Monday, January 13, 2014

Siegel, Stocks for the Long Run, 5th ed.

It’s hard to imagine, and somewhat embarrassing to admit, but I never read any of the first four editions of Jeremy J. Siegel’s Stocks for the Long Run. Yes, I knew the thesis, but that was about all. The fifth edition of this classic work (McGraw-Hill, 2014) is fully updated; it features new analyses of the financial crisis, the role of emerging markets, and international investing.

For those who have lived under a rock since Siegel’s book was first published in 1994, his claim is that “over the last two centuries the total return on equities dominates all other assets. The amount of $1 invested in a capitalization-weighted portfolio in 1802, with reinvested dividends, would have accumulated to almost $13.5 million by the end of 2012. Even the cataclysmic stock crash of 1929, which caused a generation of investors to shun stocks, appears as a mere blip in the total stock return index.” (pp. 76-77) “The compound annual real return on stocks is approximately 6.6 percent per year after inflation” (p. 81) and “has displayed a remarkable constancy over time.” (p. 90)

In the long run, Siegel maintains, stocks are less risky than bonds. What does he mean by “the long run”? Over one- and two-year periods, he readily admits, stocks are risker than bonds; in every five-year period since 1802 “the worst performance in stocks, at -11.9 percent per year, has been only slightly worse than the worst performance in bonds or bills. And for 10-year holding periods, the worst stock performance has actually been better than that for bonds or bills.” (p. 94) Moreover, “for 10-year horizons, stocks beat bonds about 80 percent of the time; for 20-year horizons, about 90 percent of the time; and over 30-year horizons, nearly 100 percent of the time.” (p. 96) Yes, bond returns nudged out stock returns for the 30-year period from January 1, 1982 through the end of 2011, but Siegel considers that period an aberration unlikely to be repeated in the coming decades.

Siegel presents a host of data and detailed analysis to guide the investor in his quest (probably futile) to outperform the market. He looks, for instance, at the impact of taxes on stock and bond returns, sources of shareholder value (earnings and dividends), yardsticks to value the stock market, as well as the importance of size, dividend yields, and price/earnings ratios. He devotes four chapters to how the economic environment impacts stocks. He delves into stock fluctuations in the short run with chapters on ETFs, stock index futures, and options; market volatility; technical analysis and investing with the trend; calendar anomalies; and behavioral finance and the psychology of investing. The book concludes with two chapters on building wealth through stocks.

Stocks for the Long Run is a book that all investors--nervous Nellies in particular—should read. I personally am very glad to have filled a gaping hole in my library.

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