Saturday, September 29, 2007

Jeremy Siegel: The Future For Investors

I finished reading Jeremy Siegel's "The Future For Investors" a couple of weeks ago. Before returning the book to the library, I think it's a good idea to write a summary for it in my blog.

In this book, Jeremy Siegel, a professor at the Wharton School and the author of "Stocks For The Long Run", argues about his "market-beating" investment strategy and his view on the baby boomer aging crisis.

The investment strategy Siegel advocates basically says that one should avoid the growth and the new economy traps in the equity market and instead buy the companies with tried-and-true products. The overvaluation (e.g. high P/E ratios) of the growth companies makes the investment risky and the return poor. On the other hand, good companies in the slow growing or even declining industries have low valuation and often pay high and steady dividends. The importance of dividends is especially emphasized for the following reasons. First, dividends are hard evidence that the company is really making profits ("show me the money"). Second, in a bear market the dividend yield can be even higher thanks to the price drop. The dividends, if reinvested, would automatically enable the investor to buy more shares at lower prices, accelerating the recovery from the bear market. The book also presents a sector-by-sector analysis and the author especially loves companies in the consumer staples and health care sectors (and probably the energy sector as well).

Some interesting data from the book include the top performing stocks from 1950 (up until 2003 when the book was written). These companies and their annualized returns are:

1. National Dairy Products (Kraft Food) 15.47%
2. R.J. Reynolds Tobacco 15.16%
3. Standard Oil Of New Jersey (ExxonMobil) 14.42%
4. Coca-Cola 14.33%

Another ranking is among the survivors of the original S&P 500 index (1957-2003):

1. Philip Morris 19.75%
2. Abbott Labs 16.51%
3. Bristol-Myers Squibb 16.36%
4. Tootsie Roll Industries 16.11%
5. Pfizer 16.03%
6. Coca-Cola 16.02%
7. Merck 15.90%
8. PepsiCo 15.54%
9. Colgate-Palmolive 15.22%
10. Crane 15.14%
11. H.J. Heinz 14.78%
12. Wrigley 14.65%
13. Fortune Brands 14.55%
14. Kroger 14.41%
15. Schering-Plough 14.36%
16. Procter & Gamble 14.26%
17. Hershey Foods 14.22%
18. Wyeth 13.99%
19. Royal Dutch Petroleum 13.64%
20. General Mills 13.58%
S&P 500 Average 10.85%

From these lists, it's not hard to find why Siegel thinks consumer staples, health care and energy sectors are the best for investors.

On the aging crisis of the baby boomer generation, Siegel believes the global economy, which he calls the true new economy, is the ultimate solution. Specifically, emerging countries such as China and India will have a relatively young population. They will be the world's major production forces and take over a large proportion of the equities from the Western world's aging population.

46 comments:

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