Word
Gems
What is a
man but the sum of his thoughts?
Wealth
& Economics
Jeremy
Seigel:
The
Future for Investors
Chapter One: The Growth Trap
...Why did Standard Oil beat IBM when if fell far short in every growth
category? One simple reason: valuation, the price you pay for earnings and dividends you
receive...
Dividends are a crucial factor driving investor returns. Because Standard Oil's
price was low and its dividend yield much higher, those who bought its stock and
reinvested the oil company's dividends accumulated almost 15 times the number of shares
they started out with while investors in IBM [had] only three times their original
shares...
...The more than 900 new firms that have been added to the index since it was
formulated in 1957 have, on average, underperformed the original 500 firms in the
index. Continually replenishing the index with new, fast-growing firms while removing the
older, slower-growing firms has actually lowered the returns to investors who
link their returns to the S&P 500 Index.
Long-term investors would have been better off had they bought the original
S&P 500 firms in 1957 and never bought any new firms added to the index. By following this buy-and-never-sell approach, the investors would have
outperformed almost all mutual funds and money managers over the last half century.
Dividends matter a lot. Reinvesting dividends is the critical factor...
In contrast to skeptics who claim that high-dividend paying firms lack "growth
opportunities," the exact opposite is true. Portfolios invested in the
highest-yielding stocks returned 3% per year more than the S&P 500 Index, while those
in the lowest-yielding stocks lagged the market by almost 2% per year.
The return on stocks depends not on earnings growth but solely on whether this
earnings growth exceeds what investors expected, and those growth expectations are
embodied in the price-to-earnings ratio. Portfolios invested in the lowest p/e stocks in
the S&P 500 returned almost 3% per year more than the S&P 500 Index... results
were almost identical to those using dividend yields...
The growth trap holds for industry sectors as well... The fastest growing sector,
the financials, has underperformed the benchmark S&P 500 Index...The
lowly railroads, despite shrinking from 21% to less than 5% of the industrial sector,
outperformed the S&P 500 Index over the last half century.
The growth trap holds for countries as well. The fastest-growing country over the
last decade has rewarded investors with the worst returns. China... has painfully
disappointed investors with its overpriced shares and falling stock prices...
Chapter Three: The Tried and the True
...The best-performing firms for the investors have been those with strong brand
names in the consumer staples and pharmaceutical industries...
No technology or telecommunications firm made the list of best-performing
stocks...
Chapter Ten: Reinvested Dividends
...It took more than a quarter of a century, but on November 24, 1954, the Dow
Jones Industrial Average finally closed above the level it had reached at the bull market
peak on September 3, 1929. This 25-year stretch is the longest time between stock market
peaks in the more than 100-year history of the Dow... Many stocks fell 90% [during the
Depression] and a vast majority of those who invested on margin or with borrowed money
were wiped out. Millions vowed never to invest in equities again.
But for long-term stock investors who declined to buy stocks with borrowed money,
those 25 years had been far from a disaster...
Instead of just getting back to even in November 1954, stockholders who reinvested
their dividends realized an annual rate of return of over 6% per year...
Chapter 12: Is The Past Prologue?
...since 1802 the after-inflation rate of return on a diversified portfolio of
common stocks was between 6.5 and 7 percent per year...
...a single dollar invested in stocks in 1802 grows to $597,485 of purchasing
power, by the end of 2003, far ahead of the $1,072 in bonds or $301 in T-bills. And a
single dollar of gold bullion, an asset so beloved by many investors, would be worth only
$1.39 two centuries later after the effects of inflation are removed... the dollar we hold
today can buy only 7 cents' worth of what it commanded two centuries earlier...
...real bond returns at 3.5%, are barely one-half of real stock returns...
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