space holder

The Stock Market Sage (continued)

    Before Siegel's ideas found their way into Stocks for the Long Run, they were published in academic journals. Part of his incentive to incorporate them into a book came from peers and colleagues who thought they would make an interesting study. The rest, he says, came from students who were looking for something else instructive to read after they had finished Burton Malkiel's influential bestseller, A Random Walk Down Wall Street. "I couldn't point to a book out there," Siegel says in his disarmingly easy-going Midwestern accent. "Everything was either too technical or was junk, written by people in the market on how to make a million and all that sort of stuff. So I decided, hey, there is a need for a book that has good academic grounding but speaks to the average investor." Although Siegel's book contains some investment strategies for those who enjoy the thrill of trying to "beat" the market, the primary mantra running through its pages is "buy and hold."
   Publishing the second edition of his book this year gave Siegel the opportunity to update his charts and to add new sections based on questions he'd been asked during the scores of lectures he gives each year to brokers and their clients. One of the greatest concerns expressed by audiences in recent years is the predicted phenomenon known as the "Age Wave" -- that there will not be enough Generation Xers with enough money to pick up the voluminous stock-and-bond portfolios of baby boomers when they retire. The solution to this problem, Siegel believes, lies in the population trends of emerging markets such as Southeast Asia.
   "I think there's going to be more integration around the world, and more capital flows," he says. "We talk about capital flows today being massive -- it's going to be a fraction of what takes place in 20 or 30 years, and there's going to be so much cross-ownership of shares and firms, the shareholders will be worldwide. I see the developing countries, as their young population today moves into middle age, being massive acquirers of capital and of U.S. shares toward the middle of the next century."
   Until its midsummer swoon, the market's robust performance was a financial-book-writer's dream. Since publication of the first edition of Stocks for the Long Run four years ago, the Dow had risen from 3,700 points to its record high of 9,338. "No one could have predicted the astronomical rise of more than doubling the market," Siegel says. "It certainly has been a favorable market climate for my book and the ideas in it." The two editions have sold about 100,000 copies to date. "I was amazed. I think my publisher told me that the average sales of an economics business book over its lifetime are something like 3,000 copies." Siegel says he isn't worried about the market's recent downturn spoiling his message. "I can still be bullish in the long run even though I'm pessimistic in the short run.'"
   Dr. William Goetzmann, professor of finance and real estate and director of the International Center for Finance at the Yale School of Management, doesn't argue with Siegel's claims that stocks make good long-term investments. But he believes that Siegel's analysis presents "too rosy a view of the future of stocks," because it only looks at 195 years in the history of the U.S. market -- the champion of all the world's stock markets. "If you've got 40 markets and you say, 'I'll take the very best market out of the 40 and use that as the measure [of stock returns],' you have to believe you're overestimating the future," Goetzmann says. "In terms of making a forecast of future stock-market returns, you probably should be a bit more conservative than the historical equity premium."
   Though Siegel does admit that the United States has been "a survivor country" compared to the markets of some other nations, he notes that many of the foreign markets that he examined experienced returns that were "remarkably close" to those in the United States.
   The phone rings. It's a New York Times reporter who wants to pick Siegel's brain about the implications of the Russian and Asian economic crises for diversified stock portfolios. Siegel cheerfully complies, leaning back in his office chair and gesturing with his arms as he expounds on the significance of "three-quarters of the world's population [moving] from being under a Communist/socialist economy where the West and Western goods were effectively totally shut out, to now being part of a global market where Western goods are not only available, but almost revered "
   "My feeling," Siegel explains later, "is that one of my functions is to be a teacher for the students here, but my second function is to try to educate as many people who want to learn. Whereas many of my colleagues are wary of the financial press, I have welcomed the financial press." So when Siegel's vacation coincided with the first 300-point decline of the Dow in early August, it was characteristic that he left his forwarding number at the shore for reporters. "I got calls from CNBC, CNN, NPR, and from virtually all the major newspapers -- The Wall Street Journal, The New York Times, Investor's Business Daily "
   One of the things that reporters expect scholars like Siegel to do is to offer definitive explanations for this dip and that rally -- even when there don't appear to be any. He writes at length in his book about this "deep psychological need to find fundamental explanations for why the market is doing what it is doing." Researching the past 123 major movements in the market (plus or minus five percentage points in one day) since the Dow Jones averages were first formulated in 1885, he found that fewer than one in four were associated with specific news events. "It is very hard," Siegel explains, "for the human mind to accept that much of the world is random and has no plan and is by chance. So you feed them explanations, and many of the smarter ones nod their heads. Deep down they know it's probably not right," he chuckles, "but it helps them that someone has an answer."
November/December Contents | Gazette Home
Copyright 1998 The Pennsylvania Gazette Last modified 10/28/98