Investments For The Future | Saturday Evening Post

Subscribe Online | E-mail Newsletter | Museum Gift Shoppe




	Departments


		Health / Fitness
		Food / Recipes
		Books / Reviews
		Opinion / Letters
		Features
		Humor / Cartoons
		Activities / Games
		Post Illustrators
		All Departments




	Topics


		Alzeimers
		Arthritis
		Bipolar Disorder
		Diabetes
		Eye Health
		Heart Health
		All Topics




	Magazine




		Current Issue
		Subscribe Online
		Magazine Extras




	Resources


		E-mail Newsletter
		RSS Feeds
		Disclaimer
		Site Map

Investments For The Future

One of the world's top investing experts, Jeremy Siegel reveals new strategies for investing and building wealth in the 21st century.

By Nick Schulz

From the July/August 2005 Issue

Wharton Business School Professor Dr. Jeremy Siegel is recognized as one of the world's most important scholars on stock ownership and investing. His influential 1994 book, Stocks for the Long Run, became an instant classic. Dr. Siegel's extensive original research demonstrated that over periods of 20 or more years, stocks are not only the best investment for your money, but the safest as well, returning 6.5 to 7 percent after inflation (a finding referred to as "Siegel's constant"), while bonds and other investment vehicles fared considerably less well.

Building on his previous research, Siegel is back with a new book, The Future for Investors: Why the Tried and True Triumph Over the Old and New, that takes a new look at the market's internal forces and offers an in-depth look at picking the best stocks.

Schulz: In your new book, you write that Investors are needlessly fixated on growth and too often fall into what you call "the growth trap." Can you explain what you mean?

Dr. Siegel: The growth trap is falling into a pattern of just buying companies with what you think are the fastest-growing earnings, and ignoring the price. It is so important to realize that when you're paying a higher-than-usual price, you're already putting up for those higher earnings. In fact, I find that the faster-growing companies often give poorer returns for investors; those investors that chase after those fast-growing companies actually suffer worse returns than those that buy slower-growing companies at reasonable prices.

Schulz: You provide an excellent illustration of this concept in your book on history's best long-term stocks. You take readers back to 1950 and look at two stocks--industry lion Standard Oil of New Jersey and the juggernaut, IBM before the great computer revolution and a digital and technological boom in the United States. From an investor's perspective, what did you find?

Dr. Siegel: This surprised me. Even though IBM won, hands-down, on all the growth parameters that Wall Street looks at--earnings per share growth, market value growth, and sales--it fell behind Standard Oil in terms of return for investors. The reason? IBM sold at more than twice the price-earnings ratio of Standard Oil and had less than half the dividend rate. When you put those two factors together, over the next 53 years, Standard Oil of New Jersey--and this is before the latest run-up in oil prices--out-performed IBM, even though IBM was one of the world's fastest-growing companies.

Schulz: Most investors would want to go with IBM at the beginning of this huge wave in technological innovation and growth. As an investor, how would you look at these two companies and decide which to invest in?

Dr. Siegel: One critical thing to look at is the price-earnings (PE) ratio, which I still consider the old reliable yardstick for valuation. What you would have found was that, yes, IBM had better prospects, but those better prospects were already embedded in the price that you were paying; and back then IBM was selling at 30, 40 times earnings. Start-ups can sell at much higher PE ratios--in fact, many of them don't even have earnings to start out with. But once you get to big-size companies, I would really stay away from anything that's over 35, 40 times earnings; they very rarely give you good returns.

Schulz: In your last book, Stocks for the Long Run, you recommended a straightforward indexing strategy for investors. Did recent research prompt you to shift your advice?

Dr. Siegel: I used to advocate straight-indexing the whole portfolio--go to the Wilshire 5000 Index--and suggested a few little strategies that might enhance performance, but they weren't important.

When I wrote this book, I saw how important value-based strategies are. I now am saying that 50 percent of your portfolio should be indexed to the world market--not just the U.S. but the world market; the other 50 should be in diversified strategies that take advantage of this value-based approach with high dividends and low price-earnings ratios. It's what I call the tried-and-true, the corporate El Dorados: those good, consumer-staple stocks with brand names and international orientations on their sales.

Schulz: You also look at demographic trends and the global picture as it relates to investors. In your book, you write: "…looming in the future are changes more fundamental, and long-lasting, than all the crises that have confronted our economy in the past." The forecast sounds troubling. What exactly are you talking about?

