When finance professor Jeremy Siegel of the Wharton School at
the University of Pennsylvania published Stocks for the Long
Run in 1994 (Irwin Professional Publishing), he found himself
getting booked on the lecture trail, called on for magazine and
newspaper articles, and taking stands on various stock market
debates of the day. Inevitably, he found himself asked, “Okay,
stocks for the long run, fine. But which stocks?” Another question
persisted as well: “What happens when the baby boomers retire?”
In his new book, The Future for Investors: Why the Tried and
the True Triumph Over the Bold and the New (Crown
Business/Random House, 2005), Siegel answers those questions and
does a lot more. He engages the big questions of the day and of the
age: The nature of civilization and prosperity, the future of
Social Security (with solutions), the direction of the U.S. and
world economy, and the meaning of contemporary demographics. He has
written it with a gift for storytelling, phrasemaking, and clear
explanation that should drive most financial writers and
journalists to fits of envy.
And he has based it, as he did his earlier book, on statistical
exploration of striking originality.
As before, Siegel emphasizes long term investing — very long
term, 50 years for the most part. That means “buy and hold”
investing, not stock jockeying, day trading, momentum buying, or
hedging. That means “value investing.” That means reinvesting
dividends.
SIEGEL’S FIRST BOOK GREW out of a long-term project to reconcile
stock market returns in the United States back to 1803. Before
Siegel, U.S. stock returns before the beginning of the last century
could not be compared to present-day returns. Now, because of the
professor’s work, the long-term average total return of U.S.
equities — just short of 7 percent — has been dubbed “Siegel’s
Constant.”
For the present book, Siegel compiled the individual total
return performance of all stocks in the Standard & Poor’s 500
from the Index’s start in 1957 to 2003. (The Index is constantly
renewed by the addition of new firms and the dropping of old ones.)
He and his students, generously credited, broke down this
gargantuan data set into several imaginary portfolios and into five
quartiles of performance. Short result: “The original firms
outperformed the newcomers.”
Among the dozens of subsidiary conclusions drawn, these stand
out: The constant addition of higher-growth companies to the Index
tends to overprice the Index and drive down its total returns.
Earnings growth does not translate to investor returns. Of all
factors, reinvestment of dividends creates the largest portion of
investor returns. High capital expenditures characterize
low-performing companies, while companies stingy with capex tend to
outperform the market.
Okay, ho-hum, say the oldsters among us: Buy low price-earnings
ratio (PE) companies that pay dividends, what else is new? Plenty.
Apply that cookie-cutter standard, and what companies might you
have bought and held from 1957 onwards, even to the present day?
Not Philip Morris, most likely, the top-performing company in terms
of investor return in the S & P 500, with an annual total
return to investors of 19.75%. And not Tootsie-Roll Industries, at
16.11%.
ONE HATES TO MOVE ON from so rich a base of statistical insight,
but there’s more. Siegel’s chapters on The Growth Trap and Capital
Pigs mightily challenge the market’s eternal fascination with the
new and the flashy. If you have never before encountered the
Fallacy of Composition, rue it now, perhaps, in the aftermath of
the NASDAQ and dot.com collapse:
Any individual or firm can through its own effort rise
above the average, but every individual or firm, by definition,
cannot. Similarly, if a single firm implements a
productivity-improving strategy that is unavailable to its
competition, its profits will rise. But if all firms have access to
the same technology and implement it [i.e., the Internet], then
costs and prices will fall and the gains of productivity will go to
the consumer.
Siegel’s discussion of Social Security may be the sanest and
best balanced yet published. His chapters on global demographics
and productivity gently and charmingly show off his erudition and
convey his love of ideas; he makes you want to read every book in
the bibliography. Along the way, with the casual finesse of a
virtuoso, he tosses off original charts and models. Check Figure
15.2 on page 205, “Projected Retirement Age for Different Growth
Rates of Developing Countries.” Or the two graphs on facing pages
228-229, “A Tale of Two Countries: China and Brazil Stock Returns
and GDP Growth” (Which country should you have invested in in 1992?
Not China) and “GDP Growth and Stock Returns in Emerging Markets,
1987-2003.
His solution to retirement investing and to what he calls the
problem of the Age Wave, as boomers retire and cash in assets, or
try to? The developing economies of China, India, and Indonesia
will provide the buyers for those assets. Meantime, an investment
portfolio invested 40 percent in foreign equities will help protect
those same investments.
GLANCE THROUGH THE FUTURE FOR INVESTORS HASTILY and you
may well miss it, it’s so unassuming, so well-organized, and so
easy to read. The Future for Investors may be the best
investing book ever written for 20-year-olds. For those of us
grayer in the hair, it’s well worth reading the eternal truths once
again, especially explained so well and illuminated so strikingly
by Siegel’s original statistical insights.
