investor would have done very well. By BOOK REVIEW: 1949 this investor would have accumulated $9,000. This is an average annual return of Stocks for the 7.86% -- more than twice what a bondholder would have realized through 1 the same Great Depression period. Long Run The first chapter compares, over the period since 1802, returns on stocks with 2 bonds, bills, and gold. With reinvestment of Craig Marxsen all interest, dividends, and capital gains, the total return on equities dominated all of the alternative assets. Indeed, even the Great Depression appeared as a mere minor blip in the relentless upward trend in stock portfolio values over the entire 200 years, while bonds and bills performed much less Jeremy J. Siegel, the Russell E. robustly, and gold showed no performance Palmer Professor of Finance (since 1998) at at all other than keeping up with inflation the Wharton School of the University of over the period. After World War II, when Pennsylvania, provides an extensive the U.S. (and most of the rest of the world) revision in the fourth edition of his book got off the gold standard, persistent that Amazon.com bills as “the most inflation added a new dimension to risk. complete and irrefutable case for stock Total returns on either bonds or bills market investment ever written.” Released became subject to negative episodes in only a short time before the great stock real, or inflation adjusted, terms, so that market crash of 2008, this edition provides bonds and bills became riskier. Relentless one of the timeliest perspectives for inflation has made the real return on bonds investors holding stocks, or considering and bills decline through time, and their holding them, in the aftermath of one of holders have gained very little from holding the most disheartening stockholder them since 1926, Siegel reports. The experiences suffered in the last 200 years. “equity premium” has thus increased since Siegel begins his book by examining the fate the 1930s. Moreover, stocks earned of a hypothetical investor. This substantially greater real return than hypothetical investor has followed John J. earned on bonds and bills (and gold). This is Raskob’s summer of 1929 advice to put $15 seen in 16 different countries that Siegel per month into common stocks. Such an charts for the period 1900 through 2006. 1 Even if capitalism declines in the future, Siegel, Jeremy J. Stocks for the Long Run: bonds and bills may fare far worse than The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies. Fourth Edition. equities in any political or economic New York: McGraw-Hill, 2008. Pp. xxii, 380. (ISBN upheaval our world of paper money may 0071494707; ISBN 9780071494700). bring. 2 Craig S. Marxsen, Ph. D., Associate Chapter 2 examines the risk of Professor of Economics, University of Nebraska at stocks compared with bonds or bills. The Kearney, Kearney NE 68849. Email: [email protected]. risk is much higher for stocks if held for only Economics & Business Journal: Inquiries & Perspectives 140 Volume 3 Number 1 October 2010 BOOK REVIEW: Stocks for the Long Run Marxsen one year – real losses have been as large as contends that globalization of financial 38.6%. Whereas real losses on bonds have markets promises to resolve that been no larger than 21.9%. However, that demographic problem. Young people in relative risk of stocks declines as the developing countries will provide a market holding period lengthens. With a holding for the assets of old people in the advanced period to 17 years, over the past 200 years, industrial economies that had too few never have people experienced any real loss babies to support their impending geezer with stocks. In contrast, bonds and bills gluts. Local, rather than global, markets have given negative real returns of 3% or confront an imminent imbalance. worse: even when a 20 year holding period Chapter 9 finds Siegel deviating from is examined. Additionally, for a sample the “efficient market hypothesis” that holds period including the past 200 years, the that a security’s market price is, at all times, standard deviation of real return for stocks “the best unbiased estimate of the falls below that of bonds and bills when the underlying value of the enterprise.” He holding period increases between 15 and 20 prefers what he calls the “noisy market years. Siegel compares the standard hypothesis”. The noisy market hypothesis deviation predicted for stocks under the holds that stock prices are constantly being random walk hypothesis and finds that it is pushed away from their efficient market larger than the actual historical standard levels by buyers and sellers who are deviation. This suggests to Siegel that stock transacting for purposes unrelated to value. returns are mean reverting. That is, when So called “liquidity” or “noise” traders are the market falls below its trend, it later buying and selling for tax motives, for tends to recover back up to