Stocks for the Long Run

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Stocks for the Long Run
Author Jeremy J. Siegel
Publisher McGraw-Hill
Publication date 1994
ISBN 9781556238048

Stocks for the Long Run[1] is a widely cited book on investment advice by Jeremy Siegel. Its first edition was released in 1994. Its fourth edition was released on Nov. 27, 2007. According to Pablo Galarza of Money Magazine, "His 1994 book Stocks for the Long Run sealed the conventional wisdom that most of us should be in the stock market"[2]. Amazon.com gives a list of 100 books that cite this book. The Washington Post called it one of the 10 best investment books of all time [3].

Contents

[edit] Overview

This is the best known book by Siegel, a Professor of Finance at the Wharton School of the University of Pennsylvania and a frequent contributor to financial publications like The Wall Street Journal, Barron's, The New York Times and the Financial Times.

Most of the book takes a long-term view of the financial markets, starting in 1802, mainly in USA (but with some comparisons with other markets). Siegel takes an empirical perspective to answer some major investing questions.

Even though the book has been termed "the buy and hold Bible" [4], the author occasionally concedes that there can be some market inefficiencies that can be exploited.

Siegel argues that stocks have returned an average of 6.5 percent to 7 percent per year after inflation over the last 200 years. He expects returns to be somewhat lower in the next couple of decades. In [5] he states:

"An analysis of the historical relationships among real stock returns, P/Es, earnings growth, and dividend yields and an awareness of the biases justify a future P/E of 20 to 25, an economic growth rate of 3 percent, expected real returns for equities of 4.5–5.5 percent, and an equity risk premium of 2 percent (200 bps)."

A significant part of the book is based on his academic and non-academic publications, many of which can be found on his web-site[6]

[edit] Outline

The book covers the following topics.

  • The Verdict of History: Stock and Bond Returns since 1802, Risk, Return and the Coming Age Wave and Perspectives on Stocks as Investments.
  • Stock Returns: Stocks, Stock Averages, and Stock Returns, Dividends, Earnings, and Investor Sentiment, Large Stock, Small Stocks, Value Stocks, Growth Stocks, The Nifty Fifty Revisited, Taxes and Stock Returns, Global Investing.
  • Economic Environment of Investing: Money, Gold, and Central Banks, Inflation and Stocks, Stocks and the Business Cycle, World Events Which Impact Financial Markets, Stocks, Bonds and the Flow of Economic Data.
  • Stock Fluctuations in the Short Run: Stock Index Futures, Options and Spiders, Market Volatility and the Stock Crash of October 1987, Technical Analysis and Investing with the Trend (He finds use of 200-day MA does not improve returns or reduce risk for DJIA, but is seems to benefit NASDAQ), Calendar Anomalies (Siegel accepts seasonality in the stock market).
  • Building Wealth Through Stocks: Funds, Managers, and 'Beating the Market', Structuring a Portfolio for Long-Term Growth.

The next edition includes a new chapter on globalization that argues that the emerging world will soon overtake the developed world[7]. A discussion on fundamentally-weighted indexes which have historically resulted in better returns and lower volatility has been added[8].

[edit] Observations

Major findings from the book are discussed here. The data is taken from Table 1.1, 1.2, Fig 1.5 and Fig 6.4 in the 2002 edition of the book.

Key Data Findings: annual real returns
Duration Stocks Gold Bonds Dividend Yld Inflation rt Eqity Prem Fed Model
1871-2001 6.8 -0.1 2.8 4.6 2.0 0-11 NA
1946-1965 10.0 -2.7 -1.2 4.6 2.8 3-11 NA
1966-1981 -0.4 8.8 -4.2 3.9 7.0 11-6 TY<EY
1982-2001 10.5 -4.8 8.5 2.9 3.2 6-3 YT>=EY.

