TOTAL REAL RETURNS
The focus of every long-term investor should be the growth of purchas-
ing power—that is, monetary wealth adjusted for the effect of inflation.
Figure 1-4 shows the growth of purchasing power, or total real returns,
in the same assets that were graphed in Figure 1-1: stocks, bonds, bills,
and gold. These data are constructed by taking the dollar returns and
correcting them by the changes in the price level shown in Figure 1-3.^14
The growth of purchasing power in equities not only dominates all
other assets but also shows remarkable long-term stability. Despite ex-CHAPTER 1 Stock and Bond Returns Since 1802 11
FIGURE 1–4
Total Real Return Indexes, 1802 through December 2006(^13) Ironically, despite the inflationary bias of a paper money system, well-preserved paper money
from the early nineteenth century is worth many times its face value on the collectors’ market, far
surpassing gold bullion as a long-term investment. An old mattress found containing nineteenth-
century paper money is a better find for an antiquarian than an equivalent sum hoarded in gold bars!
(^14) Total returns are graphed on a ratio, or logarithmic scale. Economists use this scale to graph virtu-
ally all long-term data since equal vertical distances anywhere in the chart represent equal percent-
age changes in return. As a result, a constant slope represents a constant after-inflation rate of return.