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Stocks for the Long Run by Jeremy J. Siegel

41 of 49 people found the following review helpful:

3.0 out of 5 stars Outdated. Do not buy the author's hypothesis uncritically, March 24, 2002

This is an outdated, but still useful introductory investment book. I would like to warn that the book definitely does not pay enough attention to the valuation and bad case scenarios: the real truth is that in case of worst case scenarios investors retire before they can enjoy any sizable return from their stock holdings "in the long run".

Siegel's ability to objectively analyze data is extremely limited and the whole book smells with data mining.

The book also most definitely underemphasizes the pain stock investors suffer after a crash. Moreover typical for the book "exponential" charts like the one on the cover conceal the brutal reality of periods like Japan's multi-year recession.

Beating the good bond portfolio "in a long run" is far from easy outside of periods of "irrational exuberance". In the case the investor faces a decline (or fairly flat decade) for stocks in the second half on their twenty years 401K investment cycle it requires a proper mix of cash, bonds and stocks as well as some successful trades. In no way a pure 100% stock portfolio and cost averaging can secure retirements funds for baby boomers. In this sense the book is extremely dangerous: it sells unscientific, snake oil salesman style advice to baby-boomers under the disguise of academic respectability.

Let's assume that the person was born in 1950, started to invest 10K a year at the age of 40 into 401K account and will be employed till the retirement age. With a simple 100% bond portfolio and 6% average return at the age 65 he/she will have ~$550K. With 100% investment into S&P 500 and assuming after year 2002 an average return of 5% with 10% declines in 2008 and 2013 this investor will get ~$450K: a noticeable difference.

The author also ignores a typical investors behavior during the bubbles: IMHO worst-case scenario are amplified by the fact many individual investors were lured into stock market exactly before the downturn (bear market of March 2001 - March 2002). An investor that switched all his money into S&P in March 24 2001 (when the index was 1521) in March 22, 2002 needs ~30% upswing just to break even. And a single year with 20-30% gain of S&P 500 may not repeat until his retirement. Unfortunately this is pretty realistic case for many individual investors.

The second important point missed by the author is that while the stock market cannot be accurately timed, buying stocks at high valuations is an invitation to low future returns. Robert Shiller (the author of Irrational Exuberance, 2000) argued that twenty year returns following market peaks in P/E ratios had inflation adjusted annual returns -0.2%-+1.9%. Smithers and Wright (Valuing Wall Street, 2000) came to pretty similar conclusions. In such cases stocks fail to outperform inflation protected bonds. And twenty years is what most investors have to create 401K retirement fund. One needs to understand that the US economy might be paying the costs of "irrational exuberance" for some years to come.

All-in-all the book was definitely influenced by the US stock bubble and as a typical "raging bull" the author definitely exaggerates potential returns of an all-stock 401K portfolio and ignores subtle problems. For example, it completely ignores an important problem of "share inflation" that has come in forms ranging from stock splits to extravagant options awards for executives or excessive issuance for acquisitions. It ignores Enron-style effects when along with fake earning reports the U.S. market has been flooded with shares sold by executives and there were not enough buyers to absorb the flow.

Although book provides a useful framework for the investor, do not buy the "Stocks for the Long Run" hypothesis uncritically.

For those investors that are ~50 years old, it is important to understand that the book does not take into account far reaching economic consequences of potential low annual returns on their stock market investments in the last decade before their retirement.

Other insightful reviews of Siegel pseudo-scientific theories

The Future for Investors- Why the Tried and the True Triumph Over the Bold and the New

1.0 out of 5 stars The Role of Luck in Siegel's Success, April 24, 2005
By Mark Pawley - See all my reviews
An absolute disappointment. This is a classic example of misreading the formula that made you successful in the first place. Sequels are usually bad, in this case Siegel's are bad. The reviews and cover quote by Warren Buffett are misleading, and I seriously doubt whether the reviewers read the book. There is nothing new here. Undervalued stocks (value stocks) have been touted as being superior forms of investment for a long time. Eugene Fama, and others, have produced fantastic research in this area. I found the book to be self aggrandising, offering no original contribution and totally out of character relative to the first book. The data mining is significant, and to suggest that tried and true is the way forward simply because the past delivered such a pattern is foolhardy. Give this book a miss.

54 of 144 people found the following review helpful:

1.0 out of 5 stars BAD INSIGHTS UNDERLYING A BAD BOOK, March 15, 2005

By David Smith "David Smith" (Los Angeles, CA) - See all my reviews

Jeremy Segal has put forth what he must consider to be the remarkable research that stocks that pay dividends outperform those that do not. He then ignores the effect of taxes, includes the benefit of hindsight in cherry picking his choices and then covers those errors with a surplus of data mining.

He makes no apology for his other bad book Stocks for the Long Run, which too pretended that stocks going up and down 40% or more four times within four years is not something to worry about because a Wharton professor who forgets to include taxes in his analysis thinks so.

The problem with Jeremy Siegal and his cohorts is this: they are trying to stretch a discredited theory about efficient capital markets well past its stretching point. In that task, they have the support of the mutual fund industry, which too would love people to close their eyes and keep buying the same amount of stock at the same time every month. In other words, the book is the work of a panderer and lobbyist for the mutual fund industry, and is no more interesting than say reading about solving the problems of terrorism from a lobbyist for Tazer or any other equipment manufacturer. Like all lobbyists he too has independent affiliations.

What makes the book particularly bad on its face is exactly that, its cover, which has citations from Warren Buffet and Robert Shiller, who in their main success have discredited the very theory underlying Jeremy Segal's book. Nothing smacks of contradictions more than an author in the sunset of his career running for endorsements from the very people who have eviscerated the conclusions of that career.

This is a bad book with bad insights from a bad professor of finance. If anyone disagrees, they may do well to answer the simple question: if the tried and true does trump over the bold and the new, and if you love dividends, why buy stocks at all sherlock. Buy REAL ESTATE (which is the index fund with lessor volatity and which by definition is where all profits ultimately show up, especially if you want to avoid the bold and the new). And if he loves stocks only, don't REITS pay the highest dividend anyway, so why spend part of the book about the coming fiscal crisis and not the highest paying dividends.

Finally, PLEASE DONT WRITE BOOKS WHERE THE INVESTMENT ADVANTAGE IS 2%. IT IS NOT WORTH THE UPS AND DOWNS OF 1987, 1989, 1994, 1998, 2000, 2001, 2002.