Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies

by Siegel, Jeremy J.

• ISBN13: 9780071370486
• ISBN10: 007137048X
• Edition: 3rd
• Format: Hardcover
• Copyright: 2002-06-21
• Publisher: McGraw-Hill

Summary

This book combines a compelling and timely portrait of today's turbulent stock market with the strategies, tools, and techniques investors need to maintain their focus and achieve meaningful stock returns over time.

Author Biography

Jeremy J. Siegel, Ph.D., is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania. An advisor to the Federal Reserve, Siegel is an acclaimed consultant and lecturer for financial firms and money managers around the globe and is a frequent guest on CNBC, CNN, PBS, "Wall Street Week," and NPR.

Table of Contents

Foreword	xv
Preface	xix
Acknowledgments	xxiii
PART 1 THE VERDICT OF HISTORY
Stock and Bond Returns Since 1802	3	(22)
``Everybody Ought to Be Rich''	3	(2)
Financial Market Returns From 1802	5	(2)
Historical Series on Bonds	7	(2)
The Price Level and Gold	9	(2)
Total Real Returns	11	(1)
Interpretation of Returns	12	(2)
Long-Period Returns	12	(2)
Short-Period Returns	14	(1)
Real Returns on Fixed-Income Assets	14	(1)
The Fall in Fixed-Income Returns	15	(1)
Equity Premium	16	(2)
International Returns	18	(4)
Germany	20	(1)
United Kingdom	20	(1)
Japan	21	(1)
Foreign Bonds	21	(1)
Conclusion	22	(1)
Appendix 1: Stocks from 1802 to 1871	23	(1)
Appendix 2: Arithmetic and Geometric Returns	24	(1)
Risk, Return, and Portfolio Allocation	25	(18)
Measuring Risk and Return	25	(1)
Risk and Holding Period	26	(3)
Investor Holding Periods	29	(1)
Investor Returns from Market Peaks	30	(2)
Standard Measures of Risk	32	(2)
Correlation Between Stock and Bond Returns	34	(2)
Efficient Frontiers	36	(1)
Recommended Portfolio Allocations	37	(2)
Inflation-Indexed Bonds	39	(2)
Conclusion	41	(2)
Stock Indexes	43	(14)
Market Averages	43	(1)
The Dow Jones Averages	44	(1)
Computation of the Dow Index	45	(3)
Long-Term Trends in the Dow	46	(2)
Use of Trend Lines to Predict Future Returns	48	(1)
Value-Weighted Indexes	48	(4)
Nasdaq Index	49	(2)
Wilshire 5000 and Russell Indexes	51	(1)
Worldwide Rank of Individual Firms	52	(1)
Transformation of S&P 500 Index	52	(2)
Return Biases in Stock Indexes	54	(1)
Appendix: What Happened to the Original 12 Dow Jones Industrials?	55	(2)
The Impact of Taxes on Asset Returns	57	(14)
Historical Taxes on Income and Capital Gains	58	(1)
A Total After-Tax Returns Index	58	(3)
The Benefits of Deferring Capital Gains Taxes	61	(1)
Inflation and the Capital Gains Tax	62	(2)
Increasingly Favorable Tax Factors for Equities	64	(2)
Stocks or Bonds in Tax-Deferred Accounts?	66	(1)
Conclusion	67	(1)
Appendix: History of the Tax Code	68	(3)
Perspectives on Stocks as Investments	71	(16)
Early Views of Stock Investing	73	(1)
Influence of Smith's Work	74	(2)
Common Stock Theory of Investment	76	(1)
A Radical Shift in Sentiment	76	(1)
Postcrash View of Stock Returns	77	(2)
The Cult of Equities	79	(3)
The Technology Boom	82	(1)
Legacy of the Bull Market	83	(4)
PART 2 VALUATION, FUTURE STOCK RETURNS, AND STYLE INVESTING
Sources and Measures of Stock Market Value	87	(24)
An Evil Omen Returns	87	(2)
Valuation of Cash Flows From Stocks	89	(1)
Sources of Shareholder Value	90	(2)
Does the Value of Stocks Depend on Dividends or Earnings?	92	(1)
Long-Term Earnings Growth and Economic Growth	93	(2)
Historical Yardsticks for Valuing the Market	95	(3)
The Price-to-Earnings Ratio	95	(2)
The P-E Ratio and Future Stock Returns	97	(1)
