71 of 73 people found the following review helpful
on September 19, 2006
The Future for Investors has some really great points - the main one being that the compounding power of reinvested dividends should be a significant consideration in stock selection. I agree with this approach, and Siegel makes some persuasive arguments that it provides higher returns and less volitility than other approaches.
However, I agree with some of the criticisms of the book as well:
1) Siegel does not address the tax impact on dividends. His research uses 1957 as a starting point. While our current dividend tax rate is 15% at the federal level, during most of the period from 1957 the rate was higher (sometimes the same as the income rate). During these times, the reinvested amount of the dividend would have only been about 60-70% of the total. Thus, returns would have been lower. (Some people have said that this would only make a marginal difference - maybe so, but it might have changed his argument in comparing Standard Oil to IBM as well as the small advantages he pointed out in some of his stock recomendations. A 1% per annum difference over a multi-decade period amounts to serious money).
2) Siegel cites Altria as the best performing stock during this period. I won't disagree with the conclusion, but I will point out that going for high dividends and reinvesting them works well only when the company survives. What if Beth Steel had been your choice rather than Altria? You would have received lots of dividends and reinvested them, but the ultimate outcome would have been a disaster. The point is that reinvesting dividends works especially well when the reinvestment happens during a difficult time for the stock AND (most importantly) the stock MUST recover from those difficult times. This is not generally the case, but it was with Altria.
3) Siegel's idea that the developed world will sell assets (stocks, bonds, etc) to the developing world to fund the huge retirement wave is full of problems. While the strategy will work to maintain the standard of living of the baby boomers, it will also permanently ruin the future for all subsequent generations of Americans. If you sell the assets (companies) that create your wealth in order to live a comfortable retirement (read consumption), you are giving away your ability to earn in the future. This is something Warren Buffett has been warning us about for a few years now. You cannot indefinitely fund consumption with income producing assets. When you decrease your income producing assets by selling for consumption, you increase your current standard of living at the expense of your future standard of living.
Criticisms aside, this is still a thought provoking book that is well written. Ironically, even though I think there are some questions about many parts of the book, I generally agree with the ultimate types of investments that Siegel recommends - just for different reasons.
241 of 264 people found the following review helpful
Siegel's basic advice to stock investors is to focus less on growth stocks and index mutual funds (eg., Vanguard 500) and more on looking for tried and true stocks that pay high dividends. He argues that such reinvested dividends are the true source of stock returns, or the "El Dorado." (His term). Overall, this argument is well-presented and persuasive.
However, I am perplexed on a key element. His case is largely based on historical evidence that purports to show that high dividend yield stocks, with dividends reinvested, have accumulated more total return than growth stocks or index mutual funds. However, his calculations do not account for the deleterious effect of taxes on reinvested dividend. (He says in an endnote that taxes are not significant for the portfolios he chose, but does not explain why; for most common stock portfolios, taxes are significant.) Dividends are taxed yearly and until recently at a higher rate than that of capital gains and that of retained earnings, which are not taxed at all. If taxes have been paid on dividends, only the untaxed part can truly be considered "reinvested"; the part that is taxed has to be made up by a new infusions of cash from the investor. The effect of ignoring this is that his historical comparisons are not terribly meaningful because he is not calculating the returns on true (after tax) contributions to dividend stocks vs. growth stocks. Naturally, if more is contributed to the dividend stocks, there is likely to be more at the end. (BTW, this is basically the same fallacy that sunk the allegedly huge returns of the otherwise delightful "Beardstown Ladies" of yore.) Given that the magnitude of the "advantage" he posits of dividend stocks vs. growth stocks is not all that great, one cannot have confidence that he has truly made his case.
That said, his advice is very useful for investors in tax sheltered 401Ks. Also, the new lower tax rate on dividends also helps lessen, though not eliminate, the effects of yearly taxation of dividends.
100 of 108 people found the following review helpful
In his earlier book, Siegel had proven that stocks are the best investment vehicle for the long term. In a fitting "sequel" to his previous bestseller, Siegel answers the question "which stocks to buy for the long term". The book is divided into 5 parts - the first two parts focus on analysis of historic data using very unique perspective, mostly with respect to changing membership of SP500 index over the years. In the third part, he discusses the different measures to consider while analysing a company's performance from the shareholders' points of view. The fifth part is perhaps the most useful for readers seeking investment advice. He provides a sample portfolio based on the priciples he explains in the third and fourth parts of the book. In addition to percentage allocation for US and non-US markets, he provides allocation targets for some of the specific investment strategies he discusses in the book (these strategies are well discussed and their rationale is convincingly presented; most of them are centered around the dividend paid by the company). The author also provides a sector analysis of the market over the years and provides his "prediction" on which three sectors will likely perform the best over the long term. A real treasure for any long term investor! it should be pointed out that the analysis dont really address tax implications, but the conclusions derived from the analysis would still likely hold since the strategies focus on long term investing.
