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.