On “Stocks for the Long Run”, revisited

Stocks for the Long Run

The book in question

Financial journalist and “The Inteligent Investor” columnist Jason Zweig writes in the Wall Street Journal on the consistency of long-term stock market time series used in Jeremy Siegel’s Stocks for the Long Run book. In his article, Zweig questions how useful and reliable is to analyze financial markets with (weakly constructed) historical stock-market data, and argues against a popular belief that relied on these time series, i. e., that equity returns excede bond returns in the long-term.

Jeremy Siegel (University of Pennsylvania) wrote in Stocks for the Long Run that American stocks have a stable average return of 7% after inflation is discounted, since the Jefferson administration (1801-1809). This conclusion has become a popular rule of thumb in the financial community. However, the validity of the series and the conclusion itself is now questioned.

Jeremy Siegel

Jeremy Siegel

The stock price index used by Professor Siegel is underrepresentative of the stocks held in investment porfolios in the first half of the 19th century. It also comprises a minimum number of stocks, excluding several regional exchanges as well as those from unsucessful firms. Siegel might also have overestimated the dividend yield of his stocks.

Zweig’s conclusion leaves no place for doubts:

What, then, are the odds that stocks will continue to lag behind bonds for the long run? The sad truth is that history can’t tell us the answer. The 1802-to-1870 stock indexes are rotten with methodological flaws. So we have only the period since then, or four distinct and complete 30-year stretches of stock returns, to base our long-term investment decisions on.

Another emperor of the late bull market, it seems, has turned out to have no clothes.

Here is a video on the matter. Let us wait for Professor Siegel’s reaction to this article. It will come, sooner or later, for he might want to defend the good name of his best-seller.

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