Dr. Jeremy Siegel: Are Stocks Still The Best Long-Term Investment Vehicle?

by Alexander Green, Advisory Panelist

For more than a decade, author and academic Dr. Jeremy Siegel had the Midas touch.

His book “Stocks For the Long Run,” first published in October 1996, surveyed more than 200 years of stock market history both in the United States and abroad and made a compelling case that common stocks are the very best long-term investment vehicle. Better than cash. Better than bonds. Better than real estate. Better than gold.

In the roaring bull market of the 90s – and since – his book was required reading. Millions of investors were strongly influenced by his research.

In the process, Siegel became a celebrity, appearing regularly on network and cable investment shows. He is also now an advisor to WisdomTree Investments, a sponsor of exchange-traded funds.

But while history once buttressed Siegel’s grand conclusions, current events haven’t been so kind…

More specifically, as of June 30, U.S. stocks have underperformed long-term Treasury bonds over the past five, 10, 15, 20 and 25 years.

Zweig Argues Against Siegel’s Methodology

To add insult to injury, Jason Zweig recently argued in The Wall Street Journal that Jeremy Siegel’s methodology was flawed from the beginning. It turns out that Siegel’s chosen stock market indexes and dividend calculations from the 1800s were not representative of the period, skewing returns upward.

“Another emperor of the late bull market,” Zweig concludes, “has turned out to have no clothes.”

But what’s the real story here: Are stocks not the best long-term vehicle? Are bonds – or something else – better? Is Siegel just plain wrong?

The answer to each of these questions, it seems, is yes and no.

Bonds have outperformed stocks over the last 25 years in part because yields at the starting point – during the hyper-inflationary early 80s – were sky high. From current low levels, outsized returns like these are impossible.

(That doesn’t mean, of course, that equity returns couldn’t still lag them.)

And we can quibble about how equity returns were calculated in the 1800s, but let’s be serious. What difference does it make exactly what “stocks” returned when investors were swapping certificates – along with fox and beaver pelts – under a shade tree beside a dirt road.

That scenario bears little resemblance to modern financial markets.

The Real Reason To Invest In Stocks

No, the real reason to invest in stocks is because it allows the average investor to hold a liquid, diversified portfolio of profitable businesses, something that would otherwise be cost prohibitive for most.

Granted, the economy is tough right now. But businesses can always respond to adverse circumstances.

• During recessions, a business can cut costs, lay off unnecessary personnel and refinance debt at lower levels. During inflationary times, businesses can pass on higher costs to customers. Even the burden of higher taxes and greater regulation – both underway – are ultimately passed along to consumers.

In short, we will always have economic needs. Yet it is not government that provides us with food, clothing, shelter, health care and other essential goods and services. It is business.

• Businesses exist to meet our needs and, in the process, maximize profits for shareholders.
• Business ownership has always been the most reliable route to financial independence. And owning a diversified portfolio of fine companies should continue build and safeguard capital.

Just don’t make the mistake of believing that anything is guaranteed or that the future will look just like the past.

As the late, great Peter Bernstein said in the Preface to the first edition of “Stock for the Long Run“:

“When all is said and done, the future will always remain hidden from us. The past, no matter how instructive, is always the past… Professor Siegel so rightly warns readers of this when he writes that ‘the returns derived from the past are not hard constants, like the speed of light or gravitation force, waiting to be discovered in the natural world. Historical values must be tempered with an appreciation of how investors, attempting to take advantage of the returns from the past, may alter those very returns in the future.’ Although the advice set forth in this book very likely will yield positive results for investors, the odds are higher that uncertainty will forever be your inseparable companion.”

Good investing,

Alexander Green

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