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.
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