Bests & Worsts Reviews from Amazon

The basic theme throughout is simply that stock returns (in all developed nations, though at differing slopes, pp. 88-90) regress to a mean, as bonds, and all other investment alternatives, do not. That’s one point. By taking the long historical view (from the dawn of the American republic), Siegel also demonstrates (Chapter 6, pp. 93-103) that in this country over periods of five years and longer, real stock returns (after inflation) stray from our mean return (6.5%) less and less, until at thirty years the observed deviations are half what standard statistics expect. So stocks are both much more volatile short-term—cf. Mandelbrot and Hudson, The (mis)Behavior of Markets—and much less volatile long-term, than Modern Portfolio Theory says they should be. That’s point #2. And, his third crucial point, value strategies (Chapter 12, pp. 173-193, on low-P/E, high-dividend stocks) consistently surpass the market indices by 2% or more in annual compounded returns. I know of no other book which has made any one of these three points so clearly and demonstrated them so forcefully with historical data and mathematical analysis. Ben Graham, to be sure, made the case for value investing decades ago, and does a better job of understanding and presenting the process than anyone else before or since, but of course he couldn’t come close to the range and depth of modern databases and computing power to undergird his argument. Siegel has written the one book since Graham’s Intelligent Investor that everyone should read and re-read before presuming to buy any security other than an index fund. So, for instance, I needed to know that stocks have never failed to offer a positive real return over any period of seventeen years or more. Long-term bonds, in contrast, since the Civil War have outperformed stocks in just one 30-year period (by a minuscule .05% per year!), as interest rates fell from 16% in late 1981 to 2% in 2011—but the real return on these “safe” investments was negative for the entire post-war period before that, and likely will be for years to come. And Siegel repeatedly makes the point that especially when we think about retirement the only safety that matters is the assurance of rising purchasing-power over spans of decades. The book is not without its limitations. I don’t think Siegel understands options or other derivatives; his faulty discussion of stock index options in the 4th edition has been abbreviated, but his remaining remarks are misleading at best. Consequently the major new sections in this edition, which deal with the recent financial crisis, while fairly sound (e.g. showing how slight a role Fannie and Freddy played), understate the impact of synthetic credit default swaps, which by the time the fever broke had made the subprime mortgage market five times larger than the mess the bankers and mortgage brokers had created in the first place. Hence next to no one had any idea how immense the problem really was, though a few (see M. Lewis, The Big Short) saw enough to profit hugely. Other material in Siegel’s 378 pages adequately and sensibly covers major areas of historical interest (the primary stock indices, money, monetary policy and the gold standard), analyzes other financial and economic crises, surveys current issues (the business cycle, market responses to current events) and concerns (the developed world’s retirement “crisis”, on which he is quite optimistic), and I could cavil here and there or suggest other specialized treatments. But what he has to say on these topics is sufficient (and his history of the S&P 500 is excellent) for firmly embedding the three points with which I began, which are points every investor should ponder long and hard. But how many of us will profit from them? On p. 97 he mentions the allure of “safer” alternatives which do after all outperform stocks, over periods of one or two years, nearly 40% of the time. I don’t know that he sees how deep the pain goes for individuals watching dollars vaporize by the thousands, dollars which a bank account would at least have preserved and guaranteed. Nor, I think, does he see how hard it would be for asset managers to follow his principles when markets soar and “irrational exuberance" reigns triumphant; sticking to a long-term strategy is impossible when benchmark risk means your assets are marching out the door. Siegel’s work will most benefit those who know not just the concepts but themselves. It hurts to play from behind, alone, trusting the odds, trying to trust yourself. Long-term investment is a discipline less of intellect than of temperament and character. But the discipline of study and thought is still part of it, and Siegel’s history and mathematics keep me mindful of what the true odds are. In this and earlier editions, Stocks for the Long Run is one of just six books (cf. my review of M. Mauboussin More Than You Know) which have decisively shaped how I think about what I do.