Stocks for the Long Run (Hardcover)

This book is the best summary of the historical data on investing. Some of the data go back to 1802.

Rather than summarize everything the book shows, let me focus in on a few key points that might slip past you. These are contrary to the conventional wisdom in some cases, and different from what you will hear on television. I suggest you pay careful heed.

(1) Diversification and historical data suggest that you should be sure to invest outside of the United States with part of your financial assets. Currently, for many people, this should be up to 25 percent of the total portfolio in international stocks. These stocks should be equally weighted between Europe, Asia, and emerging countries.

(2) Written in 1997 for this edition when the Dow was 7400, nothing in the book justifies a Dow of 11,000. If you look at the long-term chart of stock-price multiples, there has been a severe downdraft after the two other times when multiples expanded so much. This suggests caution.

(3) Small cap value stocks provided superior returns historically, and those returns were highly concentrated in January of each year. This suggests a potential trading strategy opportunity of owning those stocks in January and shifting into other stocks at the end of January, depending on the 200 day moving average trends.

(4) Almost no professional investors keep up with the market averages over 10 years. Although he doesn't express it, individual investors tend to do worse. Why will it be different for you over the next 10 years? Therein lies the case for index funds and the Dow 10 strategy (buy the 10 highest yielding Dow Industrial stocks each January).

(5) The main cause of more rapid stock price growth in the last 30 years was the ending of the gold standard. Central banks pump up the money supply after gold is taken away, which expands multiples. Over time, this also drives up inflation, which is brutal on stock-price multiples. Alan Greenspan is very aggressive in building up the money supply, even when he is raising interest rates. All of that money eventually causes prices to rise. This will probably happen in this country as the growth in the baby boom population reaching 45 slows. Companies eventually overcome inflation, but the near-term losses can be large. Witness the fact that many Internet stocks are down over 80 percent in the last year.

Whether you agree with these perspectives or not, you should be aware of them. Professor Siegel has done us a service by making the information available. On the other hand, this book needs a third edition to update the data to reflect on the current multiples.

If you are not a quantitative thinker, you will not like this book. Just read my comments and think about them.

If you are a quantitative thinker, you will get many new and important perspectives from this work which suggests that it's not a random walk after all.

Good luck with your investing. Before taking any large risks, be sure you know what the risks are and think through how you will handle them if they turn out to be irresistible forces pushing you in the wrong direction.

However.

The basic conclusion is this: IF you manage to live in a country with a stable legal, social, and political regime for 40 years, THEN during that period stocks will be the best place to park your money.

Sure, in the US since 1945 the longest time it took to recover bear market losses was three years. How long did it take the Russians to recover their losses after the Communists annexed their property? How long has it taken Japanese investors who bought at the peak of the Nikkei to recover their losses?

Well, you should never invest in only one market! Diversify! Today it is easier than ever with so many different kinds of mutual funds available.

And you should never invest all your money at any one time ('at the peak of Nikkei' possibility always exists). Use dollar-cost-averaging for a long term investment strategy; it evens out the ups and downs!