What Do Stocks Really Return?

The stock market's comeback in 2009 has probably reinforced the old adage, "the market always comes back". That view has received considerable currency from Jeremy Siegel's book, Stocks for The Long Run, which details the performance of the US market since 1802, and contends that over any long period stocks will outperform.

Recent efforts by us and others have at least called that into question (especially when adjusted for risk), while a WSJ column questioned the availability and veracity of data.

We undertook an analysis of Jeremy Siegel's Stocks for the Long Run. The Financial Times recently commented that this work was "influential in persuading asset allocators to put a big weighting toward equities." We found Siegel’s effort to be lacking in data, details, and methodology in addition to other shortcomings. In fact relatively little of the book deals with the title. It may well be, as Barron's has suggested, useful for the 'amateur' investor as it covers some basic topics but with little depth.

We are not enthusiastic regarding this book and its conclusions for reasons which include:

• We find little evidence that the author undertook basic, roll up your sleeves research. The book depends heavily on a 1989 study for the NBER by William Schwert which in turn was a "cobbling" together of a number of other prior studies varying greatly in terms of composition and methodology.
• Earlier researchers suggested that pre-1871 data was not available. Siegel defended his publication by noting that other, more recent, analysts have found the historic data to be available; however, one study's data was not as complete as suggested, and in one instance had a huge error in data collection.
• Indexes and measures which overlapped those used by Siegel often have differed substantially from those Siegel used.
• The data used in the book showed an average annual price gain of 2.9% for the 200+ years; his total return result, 8.3%, was achieved by an aggressive dividend assumption, in excess of that suggested by other analysts.

Investors should be aware that there are issues in index collection and compilation. We have found instances where DJIA data is incorrect by a significant factor. And the S&P 500, not only historically but as recent as 2004, has had issues with which we disagree.

Our experience is that academics, like other analysts, are prone to what we term "a propensity to financial bias;" they should be more rigorous, detailed, and searching; rather than accepting a given and contending that it is a truth.

Comments

[Larry House:]

One point each investor must assess is just how much "long run" is in his/her investment horizon. We have had 20-year periods when stocks were subpar in returns. The "long-run" better be longer than that, or the data cannot be trusted.

Oct 06 03:10 PM

[Jasper M:]

GOOD article.
As this Ursa Major grows, there will be more and more willing to challenge the orthodox mythology currently dominating thought in the investment community.

Oct 06 03:57 PM

[Living4Divi...:]

"Recent efforts by us and others"

Author - The first edition of Stocks for the Long Run was released in 1994. It was a ground-breaking and much heralded investment book.

I am curious as to why the Financial Times would wait 15 years to poke holes in such an important investment book?

As well, Jeremy Siegel is a high-profile figure, and, as such, his work has attracted the attention of most of the investment community. I have read the criticisms of his data and, while I agree that the data in his study from earlier periods (pre Cowles) is sketchy, the Cowles data from the later part of the study has been verified.

Oct 06 05:39 PM

[Living4Divi...:]

Part 2:

1802 - 1871 data is sketchy, but 1871 and on data is quite good. Siegel could have come to nearly the same conclusion if he had just used the 1871 and on data. Furthermore, Siegel's work on the latter period has substantiated by reputable scholars who come up with similar conclusions.

Oct 06 05:43 PM

[chap08:]

If you want to refute Siegel's analysis then you also need to refute "Triumph of the Optimists" (TOTO). The key thing here is that TOTO looked at 16 countries. I think that is important. Looking at different countries in different continents in different economic conditions is a good way to test out the theory. You can argue the detail, but the conclusions back up Siegel's work.

It was published (I think) in 2001, but mentioned here on SA in 2007:

seekingalpha.com/artic...

Oct 06 07:20 PM

[Flying Bird:]

Chap08, if you look closely at Triumph of the Optimists their international data is also quite sketchy. For example, while German stocks were closed and did not trade during both World Wars their data sets assumed that these data sets were unchanged during those periods. I would argue that after World War II Germany was more or less devastated and as such the value of its equity market before that period cannot be compared to the value afterwards. The same is true for several other European countries over the same time period.


On Oct 06 07:20 PM chap08 wrote:

> If you want to refute Siegel's analysis then you also need to refute
> "Triumph of the Optimists" (seekingalpha.com/symbo...).
> The key thing here is that TOTO looked at 16 countries. I think that
> is important. Looking at different countries in different continents
> in different economic conditions is a good way to test out the theory.
> You can argue the detail, but the conclusions back up Siegel's work.
>
>
> It was published (I think) in 2001, but mentioned here on SA in 2007:
>
>
> seekingalpha.com/artic...

Oct 07 08:57 AM

[ProfMas:]

How about a simple idea: If you believe in Siegel's analysis then invest accordingly. If you do not believe in Siegel's analysis, then don't follow his investing approach.

Oct 08 11:57 PM