Stocks for the long run : the definitive guide to financial market returns and long-term investment strategies

Stocks for the Long Run set a precedent as the most complete and irrefutable case for stock market investment ever written. Now, this bible for long-term investing continues its tradition with a fourth edition featuring updated, revised, and new material that will keep you competitive in the global market and up-to-date on the latest index instruments. Wharton School professor Jeremy Siegel provides a potent mix of new evidence, research, and analysis supporting his key strategies for amassing a solid portfolio with enhanced returns and reduced risk. In a seamless narrative that incorporates the historical record of the markets with the realities of today's investing environment, the fourth edition features: A new chapter on globalization that documents how the emerging world will soon overtake the developed world and how it impacts the global economy An extended chapter on indexing that includes fundamentally weighted indexes, which have historically offered better returns and lower volatility than their capitalization-weighted counterparts Insightful analysis on what moves the market and how little we know about the sources of big market changes A sobering look at behavioral finance and the psychological factors that can lead investors to make irrational investment decisions A major highlight of this new edition of Stocks for the Long Run is the chapter on global investing. With the U.S. stock market currently holding less than half of the world's equity capitalization, it's important for investors to diversify abroad. This updated edition shows you how to create an “efficient portfolio” that best balances asset allocation in domestic and foreign markets and provides thorough coverage on sector allocation across the globe. Stocks for the Long Run is essential reading for every investor and advisor who wants to fully understand the market-including its behavior, past trends, and future influences-in order to develop a prosperous long-term portfolio that is both safe and secure. Contents 7 Foreword 17 Preface 19 Acknowledgments 23 Part 1 The Verdict of History 27 Chapter 1 Stock and Bond Returns Since 1802 29 “Everybody Ought to Be Rich” 29 Financial Market Returns from 1802 31 The Long-Term Performance of Bonds 33 The End of the Gold Standard and Price Stability 35 Total Real Returns 37 Interpretation of Returns 38 Real Returns on Fixed-Income Assets 40 The Fall in Fixed-Income Returns 41 The Equity Premium 42 Worldwide Equity and Bond Returns: Global Stocks for the Long Run 44 Conclusion: Stocks for the Long Run 46 Appendix 1: Stocks from 1802 to 1870 47 Appendix 2: Arithmetic and Geometric Returns 48 Chapter 2 Risk, Return, and Portfolio Allocation: Why Stocks Are Less Risky Than Bonds in the Long Run 49 Measuring Risk and Return 49 Risk and Holding Period 50 Investor Returns from Market Peaks 53 Standard Measures of Risk 54 Varying Correlation between Stock and Bond Returns 56 Efficient Frontiers 58 Recommended Portfolio Allocations 60 Inflation-Indexed Bonds 61 Conclusion 62 Chapter 3 Stock Indexes: Proxies for the Market 63 Market Averages 63 The Dow Jones Averages 64 Beware the Use of Trend Lines to Predict Future Returns 67 Value-Weighted Indexes 68 Return Biases in Stock Indexes 72 Appendix: What Happened to the Original 12 Dow Industrials? 73 Chapter 4 The S&P 500 Index: A Half Century of U.S. Corporate History 77 Sector Rotation in the S&P 500 Index 78 Top-Performing Firms 84 How Bad News for the Firm Becomes Good News for Investors 86 Top-Performing Survivor Firms 87 Other Firms That Turned Golden 88 Outperformance of Original S&P 500 Firms 89 Conclusion 90 Chapter 5 The Impact of Taxes on Stock and Bond Returns: Stocks Have the Edge 91 Historical Taxes on Income and Capital Gains 92 A Total After-Tax Returns Index 92 The Benefits of Deferring Capital Gains Taxes 95 Inflation and the Capital Gains Tax 96 Increasingly Favorable Tax Factors for Equities 98 Stocks or Bonds in Tax-Deferred Accounts? 99 Conclusion 100 Appendix: History of the Tax Code 100 Chapter 6 The Investment View of Stocks: How Fickle Markets Overwhelm Historical Facts 103 Early Views of Stock Investing 105 A Radical Shift in Sentiment 108 The Postcrash View of Stock Returns 109 The Beginning of the Great Bull Market 111 Warnings of Overspeculation 112 The Top of the Bubble 114 The Bear Market and Its Aftermath 115 Part 2 Valuation, Style Investing, and Global Markets 119 Chapter 7 Stocks: Sources and Measures of Market Value 121 An Evil Omen Returns 121 Valuation of Cash Flows from Stocks 123 Earnings Concepts 128 Earnings Quality 134 Downward Biases in Earnings 135 Historical Yardsticks for Valuing the Market 136 Conclusion 147 Chapter 8 The Impact of Economic Growth on Market Valuation and the Coming Age Wave 149 GDP Growth and Stock Returns 150 Economic Growth and Stock Returns 153 Factors That Raise Valuation Ratios 154 The Age Wage 159 Conclusion 164 Chapter 9 Outperforming the Market: The Importance of Size, Dividend Yields, and Price-to-Earnings Ratios 165 Stocks That Outperform the Market 165 Small- and Large-Cap Stocks 167 Valuation 170 Dividend Yields 171 Price-to-Earnings (P-E) Ratios 175 Price-to-Book Ratios 176 Combining Size and Valuation Criteria 178 Initial Public Offerings: The Disappointing Overall Returns on New Small-Cap Growth Companies 180 The Nature of Growth and Value Stocks 183 Explanations of Size and Valuation Effects 183 Conclusion 185 Chapter 10 Global Investing and the Rise of China, India, and the Emerging Markets 187 The World’s Population, Production, and Equity Capital 188 Cycles in Foreign Markets 190 Diversification in World Markets 194 The World in 2050 204 Conclusion 208 Appendix: The Largest Non-U.S.