The book is thorough and comprehensive, but explained in an easy manner. Each chapter ends with a summary which provides a succinct representation of the chapter. A detailed list of references/citations used by the author and a set of appendices with more data analysis is also included, and is certainly a resource for any serious investor. Day traders and speculators may be disappointed with the book, but any long term investor will find this to be a cornerstone of any investment plan. A must have!
54 of 57 people found the following review helpful
Siegel says he was sold on the concept of indexing to the S&P 500 or Wilshire 5000, but he has now changed his mind. He says indexing to the US stock market is still a very good strategy for most investors, but he has found other strategies that have given slightly higher annual returns.
Siegel speculates that in the future, returns of index funds will be slightly reduced. Every year Standard & Poors removes some companies from the S&P 500 and adds new ones. His research indicates the new companies usually under-perform the remaining stocks in the index. He attributes these poorer returns on the companies added to several factors.
The first factor is that the new companies which are added to the index are popular with investors with higher PE ratios. Buying companies with higher PE ratios is going to give a lower return going forwards buying stocks with lower PE ratios.
The second factor is the price of new companies added gets increased as soon as it is announced they are joining the index. This raises the price mutual funds or ETF's have to pay to buy the stock......giving a higher PE ratio and subsequently lower annual future returns.
Siegel also found that boring companies with lower PE ratios that pay dividends usually outperform exciting growth companies with higher PE ratios. Investors flock to the exciting growth companies thinking they will get higher returns (e.g. IBM versus Exxon 50 years ago). Exxon actually gave higher historical returns because of lower initial PE ratio and high paying dividends. As we re-learned in the Enron and Worldcom scandals, managers can manipulate earnings in an effort to drive up stock prices, but they can't manipulate dividend pay-outs. His research indicates buying boring steady performers with good dividend payouts has given higher returns than new glamour companies.
Siegel's research also indicates investors should be relatively aggressive with regards to allocating more stock investments in foreign versus U.S. markets. He is recommending that investors should allocate 30-40% of their stock allocation to foreign stocks versus the 10% recommended by the old rule-of-thumb. His rationale is that economies of other countries are growing faster than U.S. He also warns investors to watch PE ratio's of what foreign stocks you buy. Investors in China since 1992 have suffered poor returns because foreign investors bid up the PE ratios to high.
Siegel also offers a soothing prediction to many Baby Boomer investors who are worried the value of their nest eggs will diminish as all the Baby Boomers sells stocks to reduce risk in their retirement years. He predicts the U.S. stock market will not crash as Baby Boomers hit retirement and cash out their financial assets. His computer models of the global economies indicate emerging countries will have more middle class people who will buy our U.S. stocks as investments. He calls this the Global Solution to the Baby Boomer cash-out. The emerging countries will be China, Brazil, India, and Russia.
Many of Siegel's findings should come as no surprise to experienced and well-read investors. As indexing to the S&P 500 becomes more popular, it should be no surprise some inefficiencies will arise such as new entries rising in value when they are chosen for the index. Maybe indexing to the Wilshire 5,000 or indexing with equal weighted versus market cap weighted funds will offset these inefficiencies.
Buying undervalued boring stocks with good dividend payouts has been studied and recommended many times in the past. See Contrarian Investment Strategies by David Dreman.
It is no secret that the BRIC (Brazil, Russia, India, and China) countries will probably grow their economies faster than the U.S. economy. It might be lower risk for U.S. investors to invest in U.S. based companies which have more than ½ their sales in these rapidly growing countries than directly buying stock in the BRIC countries.
Although as a Baby Boomer investor it is soothing to hear Siegel's forecast that the selling of stocks by Baby Boomer retirees won't crash the U.S. stock market, I'm not sure this is how it will really play out over the next 20 years.
All-in-all, a great read and helpful for developing successful investing strategies. I would suggest companion books to supplement this book including The Richest Man in Babylon, Bogle on Mutual Funds, The Millionaire Next Door, The 4 Pillars of Investing, A Random Walk Down Wall Street, Wealth of Experience: Real Investors on what Works and What Doesn't.
48 of 53 people found the following review helpful
Anyone who enjoyed Stocks for the Long Run will find this book to be a very valuable addition to his or her knowledge about stock investing for tax-deferred investment accounts.
Professor Siegel has checked history again. This time he has looked for ways to do stock investing that have performed better than indexed mutual funds for tax-deferred accounts.
Much of what he finds is counter to the conventional wisdom, but makes sense when examined objectively.
Here are some key findings:
1. High dividend yields, when reinvested in the same stock, provide superior returns. That's only true in a tax-deferred account, of course.
2. Buying stocks with low multiples that grow faster than expected is much easier and more profitable to do than simply choosing companies in fast growing industries.
