Book Review: Stocks For The Long Run by Jeremy Siegel

Reading Jeremy Siegel’s classic on investing Stocks For The Long Run: A Guide To Selecting Markets For Long-Term Growth, I was reminded of three well-known investing aphorisms.

“Take the long view.” (Also related: “Successful people have long time horizons. Unsuccessful people have short time horizons.”)

“It almost certainly isn’t different this time”; and

“Read books, not magazines and newspapers (nevermind blogs or tweets) on investing.”

In taking the long view, Siegel presents the data and definitively settles the answer to the question of stocks v. bonds. He’s the guy that produced the 200+ years of data – going back to 1800 – that show the superior returns of stocks vs bonds or vs cash or vs (horrors!) gold.

Because it certainly isn’t different this time, Siegel himself draws upon work done in earlier eras that conclude, inevitably, the same way.[1] I had not previously heard of Edgar Lawrence Smith’s Common Stocks as Long Term Investments, which came out in 1924, but Siegel credits him with carefully and correctly building the earlier time series to show the overwhelming advantage of equities throughout modern times.[2] Siegel’s book – first published in 1994 – updates and extends the time horizon for considering the relative returns on different asset classes.

When I teach a night-school course for adults called “Get Rich Slow,” one of the visual lessons I employ is to show the relative returns of different assets according to different time horizons. The lesson of my visuals is the importance of taking the long view.

With a one-year timeframe, for example, stocks appear extremely volatile, especially compared to a ‘safe’ investment like bonds.

Widening the timeframe to a five-year horizon, however, you can see that in the majority of time periods stocks beat bonds, and typically quite handily.


Taking an even broader timeframe – such as ten years – the historic data shows that stocks are an overwhelming favorite over bonds. To prefer bonds over stocks through an investing decade is really to say that you believe a quite rare and unusual thing is likely to happen. You’re betting on the improbable. You’re betting, in fact, that you know “it’s different this time,” which is typically a losing bet.

The power of Siegel’s book derives from him taking the longest view – from 1800 to today – to show that equities are the only way to build wealth.

Readers of Nick Murray’s Simple Wealth Inevitable Wealth – or readers of my review of that book – will not find the overarching message of this book any different in Siegel’s Stocks For The Long Run.

What readers of both books will find different is that – while Murray assumes the voice of accumulated self-evident wisdom and a bit of disdain to ‘prove’ his points – Siegel actually has done the proving (in so far as a long-dated data series can ‘prove’ anything in finance.) I’m sure Murray was deeply influenced by Siegel’s book and considers it the final word on long-term stock versus long-term bond returns. And it is.

The big idea

Both authors conclude that – in the long run – only stocks provide an increase in purchasing power over an investor’s lifetime. Meaning, only stocks grow your wealth. Bonds (and similar fixed income instruments) preserve nominal dollar values but might not even keep pace with inflation, and certainly cannot build wealth.

Risk, therefore, resides with bonds and the loss of purchasing power, not with stocks. Stocks – when held for the long run (and with diversification) – turn out to be not risky at all.

If you want the data and charts behind this idea that only stocks can build wealth, and are not risky, while bonds are the opposite, Siegel’s book brings the data.

Read books not articles

Siegel also comprehensively addresses major questions an intelligent investor might want to have answered, in a way that only a full book-length work can. Since you’re reading an article I’ll do my best to summarize each chapter in my own words, with a view to enticing you to read the whole thing.[3]

Chapter 1 – $1 invested in 1800 in US stocks becomes $260,000 in real terms (inflation-adjusted), while $1 in bonds becomes $563 by 1994. The value of that data point alone is worth the price of admission. Stocks in Britain, Japan, Germany – while responding to their own historical ups and downs – have a similar long-term upward trajectory.

Chapter 2 – Stocks, in contrast to bonds, have never offered investors a negative real return over 20 years. Bonds may offer a positive ‘nominal’ return, but after medium to high inflation your money invested in bonds may actually buy less than it did 20 years ago.

Chapter 3 – A broadly diversified portfolio – such as a market-representative index – offers lower risk than one or a few securities, assuming individual stocks are not perfectly correlated.

Chapter 4 – Stock prices respond to a combination of fundamental value (in the longest run) and investor sentiment (in the short and medium run), but neither approach provides certainty when it comes to investing. Dividends, it turns out, account for a tremendous amount of long-term returns to investors. Dividend Yield (dividends/price) offers an imperfect indicator of a good investment.

