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Dr. Jeremy Siegel: Are Stocks Still The Best Long-Term Investment Vehicle?
by Alexander Green, Advisory Panelist
Tuesday, July 28, 2009: Issue #1052
For more than a decade, author and academic Dr. Jeremy Siegel had the Midas touch.
His book “Stocks For the Long Run,” first published in October 1996, surveyed more than 200 years of stock market history both in the United States and abroad and made a compelling case that common stocks are the very best long-term investment vehicle. Better than cash. Better than bonds. Better than real estate. Better than gold.
In the roaring bull market of the 90s – and since – his book was required reading. Millions of investors were strongly influenced by his research.
In the process, Siegel became a celebrity, appearing regularly on network and cable investment shows. He is also now an advisor to WisdomTree Investments, a sponsor of exchange-traded funds.
But while history once buttressed Siegel’s grand conclusions, current events haven’t been so kind…
More specifically, as of June 30, U.S. stocks have underperformed long-term Treasury bonds over the past five, 10, 15, 20 and 25 years.
Zweig Argues Against Siegel’s Methodology
To add insult to injury, Jason Zweig recently argued in The Wall Street Journal that Jeremy Siegel’s methodology was flawed from the beginning. It turns out that Siegel’s chosen stock market indexes and dividend calculations from the 1800s were not representative of the period, skewing returns upward.
“Another emperor of the late bull market,” Zweig concludes, “has turned out to have no clothes.”
But what’s the real story here: Are stocks not the best long-term vehicle? Are bonds – or something else – better? Is Siegel just plain wrong?
The answer to each of these questions, it seems, is yes and no.
Bonds have outperformed stocks over the last 25 years in part because yields at the starting point – during the hyper-inflationary early 80s – were sky high. From current low levels, outsized returns like these are impossible.
(That doesn’t mean, of course, that equity returns couldn’t still lag them.)
And we can quibble about how equity returns were calculated in the 1800s, but let’s be serious. What difference does it make exactly what “stocks” returned when investors were swapping certificates – along with fox and beaver pelts – under a shade tree beside a dirt road.
That scenario bears little resemblance to modern financial markets.
The Real Reason To Invest In Stocks
No, the real reason to invest in stocks is because it allows the average investor to hold a liquid, diversified portfolio of profitable businesses, something that would otherwise be cost prohibitive for most.
Granted, the economy is tough right now. But businesses can always respond to adverse circumstances.
- During recessions, a business can cut costs, lay off unnecessary personnel and refinance debt at lower levels. During inflationary times, businesses can pass on higher costs to customers. Even the burden of higher taxes and greater regulation – both underway – are ultimately passed along to consumers.
In short, we will always have economic needs. Yet it is not government that provides us with food, clothing, shelter, health care and other essential goods and services. It is business.
- Businesses exist to meet our needs and, in the process, maximize profits for shareholders.
- Business ownership has always been the most reliable route to financial independence. And owning a diversified portfolio of fine companies should continue build and safeguard capital.
Just don’t make the mistake of believing that anything is guaranteed or that the future will look just like the past.
As the late, great Peter Bernstein said in the Preface to the first edition of “Stock for the Long Run“:
“When all is said and done, the future will always remain hidden from us. The past, no matter how instructive, is always the past… Professor Siegel so rightly warns readers of this when he writes that ‘the returns derived from the past are not hard constants, like the speed of light or gravitation force, waiting to be discovered in the natural world. Historical values must be tempered with an appreciation of how investors, attempting to take advantage of the returns from the past, may alter those very returns in the future.’ Although the advice set forth in this book very likely will yield positive results for investors, the odds are higher that uncertainty will forever be your inseparable companion.”
Good investing,
Alexander Green
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3 Responses to “Dr. Jeremy Siegel: Are Stocks Still The Best Long-Term Investment Vehicle?”
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Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.
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July 28th, 2009 at 8:32 am
Stocks for the Long Run is an excellent academic exercise based on a number of variables that fail to exist in the real world. Certainly, once must compare periods where accurate data and liquidity in the stock market was available. The data should begin, at minimum, in the 1920’s. Investments in the latter part of the century are difficult to compare to earlier times. Now, we have etf’s and mutual funds which allow participation in a number of various markets and countries. Cost and expense ratios are different today among funds than in previous years. Tax rates on capital gains have changed dramatically. Comparisons must be made between investments in individual stocks and funds as well as whether stocks are owned in tax deferred accounts, ie. IRA’s or in taxable accounts. In addition, as Keynes said, “In the long run we are dead”, and it is difficult to estimate the length of time that one holds a stock and what the returns are for those particular periods of time. You also have to factor in inflation and how it affects the value of the holdings during the period. What Siegel is trying to demonstrate, is that typically, more success in investing is gained by holding over the long term than in short term trading but there have been many periods where long term bonds when including interest and capital gains have outperformed stocks. In the early 80’s, one could acquire zero coupon treasury bonds, with no risk that returned up to 14% annually–compounded over 30 years plus any capital gains as interest rates declines. Those returns are hard to beat. However, if one invests in specific stocks at the right time, such as Microsoft or Apple, the gains may be enormous.
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July 28th, 2009 at 9:45 am
That’s why Jeremy Siegel called the book,”Stocks for the LONG Run”, not a year or two. Also the reason for Warren Buffet’s mantra,”Buy and HOLD”. We don’t know the future, certainly, but we can learn and deduce from the past.
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July 28th, 2009 at 12:46 pm
In theory Mr Green is correct. A shareholder can own a business through stock ownership.
But that ownership is illusory.As recent events have proven, the little guy is helpless against the corrupt or just plain incompetent executive leadership and crony boards of directors. Sure, you can vote with your feet and sell, at a loss; mount a futile proxy battle; or take legal action where crony laws of incorporation in Delaware guarantee a loss for you.
And so long as real reform continues to be bitterly opposed,Mr Green’s scenario must remain the dreams of pipes.
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