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The Stock Market Sage (continued)

   Siegel leans toward the terminal again and announces that the Dow has dropped 64 points. "There is a serious deterioration of the market," he whispers, sounding as if he's observing a surgical operation unfold through the computer screen, and the patient is hemorrhaging. "The bull is over." Later, the Dow gains back a couple dozen points, but Siegel isn't encouraged. "It's not going to hold. There's going to be another attack on the market before this day is out."

   And he's right. The Dow will close down 114 points, at 8,051.68, for the day. By early October, it will have fallen 18 percent from its peak. "See how you get to know the market, to predict the movements?" Siegel says. "It's like, almost, it's not a living thing, but the essence of all the psychology around the world. And I tell you, no one will ever figure out the human mind, but the closer you are to [the market], you get some insights into its internal dynamics."
   To become as entranced as he has by the market, one might think that Siegel had been strongly influenced by some person during his childhood. But the 52-year-old suburban Chicago native, whose family owned a small lumber business, says his parents distrusted stocks. Both had grown up during the Great Depression, and, when Siegel was very young, his mother lost most of her savings on a mining stock. Siegel was nevertheless captivated by the fluctuations of the market. "I liked charts and graphs. I liked things that changed from day to day," he says. "I remember once when I was very young that we had a couple of morning-glory vines outside the breakfast window. Every day the morning glories would bloom and they would only last for a day, and then they would die." The seven-year-old Siegel would go outside each morning to count the flowers, neatly tracking their number with colored pens on graph paper.
   Siegel showed a facility for math early on and decided one day that he was going to double enough numbers to reach what's known as a vigitillion (one with 63 zeros after it). He carried around a roll of adding-machine tape on which he wrote his calculations ("one plus one is two, two plus two is four, four plus four is eight ") until he finally reached the impressive figure. "My third-grade teacher looked at me rather oddly," he recalls.
   Rather than discourage his interests, his parents bought him a share each of about 20 different blue-chip stocks when he was a young teenager. ("This could be done pretty cheaply back then.") Siegel soon discovered, however, that it was the market as a whole that intrigued him more. "I never had as much interest in picking individual stocks, which is of course the way that most people get into the market. In a way I regarded that as too complicated."
   Then, when he was a sophomore at Highland Park High School, Siegel read up on the stock market crash of 1929 and gave a talk on it for speech class. "I just loved it," he recalls. "I guess I [already] knew I liked teaching in a way because I did tutoring a lot in math and chemistry and other subjects, and I would love to explain things to people, but this was the first time it wasn't one on one."
   It wasn't until Siegel was a junior at Columbia University that he took his first economics course. "I started as a math major," he says. "Three weeks into [macroeconomics], I knew I wanted to be an economist. It so captivated me. I had a wonderful teacher, Professor Peter Kenen -- he's now at Princeton. It was a big lecture hall with 350 people, but macro -- what made the economy go up or down -- wow! That was what I loved." Siegel went on to earn his Ph.D. at the Massachusetts Institute of Technology, where he became friends with economist Dr. Robert Shiller. They met on the first day of school, while lining up alphabetically for the required chest x-rays. "He seemed to know a lot about the market and was argumentative in class," recalls Shiller, The Stanley B. Resor Professor of Economics at Yale University who previously was on the faculty at Penn. "When the professor said something he regarded as wrong, he wouldn't let go. He was a lot of fun."
   Siegel still likes to argue, and when their families vacation at the Jersey shore together, he and Shiller quibble over premiums during long walks along the beach. "He has been bearish for years and I've been bullish for years," Siegel says. "What's funny is that we've often been put at opposite ends [in the media], and yet they don't know that we are the closest friends."
   Today, Siegel still asserts that, even bought at the market peak, stocks are a superior long-term investment. Shiller, on the other hand, argues that stocks have been dramatically overvalued in recent years. In a study conducted with Dr. John Campbell of Harvard University last winter, he concluded that if the price/earnings ratio and dividend yield of stocks reverted to their historic norms over the next 10 years, the market would drop some 40 percent (a finding that Siegel politely disagrees with).
   "He's made the point very forcefully that investors have to watch out about [getting in and out of the market] too often," says Shiller of Siegel. "That they should be long-term investors. He doesn't want to get involved in ever changing that message. He may be right in the long run. I'm saying, I don't see why you should be in it right now. Why buy something that's so overpriced? It just doesn't look like a good gamble. There's a lot of volatility and no expected return for it.
   "I guess it's like when people give medical advice," he concedes. "It has to be very simple." Yet for all of their disagreements, Shiller adds, "His thinking has shaped mine so much, and these walks on the beach have been very helpful to me. I've learned so much from him."
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