This table presents some of the main findings presented in Chap 1 and some related text. Stocks on the long term have returned 6.8% per year after inflation, whereas gold has returned -0.4% (i.e. failed to keep up with inflation) and bonds have returned 1.7%. The equity risk premium (excess return of stocks over bonds) has ranged between 0 to 11%, it was 3% in 2001[9]also. The Fed model of stock valuation was not applicable before 1966. Before 1982, the treasury yields were generally less than stock earnings yield.

Why the long-term return is relatively constant, remains a mystery.

The dividend yield is correlated with real GDP growth, as shown in Table 6.1.

Explanation of abnormal behavior:

  • The low stock return during 1966-81 (and high gold return) was due to very high inflation.
  • The equity risk premium rose to about 11% in 1965, however that should be unsustainable over a very long term.

In chapter 2, he argues (Figure 2.1) that given sufficiently long period of time, stocks are less risky than bonds, where risk is defined as the standard deviation of annual return. During 1802-2001, the worst 1-year returns for stocks and bonds were -38.6% and -21.9% respectively. However for a holding period of 10-years, the worst performance for stocks and bonds were -4.1% and -5.4%; and for a holding period of 20 years, stocks have never lost money. Figure 2.6 shows that the optimally lowest risk portfolio even for one-year holding, will include some stocks.

In Chapter 5, he shows that after-tax returns for bonds can be negative for significant period of time.

Key Data Findings: annual real returns
Duration Stocks Stocks after tax Bonds Bonds after tax
1871-2001 6.8 5.4 2.8 1.8
1946-1965 10.0 7.0 -1.2 -2.0
1966-1981 -0.4 -2.2 -4.2 -6.1
1982-2001 10.5 6.1 8.5 5.1

[edit] Criticism

Some of the critics argue that the book uses a perspective that is too long term to be applicable to today's long-term investors.

[edit] Publication history

  • Siegel, Jeremy J. (January 15, 1994). Stocks for the Long Run: A Guide to Selecting Markets for Long-term Growth. Burr Ridge, Illinois: Irwin Professional Publishing, 388. ISBN 9781556238048. 
  • Siegel, Jeremy J. (March 1, 1998). Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, 2nd, New York: McGraw-Hill, 388. ISBN 9780070580435. 
  • Siegel, Jeremy J. (June 21, 2002). Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, 3rd, New York: McGraw-Hill, 388. ISBN 9780071370486. 
  • Siegel, Jeremy J. (November 27, 2007). Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, 4th, New York: McGraw-Hill, 436. ISBN 9780071494700. 

[edit] See also

[edit] References

  1. ^ Stocks for the Long Run, by Jeremy J. Siegel, McGraw-Hill Companies; 4nd edition (November 27, 2007, ISBN 9780071494700)
  2. ^ November 30, 2004 Siegel: How to invest now, November 30, 2004
  3. ^ Buy! Sell! Have a Beer! Dueling Gurus (and Pals), David Leonhardt New York Times, September 2, 2001
  4. ^ http://www.nareit.com/portfoliomag/04julaug/capital.shtml Q&A with Jeremy Siegel [July/August 2004] By Christopher M. Wright
  5. ^ http://neumann.hec.ca/pages/martin.boyer/6204A05/RiskPremiumPuzzle_v2002n1.pdf Historical Results, EQUITY RISK PREMIUM FORUM, NOVEMBER 8, 2001
  6. ^ http://www.jeremysiegel.com/index.cfm/fuseAction/Resources.ListResources/type/article.cfm Resources - Articles
  7. ^ http://www.jeremysiegel.com/index.cfm/fuseaction/Resources.ViewResource/type/article/resourceID/6541.cfm What Powers the Growth of India and China?
  8. ^ http://www.jeremysiegel.com/index.cfm/fuseaction/Resources.ViewResource/type/article/resourceID/6622.cfm The Next Wave of Index Investing
  9. ^ Also see [1] where equity risk premium is computed slightly differently