By: Jeremy Siegel
Historical Performance of Stocks vs. Bonds
In this book, Jeremy Siegel starts out by comparing the historical performance of stock returns to bond returns. At various points throughout the history of financial markets, bonds have actually provided better returns than stocks. However, with the advent of unconventional monetary policy from central banks, equities have unanimously outperformed publicly-traded corporate debt. Professor Siegel (of Wharton) spends the first section of this book describing this historical performance and explaining how inflation is the primary reason why stocks usually outperform bonds.
Investment Time Horizon
After concluding that equities are a necessity for every investor’s portfolio, Professor Siegel begins to analyze data relating to investment time horizons. This is really the crux of the book. Siegel argues that it is nearly impossible for the average investor to predict short-term price movements of the stock market. In this section, he also delves into topics like risk-adjusted returns and tax consequences of short vs. long-term investing. Using data and logic, he concludes that investing in index funds is the most efficient method for the average mom-and-pop investor to achieve decent portfolio returns over a long investment horizon.
Valuation & Stock Analysis
In the next section of Stock for the Long Run, Siegel looks at various metrics relating to valuation and performance of returns. He discusses a wide range of topics, such as size of companies (large vs. small cap), price levels (value vs. growth), initial public offerings, dividend yield rates, etc. This section is considerably important for beginning investors to read and fully understand.
The next part of the book analyzes macroeconomic phenomena and their implications for investors. Siegel discusses current events like population growth rates, terrorism, and country-specific asset bubbles. He studies the merit of hedging assets such as gold. He argues that gold cannot be a true investment because it does not produce cash flows among other issues. In this latter section, he also describes the relative merits of technical analysis and market anomalies (January effect).
Portfolio Construction & Conclusion
The very last section of the book deals with how investors should construct their portfolios. Siegel integrates many of the topics discussed throughout the book to describe how the average investor can design a portfolio with better returns than many professional money managers. In this section, he briefly talks about mutual fund managers and how the industry’s structure is maligned with regards to achieving superior returns for their clients (average investors).