Earnings Definitions and Controversy	98	(2)
Reported and Operating Earnings	98	(1)
Aggregate Earnings Estimates	99	(1)
Earnings Quality and Returns	100	(1)
Book Value, Market Value, and Tobin's Q	100	(3)
Market Value Relative to GDP	103	(1)
The Fed Model of Market Valuation	104	(3)
What Do These Valuation Measures Show?	107	(4)
The Great Bull Market, the New Economy, the Age Wave, and Future Stock Returns	111	(20)
The New Economy and Earnings Growth	112	(1)
Corporate Profits and National Income	112	(3)
Profits in the New Economy	115	(1)
Factors Raising the Valuation Ratios	115	(6)
More Stable Economy	116	(1)
Transactions Costs	117	(1)
Taxes	118	(1)
New Justified P-E Ratios	119	(2)
The Equity Premium	121	(1)
Future Equity Returns	122	(2)
Terrorism	124	(1)
The Age Wave	125	(3)
Solutions to the Age Wave Crisis	128	(1)
Conclusion	129	(2)
Large Stocks, Small Stocks, Value Stocks, Growth Stocks	131	(16)
Outperforming the Market	131	(1)
Risks and Returns in Small Stocks	132	(1)
Trends in Small Stock-Returns	133	(3)
Value-Based Criteria	136	(1)
Price-to-Earnings (P-E) Ratios	136	(1)
Price-to-Book Ratios	136	(1)
Value and Growth Stocks	137	(4)
Nature of Growth and Value Stocks	141	(1)
Dividend Yields	141	(1)
Distressed Firms	142	(1)
Initial Public Offerings	143	(1)
Investment Strategy	144	(3)
Valuation of Growth and Technology Stocks	147	(16)
The Nifty Fifty of the 1970s	150	(3)
Evaluation of Data	153	(1)
What Was the Right P-E Ratio to Pay for the Nifty Fifty?	153	(1)
Earnings Growth and Valuation	154	(1)
Returns of High and Low P-E Nifty Fifty Stocks	155	(1)
Justified P-E Ratios for Individual Stocks	156	(4)
Conclusion	160	(1)
Appendix: Corporate Changes in the Nifty Fifty Stocks	161	(2)
Global Investing	163	(20)
Cycles in Foreign Markets	164	(4)
Diversification in World Markets	168	(6)
Principles of Diversification	168	(1)
Efficient Portfolios	168	(1)
Increase in Correlation between World Returns	169	(4)
Sector Diversification	173	(1)
Hedging Foreign Exchange Risks	174	(1)
Hedging in the Short Run	175	(1)
The Emerging Market Crisis of 1998	176	(2)
Aftermath of Crisis	178	(1)
Conclusion	179	(4)
PART 3 ECONOMIC ENVIRONMENT OF INVESTING
Gold, the Federal Reserve, and Inflation	183	(20)
Money and Prices	184	(2)
The Gold Standard	186	(1)
Establishment of the Federal Reserve	187	(1)
Fall of the Gold Standard	187	(1)
Postdevaluation Policy	188	(2)
Postgold Monetary Policy	190	(1)
The Federal Reserve and Money Creation	191	(1)
How the Fed Affects Interest Rates	191	(1)
Fed Policy Actions and Interest Rates	192	(2)
Stocks as Inflationary Hedges	194	(1)
Why Stocks Fail as a Short-Term Inflation Hedge	195	(3)
Higher Interest Rates	195	(2)
Supply-Induced Inflation	197	(1)
Fed Policy, the Business Cycle, and Government Spending	198	(1)
Inflation and the U.S. Tax Code	198	(3)
Inflation Distortions to Corporate Earnings	198	(2)
Inflation Biases in Interest Costs	200	(1)
Inflation and the Capital Gains Tax	200	(1)
Conclusion	201	(2)
Stocks and the Business Cycle	203	(12)
Who Calls the Business Cycle?	204	(3)
Stock Returns Around Business Cycle Turning Points	207	(3)
Gains Through Timing the Business Cycle	210	(1)
How Hard Is It to Predict the Business Cycle?	211	(3)
Conclusion	214	(1)
World Events That Impact Financial Markets	215	(14)
September 11, 2001	215	(2)
What Moves the Market?	217	(3)
Uncertainty and the Market	220	(1)
Democrats and Republicans	221	(3)
Stocks and War	224	(4)
The World Wars	225	(2)
Post-1945 Conflicts	227	(1)
Conclusion	228	(1)
Reactions of Financial Markets to Economic Data	229	(14)
