[e-mail]

Jeremy Siegel: Stocks for the Short Term

Mr. Heath: I agree with your analysis about the limits of this kind of regression analysis. I also have been haunted by the low rate of return for Japanese stocks over the last 5 of its last 20 year holding period. It would be interesting to see a Japanese stock trendline over the last 100 years. It would be interesting to see other country trendlines over the last 100 years and to see a regression analysis of how global securities have fared over the very long term and how typical or untypical U.S. long term holding periods are for superior stock returns. Is a superior U.S. return on average every 12 years different or within the data set for stocks of other countries. How do global stocks individually do over 25 year periods? Are there differences for Japan or any other European country or Canada? It would be also interesting to see how currency or individual country inflation affects the data set and what other variables such as GDP growth you identify and other exogenus factors might explain the data set for holding stocks. Is there a universal conclusion about stocks for the long term? Does studying global stats close in on the question of what is the long term? Are you familiar with any studies in this regard? Perhaps Professor Siegel is familiar with some definitive global studies?

On Jan 24 01:36 PM Robert H. Heath wrote:

> Thanks for the article, but I advise caution.
>
> Siegel's graph indeed shows that US equities -- held for a sufficiently
> long time -- have delivered higher real returns than bonds, bills,
> gold or cash. That's utterly consistent with modern financial theory
> that says that investors demand (and historically have received)
> a higher expected return for bearing the higher risk of owning equities.
>
>
> Siegel's work also suggests that one can diversify much of the short-term
> volatility of equity risk by holding equities for a sufficiently
> long time, much as one can diversify idiosyncratic equity risk by
> holding a portfolio of stocks rather than one or two names.
>
> But keep in mind that a plot of an ordinary least squares regression
> line through a data series that follows a random walk will always
> exhibit apparent cases of “regression to the mean” over some time
> frequency. That’s in the nature of the math, and not necessarily
> indicative of a mean-reverting tendency of the process being analyzed.
> True, Siegel claims that US stock returns exhibit a mean-reverting
> tendency because the decline in the standard deviation of average
> annual terms over lengthening holding periods is lower than one would
> expect in a true random walk. But note that this phenomenon manifests
> itself when you consider holding periods of five years or longer.
> (1) As Siegel puts it “…[US] stocks… have never offered investors
> a negative real holding period return yield over periods of 17 years
> or more.” (2)
>
> This is not to say that the chart is uninteresting. A plot of major
> US market indices shows long periods (18-25 years) of below- and
> above-trendline performance, which might be suggestive of changing
> investor tastes or demographic trends playing out on generational
> time-frames. But again, caution is in order here. If you have 200
> years of data to evaluate 20-year trends, you have only ten independent
> data points.
>
> As regards a short-term market call, your excerpted chart shows that
> the “regression to the mean” that followed the “oversold” market
> in 1974 took 20 years to regain the trendline. These facts and indeed
> Siegel’s advice against market-timing hardly seem consistent with
> a recommendation for a short-term trade, even one with a “nice cushion”
> of 750 on the S&P and a holding period all the way out to April.
>
>
> Finally, I doubt any of this provides comfort to an investor who
> loaded up on Japanese equities in 1989 with the Nikkei Dow at 38,000.
> Unless Japanese stocks increase four- to five-fold this year, Japanese
> investors from 1989 are facing a twenty-year holding period with
> a significantly negative return.
>
> (1) See Siegel, Stocks for the Long Run, 2nd edition; page 32, figure
> 2.4
>
> (2) Ibid., at 26
>

Abbott Labs: Powerful Company with a Bright Future

Abbott Labs has been overweighted in my portfolio for the last 20 years. However, did it escape your notice that two weeks ago 8 insiders sold over $32,000,000 of their stock. Every study I have ever seen suggests that when insiders are selling a stock will underperform the market over the next 12 months. What say you?