After a brief foray into the world of psychology, we’re back on the investing train with Dr. Jeremy Siegels’ ‘Stocks for the Long Run’.
Jeremy Siegel is a Professor of Finance at the Wharton School of the University of Pennsylvania. He majored in mathematics and economics at Columbia University and went on to obtain a Ph.D. from MIT.
He has authored five books on the topics of economics and investing, as well as being a frequent guest on CNN, CNBC, and NPR.
Stocks for the Long Run
‘Stocks for the Long Run‘ was first released in 1994 and is often referred to as the “the buy and hold Bible” of investing.
Siegel takes a long-term view of the financial markets, deep-diving into data all the way back to 1802. The book is largely focused on the United States but makes some reference to foreign markets as well.
Using this data, Siegel seeks to answer some fundamental questions regarding the best practices for the individual investor, as well as challenge some of the more widespread misinformation that continues to persist in the investing community.
The Fall Guy
Siegel begins his book with an anecdote about a man called John J. Raskob—a senior financial executive for General Motors in the 1920s. Raskob gave an interview in 1929 to a journalist called Samuel Crowther in which he claimed that America was on the verge of an amazing industrial expansion. If people were to put $15 per month into stocks, they could accumulate $80,000 over the next 20 years—an annual return of 24% he claimed.
That interview was published in Ladies’ Home Journal under the rather audacious title, ‘Everybody Ought to Be Rich’. Seven weeks later, the stock market crashed, leading to the Great Depression in which millions of people lost their life savings. When the dust had settled, the market value of America’s greatest corporations had declined 89%, leaving many families in dire poverty.
Due to the unfortunate timing of the article, Raskob became the public scapegoat of the crash, even held up by one US Senator as the cause of the Depression itself. In 1992, over 60 years later, an article in Forbes even labeled Raskob as the “worst offender” of those who pushed stocks without any thought of the consequences.
In his book, Siegel actually goes back and tests out what would have happened had people followed Raskob’s advice. His finds that $15 a month invest in stocks from the time the article was published, would have accumulated $9,000 after 20 years. Held for 30 years, an investor would be sitting on $60,000.
Although this is far below what Raskob initially projected, it still represents a 13% annual average return – higher than any other financial asset and comfortably beating the “clever” investors who switched their money to Treasury Bonds at the market peak.
That story perfectly establishes the tone for this entire book. In every topic he covers, Siegel dismisses the “conventional wisdom” of the time and instead examines the empirical evidence to determine what really works in the world of investing.
Stocks over Bonds
One of the biggest conventions Siegel challenges is the concept that stocks are a riskier investment that cash, bonds, or gold. Siegel argues the opposite. He finds through his research that given a long enough time horizon, stocks have proven to be the safest asset when it comes to actual purchasing power.
To come to this conclusion, he backtests the investment returns of a single dollar in stocks, bonds, gold and cash, all the way back to 1802. The results are tabularized below.
As shown, the real returns (that is taking inflation into account) of a diversified portfolio of stocks increased almost 705 thousand fold. The next closest, bonds, only increased 1,178 times.
Meanwhile, gold returned just 0.7% a year and cash lost 95% of its value.
“The superiority of stocks to fixed-income investments over the long run is indisputable. Over the past 200 years, the compound annual real return on stocks is nearly seven percent in the U.S., and has displayed a remarkable constancy over time.”
But what about the inherent volatility in stocks versus bonds? Siegel maintains that historically if one were to adopt a 20 year holding period, that risk is negated.
“For 20-year holding periods, stocks have never fallen behind inflation, while bonds and bills have fallen 3 percent per year behind the rate of inflation over this time period…Although it might appear to be riskier to hold stocks than bonds, precisely the opposite is true: the safest long-term investment for the preservation of purchasing power has clearly been stocks, not bonds.”
Flash-forward to today, and with the markets currently hovering around all-time highs, the conventional wisdom would be that investors should wait for a pull-back. Again, Siegel looks at the data and flatly disputes this idea. He argues that even if you had invested at the very height of the market—right before a downturn—and held for 30 years, you’d still be far better off than those who moved their money into other financial assets. This concept is expanded upon in Ben Carson’s wonderful piece What if You Only Invested at Market Peaks?
On market-timing, Siegel is absolute:
“There is no compelling reason for long-term investors to significantly reduce their stockholdings, no matter how high the market seems. Of course, if investors can identify peaks and troughs in the market, they can outperform the ”buy-and-hold” investor. But, needless to say, few investors can do this. And even if an investor sells stocks at the peak, this does not guarantee superior returns. As difficult as it is to sell when stock prices are high and everyone is optimistic, it is more difficult to buy at market bottoms, when pessimism is widespread and few have the confidence to venture back into stocks.”
Though Siegel provides many examples to back up his long-term buy-and-hold philosophy, none are quite as interesting as that of the Nifty Fifty. These were fifty stocks in the early seventies that were considered “no brainers”—stocks that were so good you could invest in them at any price and still make money.
Of course, the bubble eventually burst and the Nifty Fifty investors suffered significant losses. At the time, financial journalists compared the hysteria around the Nifty Fifty to that of the Tulip mania that occurred in Holland in the 17th century.
However, Siegel argues that actually many of the companies were worthy of their lofty valuations and shows that had investors sat on their hands, they could have realized positive returns, not far off the overall market benchmarks.
“Did the Nifty Fifty stocks become overvalued during the buying spree of 1972? Yes—but by a very small margin. An equally weighted portfolio of Nifty Fifty stocks formed at the market peak in December 1972 and rebalanced monthly would have realized a 12.7 percent annual return to June 1997, just slightly below the 12.9 percent return on the S & P 500 Index. The same portfolio would have returned 12.4 percent if it were never rebalanced over time.”
Should I Buy This Book
‘Stocks for the Long Run’ is the most in-depth look into the concept of long-term buy-and-hold investing that I’ve ever come across. Aside from the few examples I’ve cited above, Siegel also investigates the effects of major world events, the dropping of the gold standard, technical analysis, and population growth.
It really is as thorough an examination as you need, well worthy of the “buy and hold Bible” status it has achieved. If you’re in anyway still cynical of the power of long-term investing, this book will set you up to get investing with confidence. It will also arm you with the data to dismiss those who push non-traditional assets like gold as a safer alternative.
If you’re new to investing, I certainly wouldn’t recommend it as a first or even fifth read. There is an assumption on the part of the author that his audience is familiar with the terminology and tropes of Wall Street, and its data-heavy analysis can be trying at times, even for those well-read on the subject.
However, if you’re serious about long-term investing, with a 20-30 year time horizon, this book is a must read. The findings within will be invaluable to you when markets look shaky and you feel the urge to sell for safer alternatives.
If you’re not serious about long-term investing, read this book and you soon will be.