3. Exciting new companies make lots of money for founders, employees and venture capitalists . . . but not enough for investors.
4. Avoid capital intensive businesses.
5. The most productive companies are those who develop new business models (something I discuss in The Ultimate Competitive Advantage) regardless of how bad the industry is.
6. Beware of excessive valuations . . . no matter how good the future looks.
7. If a company has neither a high dividend nor any cash, assume something's wrong with the accounting.
8. Indexed stocks in slower-growing emerging markets have high potential to deliver huge gains in the future due to demographic influences.
From these findings, Professor Siegel suggests a model portfolio for equities that will intrigue you (see page 254) with high-dividend ideas, global firms, attractive sectors and interesting value plays.
In addition, Professor Siegel addresses the question of what to do about paying for the retirements of all those Baby Boomers around the world. His proposal is to encourage young emerging market workers to purchase the assets of older workers in the developed world. You'll find the argument to be intriguing and compelling.
I cannot remember reading a more stimulating and original book about investing. I was particularly impressed by his historical research that shows the superiority of sticking with companies that have been around a long time rather than searching out newer companies to buy. I think the exception to the latter comes in those cases where the management has proven to be adept at improving upon their business models to provide more value to customers.
Almost every investor would benefit from reading and thinking about this book.
45 of 50 people found the following review helpful
on July 29, 2005
Good book for those less than entirely familiar with arguments for indexing and "value" investing which undercut all the silly hype about stock picking expertise that fools the masses into paying 1% plus in annual management fees to the mutual fund companies et. al. Most valuable in explaining why some indexing approaches contain significant pitfalls, i.e. the S&P 500 which keeps absorbing the latest high growth stocks that later underperform the market. And why tailoring the indexing approach to focus on higher dividend/lower PE stocks is a winning strategy over time.
Unfortunately, the one chapter the author devotes to specific portfolio recommendations is very inadequate. First of all he rather fails to offer a convincing rationale for a 40% allocation to foreign stocks. He points out that in the last five years they have reached a high degree of correlation with US stocks, so their diversification value is greatly diminished. He ackknowledges the currency risk as well but suggests it will be minimized over time. He also admits that there is no point in chasing high economic growth in foreign markets for the same reason one shouldn't chase growth stocks. Furthermore, he ignores the argument by Vanguard's Bogle that there is really no need to diversify into foreign equities, especially given the broad diversification in the US market and the fact that the US based companies have an ever greater share of sales in foreign markets. Not that investing in foreign equities is a mistake. It just isn't really necessary; the indexes for foreign equities leave something to be desired; there are higher transactions costs; and finally you cannot very well make the high dividend/ low PE play in foreign stocks that you can in US index funds.
Which raises the question a few others have pointed out. Why, after convincing us through over 200 pages to adopt one form or another of his return enhancing strategies, does he then recommend putting 50% of assets into broadly diversified index funds? Why would I want to put so much into a strategy that he just proved markedly underperforms his preferred strategies? Perhaps the reason is that he doesn't really explain how the average investor (or even a relatively knowledgeable investor) can effectively implement those strategies. How does one invest in the lowest quintile PE stocks from the 100 largest S&P 500 companies and keep up with the ever changing composition of that group? I guess we wait until someone develops a mutual fund. Speaking of which, I have the same concern about data mining as some other reviewers. I have read quite a few books advocating various selective strategies based on notions similar to Siegel's. A few of these folks DID start up mutual funds to implement their theories but unfortunately those funds made money primarily for the fund advisers and operators charging 1% plus fees.
My simpler suggestion to take advantage of Siegel's fundamentally correct analysis of the small but ultimately commanding advantages of dividend paying and/or lower PE stocks -- buy index funds with a strong tilt to small cap and value. Check out the performance of Vanguard's Mid Cap Index Fund (VIMSX) and Small Cap Value Fund (VISVX) relative to the S&P over the last five years (or three or one). Even look at thelarge cap value index funds.
Or alternatively, consider setting up your own "index fund" by selecting a group of 20-25 stocks that meet explicit value, dividend-payout, and other criteria and hold so long as they continue to meet all the criteria, adding new stocks as old ones drop out. It doesn't take genius to mine the advantages Siegel describes, just persistence and a determination to ignore all the hype about timing, sector plays, "hot" managers and all the other discredited garbage that passes for investment information in the financial media. The miracle of compounding the small percentage advantages of even modestly undervalued stocks over time is clearly illustrated by Siegel for anyone who pays attention. I just wish he had given a little more thought to real world ways of implementing his insights and had the courage of his convictions for fully allocating to meet them.
