Book Review

Book Title: Stocks for the Long Run: The definitive guide to financial market returns & long-term investment strategies

Author: Jeremy J. Siegel

Date Published (Fifth edition): 2014 

Rating: 8.5/10

 

Author background

To help put this book into perspective, I thought it would be useful to have a few life facts about Jeremy Siegel.

Some key facts follow:

  • Born: 14 November, 1945
  • Birthplace: Chicago, Illinois
  • Occupation: Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania
  • Website: JeremySiegel.com
  • Current: serves as Senior Investment Strategy Advisor of WisdomTree Investments, Inc., consulting the firm on its proprietary stock indexes. He is also a member of the company’s board of directors.

 

Stocks for the Long Run – Book Theme

“Stocks for the long run” is indeed considered essential reading for every investor and advisor who wants to fully understand the multitude of forces that move today’s markets. Stocks for the Long Run provides a complete and quite comprehensive summary of historical trends that will help you develop a sound and profitable long-term portfolio.

It is an impressive tome, comprising of around 448 pages and 24 chapters of quite in-depth analysis.

Barrons’ advise that this book “Should command a central place on the desk of any ‘amateur’ investor or beginning professional”. This view was supported by John Bogle, founder and former Chairman, The Vanguard Group, who believes it is a “clearly written, neatly organized, highly persuasive exposition that lifts the veil of mystery from investing”.

 

Stocks for the Long Run – Book Chapters

The following is a list of the sections and associated chapters:

Part 1 – Stock Returns: Past Present and Future

  • Chapter 1 – The Case for Equity: The case for facts and media fiction
  • Chapter 2 – The Great Financial Crisis of 2008 – It’s Origin, impact and legacy
  • Chapter 3 – The Market, the Economy and Government Policy in the wake of the Crisis
  • Chapter 4 – The Entitlement Crisis: Will the age wave drown the stock market?

Part 2 – The verdict of history

  • Chapter 5 – Stock and bond returns since 1802
  • Chapter 6 – Risk, Return and Portfolio Allocation: Why stocks are less risky than bonds in the long run
  • Chapter 7 – Stock Indexes: Proxies for the market
  • Chapter 8 – The S&P 500 index: More than half a century of Corporate US history
  • Chapter 9 – The impact of taxes on stock and bond returns: Stocks have the edge
  • Chapter 10 – Sources of Shareholder Value: Earnings and Dividends
  • Chapter 11 – Yardsticks to value the stock market
  • Chapter 12 – Outperforming the Market: The importance of size, dividend yields, and price/earnings ratios
  • Chapter 13 – Global Investing

Part 3 – How the Economic environment impacts stocks

  • Chapter 14 – Gold, Monetary Policy and Inflation
  • Chapter 15 – Stocks and the Business Cycle
  • Chapter 16 – When world events impact financial markets
  • Chapter 17 – Stocks, Bonds and the flow of economic data

Part IV – Stock fluctuations in the short run

  • Chapter 18 – Exchange Traded Funds, Stock Index Futures and Options
  • Chapter 19 – Market Volatility
  • Chapter 20 – Technical Analysis and Investing with the trend
  • Chapter 21 – Calendar Anomalies
  • Chapter 22 – Behavioral Finance and the Psychology of investing

Part V – Building Wealth Through Stocks

  • Chapter 23 – Fund performance, Indexing and Beating the Market
  • Chapter 24 – Structuring a portfolio for long term growth.

Stocks for the Long Run – Book Highlights

  1. Over the past 210 years, the compound annual real return on a diversified portfolio of common stock has been between 6 and 7 percent in the United States, and it has displayed a remarkable constancy over time. This is demonstrated in a remarkable graph (below) showing real return for $US1 in vested in 1802 would have an approximate value of $US704,997 compared to gold say, having an approximate value of $4.52.
  2. His analysis confirmed that in the short term, stocks are much more volatile and in the long term become far less volatile from a performance perspective. As Siegel suggests, “History has shown that stocks are actually safer than bonds for long-term investors whose goal is to preserve the purchasing power of their wealth”.
  3. Low-P/E, high-dividend stocks consistently surpass the market indices by 2% or more in annual compounded returns. In his analysis, using dividend yield as an example, Siegel on December 31 of each year from 1957 onward, sorted the firms in the S&P 500 Index into five groups (or quintiles) ranked from the highest to the lowest dividend yields and then calculated the total returns over the next calendar year. The portfolios with higher dividend yields offered investors higher total returns than the portfolios of stocks with lower dividend yields. If an investor put $1,000 in an S&P 500 Index fund at the end of December 1957, they would have accumulated $201,760 by the end of 2012, for an annual return of 10.13 percent. An identical investment in the 100 highest dividend yielders accumulated to over $678,000, with a return of 12.58 percent.
  4. When structuring a portfolio for long term growth, consider the following advice from Siegel:
    • Keep your expectations in line with history. Historically stocks have returned between 6 and 7 percent after inflation over the last two centuries and have sold at an average P/E ratio of about 15
    • Stock returns are much more stable in the long run than in the short run. Over time stocks, in contrast to bonds, compensate investors for higher inflation. Therefore, as your investment horizon becomes longer, put a larger fraction of your assets in equities
    • Invest the largest percentage of your stock portfolio in low-cost stock index funds – Investors in capitalization weighted index funds should insist on a total annual expense ratio under 0.15 percent
    • Invest at least one-third of your equity portfolio in international stocks, currently defined as those not headquartered in the United States. Stocks in high-growth countries often become overpriced and yield poor returns for investors
    • Historically, value stocks—those with lower P/E ratios and higher dividend yields—have superior returns and lower risk than growth stocks. Tilt your portfolio toward value by buying passive indexed portfolios of value stocks or, fundamentally weighted index funds
    • Finally, establish firm rules to keep your portfolio on track, especially if you find yourself giving in to the emotion of the moment.

 

Closing thoughts: I did enjoy reading this book, “Stocks for the long run”, and there is a lot of ground to cover and so it would be worthwhile reading a couple of times so that the key messages are absorbed. Particularly for younger readers, it further highlights the necessity to start investing early so that you have time on your side and that compounding can works its magic.

If you enjoyed this book review, you will also enjoy my review of “Rich Dad Poor Dad“.

Read, learn, enjoy, be persistent and most importantly, take action!

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