Investing

New research going back 120 years backs up Warren Buffett's simple advice for investing

Key Points
  • Data released by the Credit Suisse Research Institute showed that equities have provided an annualized real return of 5.2% since 1900, compared to 2.0% for bonds and 0.8% for Treasury bills.
  • In a recent interview with CNBC, 89-year-old Berkshire Hathaway CEO Buffett said he had been a net buyer of stocks every year since he was 11, a period which has seen 14 U.S. presidents.

Equities have outperformed bonds, bills, currency and inflation around the world over the last 120 years, new research has found, supporting the investment methodology touted by prominent industry names such as Warren Buffett.

Data released earlier this week by the Credit Suisse Research Institute, in collaboration with professors from London Business School and Cambridge University, showed that equities have provided an annualized real return of 5.2% since 1900, compared to 2.0% for bonds and 0.8% for Treasury bills.

The study, which analyzed 23 countries in three different regions, demonstrated that the terminal wealth from investing in stocks would have been 165 times larger than from bills by the end of 2019.

In a recent interview with CNBC, 89-year-old Berkshire Hathaway CEO Buffett said he had been a net buyer of stocks every year since he was 11, a period which has seen 14 U.S. presidents.

"There have been seven Republicans after that and seven Democrats and I have bought stocks under every one of them," Buffett told CNBC's Becky Quick on Monday.

"I haven't bought stocks every day, there have been a few times I felt stocks were really quite high, but that is very seldom."

It is this approach that led the "Oracle of Omaha" to cheer the current market sell-off triggered by the coronavirus outbreak, suggesting that it presents an opportunity to buy cheap stocks with good long-term prospects.

"Just like being a net buyer of food — I expect to buy food the rest of my life and I hope that food goes down in price tomorrow," he added.

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Warren Buffett: I've been a net buyer of stocks every year since I was 11

Over the last decade, global equities have provided an annualized real return of 7.6% compared with a real return of 3.6% from bonds.

The authors of the report, Cambridge University's Elroy Dimson and London Business School's Paul Marsh and Mike Staunton, estimate that the equity risk premium will be 3.5% in the years ahead. An equity risk premium is the excess return derived from investing in the stock market over a risk-free trade, as a measure of compensation for the higher risk taken in equity investments.

This is slightly lower than the historical figure of 4.3% but still implying that equity investors could double their money relative to short-term government bills over 20 years.

The Credit Suisse report also highlighted that real returns tend to be lower across all assets in low real interest rate environments.

With real interest rates around zero, the expected return on stocks is equivalent to the equity risk premium, and therefore the authors suggested that investors take a "realistic view" of likely future asset returns.

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