The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New Hardcover – March 8, 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.

A follow-up to "Stocks for the Long Run", Dr. Sigel's "The Future for Investors" provides a comprehensive overview of the best performing stocks of the second half of the twentieth century, and what may be in store for investors as the Baby Boomers retire and liquidate their portfolios. Written in 2005, the book covers the many investing pitfalls of the dot-com bubble that lead to astronomical valuations for both good companies and bad, and the resulting crash that wiped out 80% of the NASDAQ valuation and left investors wondering what, if anything, can lead to safe, long term gains in the stock market.Dr. Siegel's exhaustive study affirms the intuitions of the so-called "value" investors - that stocks of quality companies trading at low price-multiples will outperform the glamorous growth stocks over a long enough period of time. When dividends are consistently reinvested at low valuations, the case becomes even more compelling. The book tracked the permutations of the companies that composed the original S&P 500 in 1957 and by 2005 the results in their stocks were absolutely mind-boggling. Despite underperforming stocks in fast growing industries at any one time, the stocks of cigarette makers, food companies and oil and gas giants handily outperfmored in the long run. Thus, Siegel concludes the triumph of the "tried and true over the bold and the new."The last part of the book deals with the future for investors; namely, what will happen to market valuations during the liquidation of the Baby Boomers' portfolios. To this, Dr. Siegel suggests that trading US assets for goods produced in foreign countries will provide retirees with lower costs in retirement and better standards of living.Of course, this book was written only a few years before the Financial Crisis, which altered the course of retirement for many in the Baby Boomer generation. Nevertheless, Dr. Siegel's work provides a framework, if not a precise roadmap, for investors with a long time horizon. By implementing a strategy of building a diversified portfolio of issues in quality, dividend-paying companies, and reinvesting those dividends through thick and thin, the future for investors may be as profitable as in the past.

This is a very good and interesting book from both the perspective of historical analysis and the ability of the book to make you think differently about your investment goals. There are several good reviews about this book already and they question the taxes on these dividend stocks but the account that these income generating stocks should be bought in are tax deferred accounts. I really enjoyed the supporting facts on the value of consumer dividend paying stocks. I haven't read his book about "stocks for the long run" but this book by itself was useful in helping me think differently about asset allocation too. In summary, this is a very good book to help build your knowledge about the stock market.