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October 08, 2005
The Future for Investors
Dad sent Jeremy J. Siegel's recent book, The Future for Investors. Siegel had previously written Stocks for the Long Run, advising investors to buy index funds as a low cost way of beating many actively managed mutual funds. New research has led Siegel to this book, in which he proposes a D-I-V (dividends-internationalization-valuation) strategy over straight indexing for higher returns.
According to Siegel's research, you can beat the market investing in tried-and-true, high-value, high-dividend stocks that the market's not excited about, and you improve your portfolio by diversifying internationally using the same mind set about countries that you would about companies. The Future for Investors seemed to me full of echos of Dreman's contrarian strategies, where you tend to look for what has fallen out of favor, yet is still producing real profits and sharing them with investors.
The Future for Investors has its share of dark humor. Siegel starts out explaining the growth trap, which is what investors get stuck in when they pay too optimistically for high growth prospects. Then he shows the best performing stocks for investors from 1950-2003:
- National Dairy Products (Kraft Foods)
- R.J. Reynolds Tobacco
- Standard Oil of New Jersey (ExxonMobil)
- Coca-Cola
In other words, the best returns for investors came from companies that made it possible for Americans to eat lots of processed food, wash it all down with Coke, drive everywhere, and get addicted to smoking cigarettes. To paraphrase Keynes, capitalism is nasty, but it's the best we've got so far.
More black humor, Siegel's Future for Investors comes with his global solution to the demographic crunch in Europe, Japan, and the US. In a nutshell, these countries have approaches to paying for retirement that are basically Ponzi schemes. When the population is growing there are more young people joining the scheme than older people collecting payouts, so it all works. The danger for the Ponzi scheme retirement plans is the baby bust that came after the baby boom. If there aren't enough people buying into the scheme, eventually confidence runs out and things go sour for those left holding the bag.
Siegel says we shouldn't worry though. Developing countries with high growth rates will be there to buy our assets in exchange for their goods and services before the former get devalued. Demographics still look good for these countries. (For now, with so many not yet integrated into the industrialized economy and with probably a high proportion of uneducated women.) I guess you have to be a professor of finance at Wharton to bring forward a proposal to replace a dangerous Ponzi scheme with essentially the same one, except on a global scale, and then write:
As we look ahead to our and our children's welfare, there is no other economic goal that should have higher priority. We must embrace this future.
Overall, in addition to the humor, there's a lot of sound investment advice here. Not sure I'd know how to exploit all of it today without further investigation and thought. If you're a relatively serious investor, maybe you can use it immediately. Enjoyable reading, too.
Posted by Mark at October 8, 2005 02:30 PM
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