24 of 25 people found the following review helpful
on April 17, 2005
The Future for Investors is Jeremy Siegel's sequel to his popular Stocks for the Long Run. Overall, he makes the same point in his new book as he did in the last one: Over long periods of time, stocks have outperformed other liquid forms of investment such as bonds, bills, cash, and gold. While reaching this same conclusion, The Future for Investors does offer some new or revised insights that make it well worth reading. Some highlights include the following:
1. Since its inception in 1957, the S&P500 index has underperformed the price movements of those of its original 500 firms that still exist as independent companies. The price movements of the new firms added to the index have underperformed those of the originals even though the new firms have often had higher earnings growth rates.
2. Selecting stocks for growth alone often results in paying too much for a stock. While Siegel doesn't spell it out, he seems to be advocating something akin to a PE-to-Growth (PEG) or similar ratio. (Comment: I personally go one step beyond PEG and use PE-to-Growth-to-Uncertainty-in-Growth by dividing the conventional PEG ratio by the standard deviation of the earnings per share growth rate.) He does advocate several strategies based on the selection of low priced/high yield stocks, similar to and including the popular Dogs of the Dow strategy.
3. Dividends count in many ways. Most of the recent cases of managers cooking the books to overstate earnings occurred in firms that did not pay cash dividends, since dividends are much harder to fake than earnings. The payment of a steady or increasing cash dividend offers another measure of safety in buying a stock. The recent reduction in the double taxation of dividends makes them much more attractive. Finally, reinvesting dividends is analogous to dollar cost averaging, causing the investor to buy more shares when the price is lower had fewer shares when the price is higher. Over time, this reinvestment will pay off handsomely.
4. Much has been written about the aging of the baby boomers and what will happen when they retire. The worst case scenarios describe their departure from the workforce as resulting in (1) no one to produce the goods and services they want to buy in retirement and (2) no one to buy the stocks and bonds that they need to sell to finance buying those goods and services. Siegel is an optimist; I share his optimism and hope we are correct. Looking at the developing world, he sees an inverse demographic pattern: Lots of young people and fewer old people. If the developing world develops rapidly and broadly enough, those young people will be able to (1) produce the goods and services sought by the boomers and (2) invest in their own retirements by buying the investment the boomers must sell.
5. To participate in (and to support) this optimistic outcome, Siegel advises investing as much as 40% of one's portfolio in non-US securities. Selecting and buying foreign stocks is even harder than selecting and buying US stocks, so here Siegel puts a lot of emphasis on mutual funds and exchange traded funds tied to various world indices.
22 of 25 people found the following review helpful
on April 26, 2005
Jeremy Siegel has rediscovered the importance of dividends. When Charles Dow did his seminal research nearly a century ago he relied on dividends and ignored reported earnings because he knew that companies were lying on their balance sheets. Dividends, on the other hand, don't lie. Dividends let you compound. Very old fashioned.
The other important point this book makes is that investors almost always overpay for growth. He calls this the growth trap. It is critical for investors to distinguish between those companies whose innovations power the economy and those that provide superior returns to investors. They are usually two different things.
Many people seem to have learned nothing from the recent bursting of the NASDAQ bubble. Siegel has the research that shows what went so wrong several years ago and how to keep your head if it happens again.
The old is new again.
12 of 13 people found the following review helpful
on August 2, 2006
The author has very wise opinions that are well demonstrated.
The points are clearly explained. This book makes you rethink
your investing strategies, however old or new they are. The
methods in this book are towards the buy and hold investing and
not about trading. Siegel emphasizes that buying and holding
solid companies for the right price will work to your advantage
in the long run and make you wealthier than trying to find the
biggest gainer and trading ruthlessly. These ideas make sense to
me, but how to employ these principles to your own investing takes
some thinking and planning. Time will tell if Siegel's thoughts
prove right. He's got decades of successful market analysis and
I don't see why he would be wrong this time. I recommend this
for investors interested in investing for the long run. Not much
use for the traders looking for a quick buck.
29 of 37 people found the following review helpful
on August 26, 2005
A lot of description and time spent on topics such as
- benefit of dividents
- rationale to stay away from tech (for long term returns)
- demographic shifts in developed economies..
However, At the end of it, the author presents his conclusions in just one chapter - devoting just 30 pages out of nearly 250 to the crux of his message - Dividents, International investig & Value investing.
He recommends a portfolio allocation, but does not show how it would have performed retrospectively - or substantiate analytically why it would perform well for the future. While inspecting investment strategies, and presenting graphs, returns are presented without taking into account taxes and transaction costs.
A global solution is indicated, but the effect of a consequent depreciation of currencies of developed economies is not discussed sufficiently. Similarly large budget deficits for developed economies are indicated, but againt their impact on currency fluctuations are not discussed.
A desperately missing piece is the "call to action" - if the reader wishes to follow his advise, the author does not outline easy ways to do so. Web-sites that offer data related to S&P (P/E, or dividents, etc) would have been a good addition. Similarly interntional firms, etc.