Chapter 5 – Small capitalization stocks might provide superior returns compared to large capitalization stocks in the longest run, but are certainly more volatile, and might underperform for significant amounts of time. Value stocks might provide superior returns compared to growth stocks in the longest run, but the evidence is still mixed. Ironically and contrarily, negative earnings and non-dividend paying stocks might also offer above-market returns, historically. Buying an IPO at the initial price usually is rewarded (if you sell right away) but buying at the first days’ closing price is usually punished.

Chapter 6 – While many investors would do well to pay attention to a stock’s price/earning ratio, sometimes buying a huge PE stock turns out well, while conversely a low PE stock can just as easily evolve into a complete loser.

Chapter 7 – The tax code, and in particular the tax on capital gains, heavily rewards long term holding of stocks compared to short-term stock holding, or compared to holding bonds.

Chapter 8 – For US investors, investing only in the US is akin to remaining undiversified in a single industry, with the US making up only a third of global equity market capitalization. The lesson: diversify by geography.

Chapter 9 &10 – Leaving the gold standard in the 20th Century appeared to auger the beginning of inflationary pressures, but stocks have served as an excellent long-term hedge against inflation, preserving and enhancing purchasing power over the long run, which bonds certainly to not do.

Chapter 11 – Timing the business cycle via stock investing would be theoretically super-profitable, but also appears nearly impossible.

Chapter 12 & 13 – Wars, political shifts, and economic data releases all affect stock prices in the short run, but rarely in predictable ways. Short-term news is only effective when compared to an aggregate of market expectations.

Chapter 14 &15[4] – The combination of futures trading and financial technology explains much of the short-term market fluctuations, including in some cases crashes such as observed in 1987.

Chapter 16 &17 – Some people subscribe to ‘technical’ techniques such as ‘charting,’ and Siegel even allows for the possibility of using factors such as “200-day moving averages” as a guide to buying and selling, but I’ll editorialize these chapters and say that’s crazy talk. Siegel also describes some long-standing efficient-market anomalies such as the “January effect” of small-stock outperformance in January, or a notable market underperformance on Mondays, but again I’ll editorialize and say pay no attention to that.

Chapter 18 – Picking successful stock mutual fund managers who consistently outperform the market has proven extremely difficult. Getting warmer…

Chapter 19 – Siegel saves the best for last. For holding periods above ten years, stocks have overwhelming advantages over bonds. The risk of holding stocks (measured by the standard deviation of real returns) actually shrinks to below bonds after ten years. For investors with a long horizon, rational behavior would call for holding 100% (or even more!)[5] of one’s investment portfolio in stocks.

Given the typical underperformance of managed stock mutual funds, most investors would do better with an index fund, an idea with which I am familiar.

The best personal finance books of all time

If you’re looking for the classics of personal investing and want to read the fewest number of books with the greatest impact, I think my short list goes something like this, in some order or another.

A Random Walk Down Wall Street, by Burton Malkiel,

Simple Wealth, Inevitable Wealth, by Nick Murray,

The Intelligent Investor by Benjamin Graham, and

Stocks For The Long Run by Jeremy Siegel.

None of these are controversial picks and only Simple Wealth Inevitable Wealth is not a perennial in this type of list. If you’re looking for classics on the importance of saving money and controlling spending as a path to wealth, the two that stand out are The Millionaire Next Door by Thomas Stanley, and George Clason’s The Richest Man In Babylon.

Please see related posts:

How to Invest

Stocks vs. Bonds – The Probabilistic Answer

Book Review: A Random Walk Down Wall Street, by Burton Malkiel

Book Review: Simple Wealth, Inevitable Wealth, by Nick Murray

Book Review: The Intelligent Investor by Benjamin Graham

Book Review: The Richest Man in Babylon by George Clason

Book Review: The Millionaire Next Door by Thomas Stanley


[1] Even if history does not repeat itself, it probably rhymes.

[2] Smith’s work was roundly attacked and discredited following the market crash in 1929, and the scars of that era prevented people from seeing that he was, in fact, correct. Siegel draws on his work and extends it.

[3] Note: I read the 1994 edition (since that’s what my library had) and I know Siegel has updated it five times since then with probably a lot of good new stuff. On the other hand, taking the long view, the messages can’t be all that different.

[4] This is probably the most dated portion of the 1994 edition I read, and I’m guessing the most updated in the 2014 Fifth Edition, since financial technology has evolved quite a bit in 20 years.

[5] For a person comfortable with risk and a 30-year investment horizon, Siegel says a 134% allocation to stocks is theoretical optimal. How does one do that? Leverage, of course. Ok, let’s just stop right there, put the leverage down, and nobody gets hurt.