Dr. Siegel: I am talking about the aging of the population. The fact that the number of workers per retiree is going to go down drastically, and even much more drastically in Japan and Europe, than the United States. The entire developed world, which produces three-quarters of the world output, is going into a very rapid aging phase that's really going to change the character of their economies.

That's why I believe the rest of the world--a much younger world--is going to loom as a far more important piece of the entire growth puzzle and as a part of investors' portfolios.

Schulz: Do you offer a solution to this age-wave problem?

Dr. Siegel: The best solution to the aging problem is what I call the "global solution." We have to think of ourselves very much like Florida, which is an aging state. In a younger country, we don't talk about an aging crisis in the state of Florida. Their retirees sell their assets in the U.S. to the rest of the U.S. market that absorbs them. They import goods. They're enjoying a good retirement.

In 50 years, the United States will be more aged than all of Florida is today, but we will be living in a younger world. What I see is exactly the same pattern. We will be selling assets into the world market. They will be buying; they will be absorbing; they will be saving; and they will be producing the goods that we will be importing to satisfy our retirement needs. That is the only way that we could have an ever-increasing retirement period with the shrinkage of workers and the extension of life expectancy.

Schulz: What countries will be buying assets and producing goods that an older United States will need?

Dr. Siegel: Certainly India is a very young country. The rest of Asia is very young. Indonesia is very young and even China, despite the fact that it, too, is aging because of its one-child policy. But China has a huge supply of surplus labor with state-owned enterprises that they can absorb into the private sector. I expect (and hope) that this development not only sweeps through Asia, which looks extremely promising, but also Latin America, the Middle East, and even Africa, which has been the so-called basket case. There are a billion people in Africa--of very young ages--and they have not yet started their growth.

India and China, by the middle of the century, will together be, in my opinion, more than four times the size of the United States.

Schulz: Should developing nations like India, China, Brazil or Indonesia adopt policy changes to ensure that they can grow, raise living standards, and increase productivity?

Dr. Siegel: Absolutely. First, keep in mind that the United States needs to keep the markets open; we don't want to impose tariffs, etc. That would be detrimental to us in the future.

But these countries also will have to make changes. I expect some degree of democratization in China. Property rights are critical and the reduction in corruption is also critical, as is the ability of new firms to form without undue red tape and interference from government bureaucracies. These are critical steps that will enable these countries to be a success in the future.

And with the Internet and newer technologies at their disposal, I see growth in the next 20 to 30 years on a worldwide basis faster than ever seen in our world's history. China, Japan, the United States, and Europe are only 15 to 20 percent of the population. The United States led the first charge. We had a monopoly on knowledge and information with the Internet and the communications revolution. Today, this information is reaching into Asia, where incredible developments in China, India, and elsewhere are going to spark increased productivity, invention, discovery, and innovation that will make productivity grow more rapidly--on a worldwide basis, not necessarily just in the aging countries but particularly in the other countries--than we've ever seen before.

Schulz: How important are intellectual property protections to ensuring that these economies stay dynamic and robust and continue to grow?

Dr. Siegel: We want the extension of technology into these areas, which is very, very positive; but we also want to protect enough of the rights so people won't say, "I can't produce anything if it's going to be stolen right away." You have to balance those two. And economists are trying to find what is the right line of that balance. Clearly, intellectual property has to have some protection to originate. If we can get some sort of laws on the book, the Chinese are going to start inventing. And they won't want anyone else to steal, if they can see both sides of the coin; so we might get some progress in that direction.

Schulz: Can you elaborate on the importance of technology?

Dr. Siegel: Technology is critical for progress. For increases in standard of living--what we call growth--it is so very important; but that doesn't mean that technology stocks are the best stocks to buy, just like you should not always bet on the best horse on paper at the racetrack. The horse could be over-bet, and as a result, the odds are way too low. You've got to look at the price as well. Too many people just look at one, without looking at the other. Technology is an unbelievable force. The communications and Internet revolution is one of the most exciting things to ever happen. Do I want to go into those stocks? Maybe, maybe not. I want to see what people are paying for them. If everyone else is excited about something, I tend not to want it.

E-mail

Print

Discuss | Text Size:

Highlighted Articles

		New Solution to the organ shortage Is there a simple and better incentive to increase organ donations?
		Roughing It in Africa A behind the scenes look at the safari of a lifetime in a Kenyan game reserve.
		Diabetes: Healthy choices Learn to manage diabetes without sacrificing great taste with savory and healthy soulutions.
		Tiger Woods' turbo swing Efficient use of body physics has made Tiger Woods' drive the most powerful in golf.