Economic Data and the Market	231	(1)
Principles of Market Reaction	231	(1)
Information Content of Data Releases	232	(1)
Economic Growth and Stock Prices	233	(1)
The Employment Report	234	(1)
The Cycle of Announcements	235	(2)
Inflation Reports	237	(1)
Core inflation	237	(1)
Employment Costs	238	(1)
Impact on Financial Markets	238	(1)
Central Bank Policy	239	(1)
Conclusion	239	(4)
PART 4 STOCK FLUCTUATIONS IN THE SHORT RUN
Spiders, Cubes, Futures, and Options	243	(20)
Exchange-Traded Funds	244	(1)
Stock Index Futures	245	(2)
The Impact of Index Futures	247	(1)
Basics of Futures Markets	248	(3)
Index Arbitrage	251	(2)
Predicting the New York Open with Globex Trading	253	(1)
Double and Triple Witching	254	(1)
Margin and Leverage	255	(1)
Using ETFs or Futures	256	(1)
Comparing ETFs, Futures, and Index Mutual Funds	256	(2)
Index Options	258	(2)
Buying Index Options	260	(1)
Selling Index Options	261	(1)
Long-Term Trends and Stock Index Futures	261	(2)
Market Volatility	263	(20)
The Stock Market Crash of October 1987	265	(2)
Causes of the Stock Market Crash	267	(1)
Exchange-Rate Policies	267	(2)
The Stock Market Crash and The Futures Market	269	(1)
Circuit Breakers	270	(1)
The Nature of Market Volatility	271	(1)
Historical Trends of Stock Volatility	272	(3)
VIX: The Volatility Index	275	(2)
Distribution of Large Daily Changes	277	(2)
The Economics of Market Volatility	279	(1)
Epilogue to the Crash	280	(3)
Technical Analysis and Investing with the Trend	283	(16)
The Nature of Technical Analysis	283	(1)
Charles Dow, Technical Analyst	284	(1)
Randomness of Stock Prices	285	(1)
Simulations of Random Stock Prices	286	(2)
Trending Markets and Price Reversals	288	(1)
Moving Averages	289	(1)
Testing The Dow Jones Moving-Average Strategy	290	(4)
The Nasdaq Moving-Average Strategy	294	(1)
Distribution of Gains and Losses	295	(1)
Conclusion	295	(4)
Calendar Anomalies	299	(16)
The January Effect	300	(3)
Causes of the January Effect	303	(2)
The January Effect in Value Stocks	305	(1)
Monthly Returns	306	(2)
The September Effect	308	(2)
Intramonth Returns	310	(1)
Day-of-the-Week Effects	311	(2)
What's an Investor to Do?	313	(2)
Behavioral Finance and the Psychology of Investing	315	(26)
Technology Boom, 1999-2001	316	(2)
Behavioral Finance	318	(23)
Fads, Social Dynamics, and Stock Bubbles	319	(2)
Excessive Trading, Overconfidence, and the Representative Bias	321	(3)
Prosperity Theory, Loss Aversion, and Holding onto Losing Trades	324	(3)
Rules to Avoid Behavioral Traps	327	(1)
Myopic Loss Aversion, Portfolio Monitoring, and the Equity Risk Premium	328	(2)
Contrarian Investing and Investor Sentiment: Two Strategies to Enhance Portfolio Returns	330	(3)
Out-of-Favor Stocks and the Dow 10 Strategy	333	(8)
PART 5 BUILDING WEALTH THROUGH STOCKS
Fund Performance, Indexing, and Beating the Market	341	(18)
Performance of Equity Mutual Funds	342	(5)
Finding Skilled Money Managers	347	(2)
Reasons for Underperformance of Managed Money	349	(1)
A Little Learning Is a Dangerous Thing	349	(1)
Profiting from Informed Trading	350	(1)
How Costs Affect Returns	350	(1)
Development of Indexing and Passive Investing	351	(1)
Potential Pitfalls of Indexing	352	(1)
Effect of Overpricing on Returns	353	(2)
Effects of Overpricing on Portfolio Allocation	355	(2)
Conclusion	357	(2)
Structuring a Portfolio for Long-Term Growth	359	(12)
Principles of Long-Term Investing	360	(6)
Return-Enhancing Strategies	366	(2)
Implement the Plan and the Role of an Investment Advisor	368	(2)
Conclusion	370	(1)
Index	371