Monday Morning Jumpstart with Dan Richards
10 minutes to drive your week
Topic for October 26, 2009: Perspectives on long term performance
- Note: This is adapted from a column in the Globe and Mail Report on Business on September 25, 2009, titled History Shows Stocks Still King for Long Term Investing.
The premiere name when it comes to investing history is Jeremy Siegel of the Wharton School in Philadelphia, whose 1994 book "Stocks For The Long Run" is regularly cited among the all-time top ten books on investing.
It's for this reason that in mid September I travelled to Philadelphia to talk to Jeremy Siegel and some of his Wharton colleagues at what's considered the world's top finance faculty.
Before writing "Stocks For The Long Run", Siegel spent lengthy hours painstakingly assembling almost two hundred years of U.S. market data on stocks, bonds, treasury bills and gold.
His conclusion in 1994 was very clear: Over the long run, stocks have outperformed every other asset class, not by a little but by a lot. That was true before last year, and it's still true today.
- The price for that outperformance, of course, is short term volatility – something that investors were reminded of last year. And Siegel certainly cautions investors who need their money in the short or mid term about over-committing to stocks. For investors with a time frame of fifteen years or longer, however, Siegel has found that stocks actually deliver substantially superior returns with less volatility than bonds, not more.
- When asked about the past ten years, among the worst on record for stocks, Siegel said that he had recently revisited his data. His conclusion: Even with the disappointing performance over the past decade, stocks have still served long term investors substantially better than any other investment.
In 2005, Jeremy Siegel published a follow up book "The Future For Investors: Why The Tried And The True Triumph Over The Bold And The New."
His conclusion: The single factor that drives investor success is not picking winning companies, but rather the entry points at which companies are purchased.
Siegel looked at the top fifty US companies by market value in 1950 and studied returns to 2003. The three companies that provided the best returns were Kraft Foods, RJR Reynolds and Exxon Mobil – not high flying new economy firms but rather dull, comparatively boring old economy businesses.
- Related to his point about valuations, from his analysis of historical data Siegel has identified something he calls the growth trap - investors have a tendency to fall in love with fast growing companies and pay too much for them, depressing long term returns. It was because of elevated prices that that Siegel wrote an article in Wall Street Journal in March of 2000, at the peak of the tech boom, warning that the valuations of these stocks was unsustainable.
- During our meeting, we spent a considerable amount of time talking about prospects for stocks in the period ahead. Jeremy Siegel is firmly convinced that at current prices U.S. stocks offer excellent value for long term investors.
- To view the full article and to email it to clients, visit www.reportonbusiness.com or www.getkeepclients.com.