Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, by Jeremy J. Siegel.
Reviewed by Mark Skousen
In mid-February 2009, Wharton School finance professor Jeremy Siegel showed me his 200-year chart of the US stock market, and noted that every time the market fell 50% from its high, the market bottomed. The only exception: the 1929-33 Great Depression, when stocks plunged over 80%. Siegel thought that, due to Federal Reserve intervention, we would not see another Great Depression. He therefore concluded that we were close to the bottom of the bear market, and that stocks were a “screaming buy.”
Since that encounter, I have joined with those who call Jeremy Siegel the “Wizard of Wharton.” His forecast came within weeks of the bottom, all based on historical work that is clearly set forth in Stocks for the Long Run, now in its fifth edition. If there is indeed a “definitive” book on the stock market, then look no further than this one.
This magnum opus is replete with chapters on the history of Wall Street since 1802; the pros and cons of mutual funds, ETFs, futures, and options; the causes of bull and bear markets; the influence of monetary and fiscal policy on equity prices; the outlook for stocks, bonds and commodities in the face of inflation and an entitlement crisis; analysis of stock indexes, dividend yields, and price-earnings ratios; global equity markets, technical analysis, and potential ways to beat the market.
This fifth edition adds chapters on what we’ve learned from the 2008 financial crisis and behavioral finance, including insights into the stock market crash on October 19, 1987, and the “flash crash” on May 6, 2010. The overriding theme is that history matters, not only for policy makers in Washington, but for investors making the right kind of investment choices.
While there is much that echoes what we think we all know, it does not hurt get these things confirmed by a scholar of Siegel’s reputation. Most mutual fund managers fail to beat the market; dividend-reinvestment is good; compounded interest and dollar-cost averaging are winning strategies for individuals; and for most people, long-term investing beats short-term speculating.
Siegel’s research also leads to conclusions that often go contrary to conventional wisdom. For example, he shows that value stocks tend to outperform growth stocks. Investing in the latest hot technology stock is what Siegel calls the “growth trap.” His classic example is Big Oil vs Big Blue: Standard Oil, now ExxonMobil (ticker: XOM) vs, IBM (ticker: IBM).
Based on Siegel’s study of the two stocks from 1950 to 2012, IBM outdistanced Exxon in every growth category–sales, earnings, dividends, and cash flow. Big Blue’s earnings exceeded Big Oil’s by more than 3 percentage points per year. IBM was the classic growth stock, Exxon the classic value play.
Yet the oil giant proved to be the better stock to buy. “When your lockbox was opened 62 years later,” reports Siegel, “the $1000 you invested in the oil giant would be worth $1,620,000, more than twice as much as IBM.”
How come? “Valuation,” the author explains. “The price investors paid for IBM was just too high.” The lower price of the oil stock helped harness the power of dividend reinvestment. “Because Standard Oil’s price was low and its dividend yield much higher than that of IBM,” Siegel carefully notes, “those who bought its stock and reinvested the oil company’s dividends accumulated 12.7 times the number of shares they started out with, while investors in IBM accumulated only 3.3 times their original shares.” While taxes on dividends would have put a serious crimp in this record, it would have worked in the era of tax-sheltered IRA’s and 401-k’s.
The growth trap is also in evident in the selection process of the S&P 500. After tracking down the performance of the original 500 companies in the S&P index, the author finds that the original S&P 500 firms outperformed the dynamic updated index. Why? Because the new “growth” firms had already risen sharply before they were added, and the old firms had fallen sharply before they were dropped.
Siegel has this same theory to the global markets, and discovered that stock performance and economic growth often move in opposite directions. “The fastest-growing country by far, China, has had the worst returns,” he writes. “Mexico, Brazil and Argentina are among the slowest-growing countries but have generated excellent returns for investors.” Although I’m not sure about Argentina–its bolsa was either in crisis or illiquidity during large parts of the 20th century—the general point is well-taken.
The author challenges the efficient market proponents with anomalies in the marketplace, such as the January and September effects, the small stock effect, and momentum investing. He devotes a chapter to the challenges of beating the indexes, concluding that a few strategies seem to work, such as fundamental-weighted indexes and rising dividend stocks.
Siegel offers a mixed review of technical analysis. For example, he notes that investors and money managers who used the much- touted 200-day moving average technique avoided most of the 2007-09 bear market, but paid the price when they were whipsawed in and out of the market 20 times in 2010-12
One complaint: In the chapter on derivatives, the author does not take Warren Buffett and Peter Lynch to task for calling for the outlawing of stock futures and options. Studies show that the futures and options markets have actually reduced volatility and increased liquidity on Wall Street, and serve as a useful tool to hedge positions in the marketplace.
Stocks for the Long Run challenges the dooms-sayers who predict another stock market crash and collapse in the economy. “No one,” Jeremy Siegel declares, “has made money in the long run from betting against stocks or the future growth of our economy.”
Mark Skousen is editor of Forecasts & Strategies, a Presidential Fellow at Chapman University, and author and compiler of The Maxims of Wall Street: A Compendium of Financial Adages, Ancient Proverbs, and World Wisdom.