Click here for terms of use.
140
PART 2 Valuation, Style Investing, and Global Markets
Yet finance theory has shown that if capital markets are “efficient”in the sense that known valuation criteria are already factored intoprices, investing on the basis of these fundamentals factors will not improve returns. In an efficient market, only higher risk will enable investors to receive higher returns. The capital asset pricing model (CAPM)has shown that the correct measure of a stock’s risk is the correlation ofits return with the overall market, known as beta.2,3Beta can be estimated from historical data, and it represents thefundamental risk of an asset’s return that cannot be eliminated in a welldiversified portfolio and for which investors must be compensated. Ifbeta is greater than 1, the stock requires a return greater than the market,and if it is less than 1, a lesser return is required. Risk that can be eliminated through diversification (called diversifiable or residual risk) does notwarrant a higher return. The “efficient market hypothesis” and theCAPM became the basis for stock return analysis in the 1970s and 1980s.Unfortunately, as more data were analyzed, beta did not prove successful at explaining the differences in returns among individual stocksor portfolios of stocks. In 1992, Eugene Fama and Ken French wrote anarticle, published in the Journal of Finance, which determined that thereare two factors, one relating to the size of the stocks and the other to thevaluation of stocks, that are far more important in determining a stock’sreturn than the beta of a stock.4After further analyzing returns, they claimed that the evidenceagainst the CAPM was “compelling” and that “the average returnanomalies . . . are serious enough to infer that the [CAPM] model is nota useful approximation” of a stock’s return, and they suggested researchers investigate “alternative” asset pricing models or “irrationalasset pricing stories.”5
2
The capital asset pricing model was developed by William Sharpe and John Lintner in the 1960s.See William Sharpe, “Capital Asset Prices: A Theory of Market Equilibrium under Conditions ofRisk,” Journal of Finance, vol. 19, no. 3 (September 1964), p. 442, and John Lintner, “The Valuation ofRisk Assets and the Selection of Risky Investment in Stock Portfolios and Capital Budgets,” Reviewof Economics and Statistics, vol. 47, no. 1 (1965), pp. 221–245.3Greek letters are used to designate the coefficients of regression equations. Beta, the second coefficient, is calculated from the correlation of an individual stock’s (or portfolio’s) return with a capitalization-weighted market portfolio. The first coefficient, alpha, is the average historical return onthe stock or portfolio above the return on the market.4Eugene Fama and Ken French, “The Cross Section of Expected Stock Returns,” Journal of Finance,vol. 47 (1992), pp. 427–466.5Eugene Fama and Ken French, “The CAPM Is Wanted, Dead or Alive,” Journal of Finance, vol. 51,no. 5 (December 1996), pp. 1947–1958.
CHAPTER 9 Outperforming the Market
141
Fama and French’s findings have prompted financial economists toclassify the stock universe along two dimensions: size, measured by themarket value of the stock, and valuation, or the price relative to “fundamentals” such as earnings and dividends. The emphasis on valuation togain an investment edge did not originate with Fama and French. Valuation formed the cornerstone of the principles that Benjamin Grahamand David Dodd put forth more than 70 years ago in their investmentclassic Security Analysis.6
SMALL- AND LARGE-CAP STOCKSCracks in the capital asset pricing model’s predictions of stock returnsappeared well before Fama and French’s research. In 1981, Rolf Banz, agraduate student at the University of Chicago, investigated the returnson stocks using the database that had been recently compiled by theCenter for Research in Security Prices (CRSP) located at the university.He found that small stocks systematically outperformed large stocks,even after adjusting for risk as defined within the framework of the capital asset pricing model.7To illustrate this point, the returns from 1926 through 2006 on 10groups of 4,252 stocks sorted by market capitalization are shown inTable 9-1. The largest 168 stocks comprising 61.64 percent of total marketvalue had a compound annual return of 9.60 percent, and even thoughthe beta of these stocks was less than 1, the return trailed the CAPM prediction. On the other hand, smaller stocks had a higher beta, but their return increased more than predicted by the CAPM. The smallest 1,744companies—each of which had a market value less than $314 millionand comprised less than 11⁄2 percent of the market capitalization of allstocks—had a compound return of 14.03 percent, which was 627 basispoints above what would have been predicted by the CAPM.8Some maintain that the superior historical returns on small stocksare compensation for the higher transaction costs of acquiring or disposing of these securities, especially in the earlier years of the sample. Butfor long-term investors, transactions costs should not be of great importance. The outperformances of these small stocks, although variable,6
Benjamin Graham and David Dodd, Security Analysis, 1st ed., New York: McGraw Hill, 1934.Rolf Banz, “The Relationship between Return and Market Value of Common Stock,” Journal of Financial Economics, vol. 9 (1981), pp. 3–18.8These data are adapted from Stocks, Bonds, Bills, and Inflation (SBBI) 2007 Yearbook, Chicago: Morningstar Publications, Chap. 7.7
142
PART 2 Valuation, Style Investing, and Global Markets
TABLE
9–1
Returns on 10 Groups of 4,252 Stocks Sorted by Market Capitalization, 1926 through December 2006
have persisted over time and are difficult to explain in an efficient market model.
Trends in Small-Cap Stock ReturnsAlthough the historical return on small stocks has outpaced large stockssince 1926, the magnitude of the small-cap stock outperformance haswaxed and waned unpredictably over the past 80 years. A comparisonof the cumulative returns on small stocks with those of the S&P 500Index is shown in Figure 9-1.9Small stocks recovered smartly from their beating during the GreatDepression, but they still underperformed large stocks from the end ofWorld War II until almost 1960. In fact, the cumulative total return onsmall stocks (measured by the bottom quintile of market capitalization)did not overtake large stocks even once between 1926 and 1959. Even bythe end of 1974, the average annual compound return on small stocks exceeded large stocks by only about 0.5 percent per year, not nearly enoughto compensate most investors for their extra risk and trading costs.But between 1975 and the end of 1983, small stocks exploded. During these years, small stocks averaged a 35.3 percent compound annualreturn, more than double the 15.7 percent return on large stocks. Cumulative returns in small stocks during these nine years exceeded 1,400 percent. Figure 9-1 shows that if the nine-year period from 1975 through9The small-cap stock index is the bottom quintile (20 percent) size of the NYSE stocks until 1981,then it is the performance of Dimensional Fund Advisors (DFA) Small Company fund from 1982through 2000, and then it is the Russell 2000 Index from 2001 onward.
CHAPTER 9 Outperforming the Market
FIGURE
143
9–1
Small Stocks and S&P 500 Returns,