Jeremy Siegel: Stocks Are the Most Stable Asset Class in the Long Run

[Andrewgoh]

From CFA institute

Professor Jeremy J. Siegel walked delegates at the Equity Research and Valuation 2013 conference through a treasure trove of historical data on the financial markets. He examined the long-run performance of a wide range of asset classes, culminating in an update of his now-famous Stocks for the Long Run data set, which shows that equity risk premia are real and universal. Across huge swaths of time and across different countries, stocks consistently beat inflation. Siegel’s conclusion is that stocks are the most volatile asset class in the short run — but the most stable asset class in the long run.


Of course, Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, also sounded a note of caution, warning of aggregation bias in data. As an example, he cited Robert Shiller’s cyclically adjusted price-to-earnings ratio (CAPE). Many have focused on the CAPE ratio to argue that stocks are richly valued, but the S&P 500 (SPX) earnings data suffer from an aggregation bias in which large losses from a few companies can offset the earnings of the rest of the index. The S&P 500 treats companies as if they were a single corporation with 500 divisions. Of course, this approach to constructing the S&P earnings is wrong, particularly when there are large losses generated by a small number of firms. Importantly, P/E ratios computed from the S&P earnings data set are problematic, and these problems are amplified when one uses CAPE to examine cycles.

The game of investing is difficult enough on its own, but investing based on bad data can lead to some very poor conclusions. This flawed data from the S&P contributes to why some feel we are in an equity bubble, as Shiller’s CAPE ratio is currently well above long-run averages. However, when adjusting the data by using corporate earnings from the national income and product accounts (NIPA) and market-capitalization weighting corporate earnings, a very different picture emerges. The adjusted CAPE ratio reveals that stocks today are trading slightly below their long-run average multiple.

The risk isn’t just that you get one trade wrong. The risk is that your negative experience could cause you to abandon an otherwise sound investment principle that you erroneously conclude doesn’t work. In other words, the principle might be fine. It may just be your data.

http://blogs.cfainstitute.org/investor/2...-long-run/
Check out Siegel’s entire presentation in the video above.

[violinist]

A bull will always be a bull.

[Temperament]

In the long run it really doesn't matters anymore. Because in the long run we are all dead, literally.

[Big Toe]

I used to subscribe to the long run idea until I ran out of breath recently.
The thing is that when things go wrong, it can go really wrong and can be a one way street.
Track record and everything that mattered previously is out the window, at its lowest point,
the company switches to survival mode and you would be staring at huge losses. If it does survive,
it's a very long climb back, it is does not survive, there goes all your money. (And I am not talking about trash counters,
the ones got hit recently, Blue Monty, Lion's Arse and Ah-sia kia.)

If one has a very long life span and have plenty free cash in hand, it is possible to take advantage of extreme situation.
(I.e. CitiB @ $1.) But chances are that when extreme situation occurs, most of us would have little cash to spare or
be too scared to even look at the stock market.

[Big Toe]

Just a thought, given a choice whether I would have invested my $ in CitiB @ $1 or Osim @ $0.20.
I would still have invested in CitiB. Reason: At the point in time, there is much higher chance that CitiB would be able to slowly normalize
its earnings rather than Osim. Of course at this point I am proven wrong now that Osim is way ahead, but that doesnt change
the rationale for my investment decisions.

[Temperament]

Just a thought, given a choice whether I would have invested my $ in CitiB @ $1 or Osim @ $0.20.
I would still have invested in CitiB. Reason: At the point in time, there is much higher chance that CitiB would be able to slowly normalize
its earnings rather than Osim. Of course at this point I am proven wrong now that Osim is way ahead, but that doesnt change
the rationale for my investment decisions.

Agree. Though never look at these 2 at all. To me it's like looking at an elephant and a mouse.

[freedom]

I used to subscribe to the long run idea until I ran out of breath recently.
The thing is that when things go wrong, it can go really wrong and can be a one way street.
Track record and everything that mattered previously is out the window, at its lowest point,
the company switches to survival mode and you would be staring at huge losses. If it does survive,
it's a very long climb back, it is does not survive, there goes all your money. (And I am not talking about trash counters,
the ones got hit recently, Blue Monty, Lion's Arse and Ah-sia kia.)