-Based Companies 208 Part 3 How the Economic Environment Impacts Stocks 211 Chapter 11 Gold, Monetary Policy, and Inflation 213 Money and Prices 215 The Gold Standard 217 The Establishment of the Federal Reserve 217 The Fall of the Gold Standard 218 Postdevaluation Monetary Policy 219 Postgold Monetary Policy 220 The Federal Reserve and Money Creation 221 How the Fed’s Actions Affect Interest Rates 222 Stocks as Hedges against Inflation 225 Why Stocks Fail as a Short-Term Inflation Hedge 227 Conclusion 231 Chapter 12 Stocks and the Business Cycle 233 Who Calls the Business Cycle? 234 Stock Returns around Business Cycle Turning Points 237 Gains through Timing the Business Cycle 240 How Hard Is It to Predict the Business Cycle? 242 Conclusion 245 Chapter 13 When World Events Impact Financial Markets 247 What Moves the Market? 249 Uncertainty and the Market 252 Democrats and Republicans 253 Stocks and War 257 Conclusion 261 Chapter 14 Stocks, Bonds, and the Flow of Economic Data 263 Economic Data and the Market 264 Principles of Market Reaction 264 Information Content of Data Releases 265 Economic Growth and Stock Prices 266 The Employment Report 267 The Cycle of Announcements 269 Inflation Reports 270 Impact on Financial Markets 272 Central Bank Policy 273 Conclusion 273 Part 4 Stock Fluctuations in the Short Run 275 Chapter 15 The Rise of Exchange-Traded Funds, Stock Index Futures, and Options 277 Exchange-Traded Funds 278 Stock Index Futures 279 Basics of the Futures Markets 281 Index Arbitrage 283 Predicting the New York Open with Globex Trading 284 Double and Triple Witching 286 Margin and Leverage 287 Using ETFs or Futures 287 Where to Put Your Indexed Investments: ETFs, Futures, or Index Mutual Funds? 288 Index Options 290 The Importance of Indexed Products 293 Chapter 16 Market Volatility 295 The Stock Market Crash of October 1987 297 The Causes of the October 1987 Crash 299 Circuit Breakers 302 The Nature of Market Volatility 303 Historical Trends of Stock Volatility 304 The Volatility Index (VIX) 307 Recent Low Volatility 309 The Distribution of Large Daily Changes 309 The Economics of Market Volatility 311 The Significance of Market Volatility 312 Chapter 17 Technical Analysis and Investing with the Trend 315 The Nature of Technical Analysis 315 Charles Dow, Technical Analyst 316 The Randomness of Stock Prices 317 Simulations of Random Stock Prices 318 Trending Markets and Price Reversals 320 Moving Averages 321 Momentum Investing 328 Conclusion 329 Chapter 18 Calendar Anomalies 331 Seasonal Anomalies 332 The January Effect 332 Large Monthly Returns 337 The September Effect 337 Other Seasonal Returns 341 Day-of-the-Week Effects 342 What’s an Investor to Do? 344 Chapter 19 Behavioral Finance and the Psychology of Investing 345 The Technology Bubble, 1999 to 2001 346 Behavioral Finance 348 Part 5 Building Wealth Through Stocks 365 Chapter 20 Fund Performance, Indexing, and Beating the Market 367 The Performance of Equity Mutual Funds 368 Finding Skilled Money Managers 372 Reasons for Underperformance of Managed Money 374 A Little Learning Is a Dangerous Thing 375 Profiting from Informed Trading 375 How Costs Affect Returns 376 The Increased Popularity of Passive Investing 377 The Pitfalls of Capitalization-Weighted Indexing 377 Fundamentally Weighted versus Capitalization-Weighted Indexation 379 The History of Fundamentally Weighted Indexation 382 Conclusion 383 Chapter 21 Structuring a Portfolio for Long-Term Growth 385 Practical Aspects of Investing 386 Guides to Successful Investing 386 Implementing the Plan and the Role of an Investment Advisor 389 Concluding Comment 390 Index 393 A 393 B 393 C 394 D 395 E 396 F 397 G 397 H 398 I 398 J 399 K 399 L 399 M 400 N 401 O 401 P 402 Q 402 R 402 S 403 T 404 U 405 V 405 W 406 Y 406 Z 406 One of investing's most celebrated icons updates his classic work to reflect today's world and markets. In this long-awaited and eagerly anticipated update, Jeremy Siegel provides his legendary perspective and guidance to an investment world turned upside down. "Stocks for the Long Run" combines a compelling and timely portrait of today's turbulent stock market with the strategies, tools, and techniques investors need to maintain their focus and achieve meaningful stock returns over time. This completely updated edition includes entirely new data, charts, and figures as it provides answers on the five major issues concerning investors and professionals today: How will events related to September 11 tragedy affect long-term market returns? What behavioral roadblocks stand in the way of achieving financial success? Are "countries" still relevant for global investing? Will stock "indexing" match its past performance? Can tomorrow's stock market deliver the same returns as markets in the past? "In the summer of 1929, a journalist named Samuel Crowther interviewed John J. Raskob, a senior financial executive at General Motors, about how the typical individual could build wealth by investing in stocks."