Thursday, July 17, 2008

Jeremy Siegel's Interesting Note

Quotes by Jeremy Siegel, talking about his new book, The Future for Investors:

For example, compare the performance of Standard Oil with IBM, from 1950-2003. IBM beat Standard Oil by wide margins in every growth measure that Wall Street uses to pick stocks: sales, earnings, dividends and sector growth. Yet in the end, Standard Oil earned 14.42% in total return compared to IBM's 13.83%. Why? Because despite the better fundamentals, investors paid too high a price for IBM, while old Standard Oil was cheaply priced. I call this the "growth trap." Investors make the mistake of buying the new thing, irrespective of price. Inevitably, the price is too high, and investors get bad returns.

Since 1957, the railroad sector has shrunk from representing 21% of the S&P 500, to just 5% today. Yet, railroad stocks have actually outpaced the index. Financial stocks have grown from 1% of the S&P 500 to over 20% today, and they’ve underperformed the index.

It's funny. People go to the race track, and look at the odds. But in the stock market, people look at a stock and say, "this is the best stock" and don't look at the price.

Skousen: I read that you like the "low P/E" stocks. But they are slow movers, right?

Siegel: Right, they're not exciting, but they're often the best performers over the long run.

I heartily agree. In the book, he notes that IBM handily outperformed various other S&P components in earnings, sales, etc. but it had such a high P/E, it actually underperformed as a stock.


Anonymous said...

I remember that Prof. Siegel found that the original S&P 500 members outperformed the rebalanced index, and this was due to dividends. One question that I would ask him is whether this would hold after tax using historical tax rates for the highest bracket.

Another interesting finding I remember was the differences in performance between sectors and industries. I don't have the book with me (it's actually been out for a while) but I seem to remember that some of the loser industries were industries that the Japanese started to make inroads into around the beginning of the study, so maybe worldwide they didn't do so poorly. My memory might be off on that one, but that would be the second question that I'd ask Prof. Siegel if I had the chance.

In general though, I'm a value guy and agree with you and the Prof. that the growth trap is a deadly one.

BTW, the link in this post didn't work when I clicked on it.

Eric Falkenstein said...

Thanks, fxd link.

no one looks at taxes, but i think it's important. Clearly, for about 30 years when the tax rate was 90%, people were doing lots of funky stuff.

Anonymous said...

has he learned about survivorship bias now? 'stocks for the long run' was ridden.

Anonymous said...

that was my question. How well do such studies take into account survivorship bias and the like.

ed said...

I'll wonder if you take dividend taxes into account, if the whole difference between IBM and Standard Oil would go away?