that trend; rebalancing portfolios, or for personal rather than, for example, continuing a motives. Such noise drives some stock random walk from a new and lower starting prices below their efficient market levels, point. He shows that, to minimize the and thus generating higher than normal standard deviation of one’s entire portfolio, returns for those assets. "Value stocks" sell it must contain a substantial fraction of below what their fundamentals would stocks, and the longer the holding period, dictate. Accordingly, Siegel thinks the larger that fraction must be. purchasing value stocks can result in higher Siegel is not oblivious to some of the returns than would be expected from the doomsayers’ concerns that the future might market’s broad average. Later, he suggests not be like the past 200 years. In Chapter 8, that this phenomenon points toward a he examines the unprecedented strategy of investing in “fundamentally demographic problem confronting the weighted” index portfolios based on present cohort of prospective retirees in something other than capitalization various places in the world. There is an weighting. He likes earnings weighted imminent imbalance between old people indexing, for example, or dividend weighted attempting to liquidate financial assets and indexing, where the total earnings of a a relative dearth of young people alive to company, or the total dividends paid out by buy those assets. This supply and demand a company, govern the proportion of a imbalance compounds the projected failure company’s stock held in the index fund. of social security systems challenged by the Even if we cannot determine which specific same root demographic problem. Siegel stocks are value stocks selling for prices Economics & Business Journal: Inquiries & Perspectives 141 Volume 3 Number 1 October 2010 BOOK REVIEW: Stocks for the Long Run Marxsen lower than their true values, fundamental equity investing which he strongly indexing in a noisy market is sure to pick up advocates. He thinks an investor should put some such undervalued stocks. This is the at least one third of an equity portfolio in opposite of buying so-called “growth international stocks. Another chapter is stocks”. A focus on buying growth stocks devoted to the impact political events have tends to pick up overvalued stocks in a had on stock values. Siegel concludes that noisy market. Moreover, the fundamentally world events may upset markets in the weighted indexing approach will short run but have proven unable to automatically limit our buying into bubbles, diminish the long-term returns as stocks since bubbles involve rising market values revert to their mean returns. without rising earnings or dividends. Stocks for the Long Run came out Siegel has filled his 21 chapters with before the crash of 2008. That is practical advice for the ordinary investor. unfortunate. Since Siegel's work pre-dates The book is complimentary to Burton that event it fails to include Siegel’s explicit Malkiel’s A Random Walk down Wall Street. reaction to and encouragement for Like Malkiel, who helped pioneer the first incorporating the crash of 2008 into an index fund at Vanguard, the large no-load investment strategy. However, one cannot mutual fund group renowned for low help but conclude that a post crash edition expenses, Siegel advocates index funds and will embrace essentially the same advice passive investing for the bulk of an that he gives in the book’s final pages: “If individual’s securities holdings. He devotes you are particularly anxious about the a number of pages to explaining why market, sit down and reread the first two growth does not automatically bring a good chapters of this book.” While the crash may return. Siegel explains why index investing have cooled the average stockholder’s based on the Standard and Poors 500 index passion for stocks, it is unlikely that it leads to a predictable reduction in returns. dampened Professor Siegel’s enthusiasm. The S&P 500 index’s popularity inflates the The aftermath of the crash has found Siegel prices of any companies added into the writing, “stocks are still the best long-term index to replace dropouts. This popularity investments”.3 forces the many S&P 500 index funds to purchase immediately the stock of such added companies. He devotes one chapter to “Calendar Anomalies” and another to “Technical Analysis” that seeks to invest with the trend. “Behavioral Finance,” or the science that gives understanding of how human psychology systematically encourages human error in active investing strategies, provides a chapter strengthening the case for passive index investing strategies. Siegel thinks equities of firms 3 based outside of the U.S. will likely grow to MSN Money, be over 82% of the future global equity http://articles.moneycentral.msn.com/learn-how-to- invest/should-you-still-be-holding-stocks.aspx, market and he devotes a chapter to global 7/15/2009.