If one has a very long life span and have plenty free cash in hand, it is possible to take advantage of extreme situation.
(I.e. CitiB @ $1.) But chances are that when extreme situation occurs, most of us would have little cash to spare or
be too scared to even look at the stock market.

I don't think that's the fault of the stock market, but the unrealistic expectation of the investors.

If beating the inflation is the only expectation, investors will tend to limit their risk and select good stocks, e.g. PG/JNJ/WMT etc at fair price. And investors have great chances to buy PG/JNJ/WMT around 60 - 70.

They have almost 0 chance to lose in the long run. That's good enough for 99% of the population.

[Big Toe]

PG/JNJ/WMT are great companies but not many other companies will have moats as wide as theirs.
Then again if you look at PG at the height of the crisis it was $40+, significantly lower than what it was trading before.
Now it is at its record high but things have changed since, USD has weaken dramatically.

If an investor has put in money constantly pre-crisis, the returns may have only matched or beaten inflation only by a whisker.
In a high inflationary environment like Singapore(where almost everything is always getting more expensive),
the money might have not worked out well compared to other asset class(yes, assets like property worked out really well even though I would expect softening very soon).

The crisis of 09 was unprecedented and to make money work harder, money needs to be set aside for opportunities. Depending on where we are on the economic cycle, for the folks who missed the boat, it's actually better to prepare and wait for the next one. Thus we must stay healthy to have a longer life span to take advantage of these situation.

[Andrewgoh]

I used to subscribe to the long run idea until I ran out of breath recently.
The thing is that when things go wrong, it can go really wrong and can be a one way street.
Track record and everything that mattered previously is out the window, at its lowest point,
the company switches to survival mode and you would be staring at huge losses. If it does survive,
it's a very long climb back, it is does not survive, there goes all your money. (And I am not talking about trash counters,
the ones got hit recently, Blue Monty, Lion's Arse and Ah-sia kia.)

If one has a very long life span and have plenty free cash in hand, it is possible to take advantage of extreme situation.
(I.e. CitiB @ $1.) But chances are that when extreme situation occurs, most of us would have little cash to spare or
be too scared to even look at the stock market.

I don't think that's the fault of the stock market, but the unrealistic expectation of the investors.

If beating the inflation is the only expectation, investors will tend to limit their risk and select good stocks, e.g. PG/JNJ/WMT etc at fair price. And investors have great chances to buy PG/JNJ/WMT around 60 - 70.

They have almost 0 chance to lose in the long run. That's good enough for 99% of the population.

Well I do agree with freedom that alot of times, a lot of people get hurt in the stock market is due to buying at unrealistic expectations. If i am not wrong, in one of the memos, Howard Marks mentioned, the thing about bull market happening in 3 waves (not Elliot wave) is that there is a first group of people that 1st saw the undue pessimism priced in the market and thinks that market is turning ard, the 2nd wave is the group of investors that believes the market has turned ard and growing, the 3rd wave of the bull is when EVERYONE thinks the market is growing and will keep growing at that exponential rate.

@Big Toe, I still subscribe to the idea of stocks for the long run and i hope that you do not lose faith! If you read the book that Jeremy Siegel wrote, he did caveat that his data has alot of survivorship bias (if my memory doesn't fail me, he did put down the index constituents of the dow since it begun and the dow now, almost all changed with only 1 or 2 still in), its just a generic idea of stocks as an asset class offering the best real returns in the long run, not holding the same stocks forever. Maybe what you could do is to buy cheap, sell when its dear or fair and rebalance.

Talking about take advantage of extreme situation, given that usdidr has recently touch the 12,000 psychology level (unseen for the last 10 years, if i am not wrong 12,000 is in year 2000 and 14k or 15k in '97), I am working thru some of the co's there to find some pockets of value.. coal prices going up recently, the indonesian elections is in march-apr 2014 and if not wrong they are going to offer usd bond offering this week. What do u guys think?

[freedom]

Bear market is relatively much shorter than the bull market. That's one of the reason that the world is moving forward instead of backward. For the long term investment horizone, I am not advocating investment only during extreme bad time. For one, it could be one year out of a decade. How many decades can a person have? Secondly, no one has any idea where is the bottom. Buying during the bear market could well be worse than buying at the early bull market. Plus, during extreme bear market, fear is not easily conquered to keep putting more money into the market. Even warren Buffett can't fully be fully invested during the bear market and he famously said that "be greedy when others are fearful and be fearful when others are greedy."