THE FUTURE FOR INVESTORS
Why the Tried and the True
Triumphs Over the Bold and the New
By Jeremy J. Siegel
Crown -- 319pp -- $27.50
The Good A provocative update on "value investing."
The Bad Its analysis of tech investing isn't always persuasive.
The Bottom Line Despite a failure to prove his main thesis, Siegel's book is valuable and at times fascinating.
In 1994, Jeremy J. Siegel, a finance professor at the Wharton School, came out with a new book, Stocks for the Long Run. The volume had a powerful theme: Over long enough periods, stocks almost always outperformed bonds. Investors with a 20- or 30-year time horizon should therefore not be afraid of investing in the stock market.
Stocks for the Long Run was an immediate classic. Now, a decade later, Siegel has written The Future for Investors. This volume, which hits the stores on Mar. 8, has an equally provocative thesis: Putting your money into hot technology companies, rapidly expanding sectors, and fast-growing countries is not the best route to investment success.
The "relentless pursuit of growth," writes Siegel, "dooms investors to poor returns." He warns investors not to chase the Next Big Thing. "Technological innovation...turns out to be a double-edged sword that spurs economic growth while repeatedly disappointing investors," concludes Siegel. Investors should instead focus on what he calls the "tried and the true," since "history shows that many of the best-performing investments are...found in shrinking industries and in slower-growing countries."
Siegel offers up a plethora of fascinating facts and insights as he explains why the "tried and true" should outperform the "bold and new." Unfortunately, this book is not nearly as persuasive as Siegel's previous one. His message to investors is undercut by his own analysis, which shows that health care and information technology, both innovative industries, have beaten the overall market during the past half century. Even in the past 10 years -- including the boom and bust -- investors would have done better putting their money into the info tech sector than into a Standard & Poor's 500-stock index fund.
Despite this failure to prove his main thesis, Siegel's book is still valuable to investors. He points out, for example, that the 900-plus companies added to the S&P 500 index since its creation in 1957 have underperformed the original 500. Initial public offerings also underperform a portfolio of existing small stocks. And he tells why "most capital expenditures provide investors with poor returns."
Siegel gives investors concrete guidance about where to put their money. Rather than only relying on index funds, he recommends using such strategies as focusing on companies with high dividends or low price-earnings multiples. For example, a strategy of holding stocks with high dividends and reinvesting those dividends serves as protection against a bear market. Why? Because when the stock market goes down, the dividends buy more shares, and there's a chance of a big gain when the market comes back.
Siegel also explains at length how the Baby Boom generation in the U.S., Europe, and Japan will be able to finance its retirement. He does not predict doom, as many do. Rather, Siegel puts his trust in the fast-growing economies of the developing world. "The aging populations will import the goods and services they need," he writes, "and finance these purchases by selling their stocks and bonds to the investors in the developing world." In effect, Siegel is expecting Chinese and Indian investors to follow his advice and put their money into the slower-growing countries of the West.
Still, most people will read the book for its treatment of technology investing, and that's where it falls short. Consider Siegel's claim that investors should be wary of putting money into new technologies. In health care especially -- revolutionized by new drugs and surgical techniques during the past 50 years -- Siegel writes that "investor excitement had led to higher prices and disappointing returns." Yet by his calculations, health-care stocks have generated a 14.2% rate of return since 1957, more than any other sector and way above the 11% or so for the overall S&P. Abbott Labs (ABT ), Bristol-Myers (later Bristol-Myers Squibb (BMY )), Merck (MRK ), Pfizer (PFE ), and Warner-Lambert (bought up by Pfizer) all turned in annual returns of around 16% or better over the same stretch.
Since 1957, the information technology sector -- including both new and existing companies -- has produced an 11.4% return, also beating the overall market. Interestingly, people who invested back then in RCA, an early maker of transistors, and held their shares when RCA was bought by General Electric Co. (GE ) in 1986, would have seen an almost 13% annual return. (MOT )
From 1994 to today -- a period that includes the greatest tech bust in history -- the info tech sector has produced annual returns of 13%, compared with 12% for the whole S&P 500 index. The annual return on the health-care sector is almost 15% (these figures include reinvested dividends and are based on data from Bloomberg Financial Markets).
Siegel is one of the most influential figures in modern finance, and well worth reading. But investors should come fortified with a healthy dose of skepticism.
By Michael J. Mandel