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Ask an Ex-Banker About The Big MO: What Are Returns?

A version of this appeared in the San Antonio Express News

Dear Michael,
I own a little of MO, purchased some time back with an average cost of $27.37. As you know it pays $2.08 dividend, and when I tell my friend my return is 8%, he says my return is what the stock presently pays, 3.8% or so.

I figure my return on my cost, not present price. Who is correct?

George, in Boerne, TX

The Marlboro Man, before dying a horrible death

Dear George,
Thanks for your question, which hinges on what we mean by ‘returns’ when we talk about an investment. And I can tell you who is right.
I will also use your question to discuss the unending debate between returns on stocks and returns on bonds.

Dividend Yield
Your friend’s definition of return at 3.8% posits a very particular number known as ‘dividend yield.’ We figure dividend yield mathematically by dividing the annual dividend of a stock by the current price of that stock.

Since the stock MO (slightly more commonly known as Altria, more likely known as Phillip Morris, and best known as a massive purveyor of cigarettes such as the iconic Marlboro brand) pays $2.08 per share per year in dividends and currently trades around $55 per share, the dividend yield is roughly 3.8% – which is $2.08 divided by $55.
I know precisely zero people (like your friend) who would call 3.8% the ‘return’ on owning MO stock.
So he’s wrong.

Instead, the return of MO stock ownership is the calm satisfaction you get from funding a delicious and refreshing tobacco-smoking experience for millions of satisfied customers.

Haha just kidding, lolz, smoking is disgusting.

altria_stock_chartAnnual vs. Overall Returns
What I actually mean is the real return of MO stock ownership is calculated, as you already indicated, by figuring out your average purchase price, the current market price, and any dividends you may have received in the interim. Since your MO shares have doubled in price since you bought them, your overall return is something north of 100%, so far.

And so far, so good, for you.

However, we frequently talk about ‘annual return’ on an investment rather than ‘overall return’. If you made this purchase nine or ten years ago, your annual return might be something like the 8% you stated.
But I don’t know. It depends partly on when you bought, and also how you did or did not reinvest dividends.

If you know your way around an Excel spreadsheet, I could use the ‘IRR’ function to input your various annual purchases, plus any interim dividend cashflows, and then the proceeds you would collect when you sell, in order to calculate your annual return.

Then you can tell your friend to put that number in his pipe and smoke it, so to speak.
It’s well above 3.8%.

Knowable vs. Unknowable returns
But since you haven’t sold MO, you don’t actually know yet what your total, or annual, returns will be on the stock. You have to sell the shares to know your return on any stock investment.

And that leads me to a thought on the psychological problem of investing in stocks, especially when compared to bonds.
Since you have to sell to know your return, and since the correct holding period for stocks is roughly ‘forever,’ stock returns are less knowable than bond returns.
Stock returns, unlike the returns on bonds, are unknowable ahead of time. You basically have to leap into the unknown with stocks, which you don’t have to do with bonds.
Unlike stocks, traditional bonds simply ‘mature’ after a set number of years and ‘return’ your money back to you in the fullest sense of the word. Because your money ‘returns’ to you with a bond at a set date, calculating bond returns is knowable.

As goofy as he sounded, Rumsfeld was right. About investing, at least

Bond yields are, however, a bit mathematically complicated.
For simplicity’s sake, traditional bonds have a known ‘Coupon Yield’ which tracks the income an investor can reasonably expect just by holding the bond. This would be analogous to your ‘Dividend Yield’ that I described for stocks above.
The Coupon Yield is the ratio of the annual bond payments to the bond price, so a bond issued with a 3% annual coupon starts off with a Coupon Yield of 3%.
Sophisticated bond investors do not consider ‘Coupon Yield’ an accurate enough measure of bond returns, however.

Calculating bond yields
After a bond has been issued, the ‘annual return’ or ‘yield’ you get holding a bond depends on whether you paid more or less than face value for the bond. If you paid less you will make a higher return than the coupon, and if you paid more, you will earn a lower return than the coupon. A precise yield or return calculation would require applying a special ‘discounted cash flow’ math formula to all remaining bond payments.
Confused yet? That’s the way we finance people want to keep it!

Haha just kidding, lolz. Finance is disgusting.

Ok, no, it’s not disgusting, but I’d have to direct you to some math to learn more about calculating bond yields and ‘returns.’ Don’t worry though, because a main point is this: The final ‘returns’ of a traditional bond held to maturity are knowable, making bonds psychologically comfortable for some folks.

Final ‘returns’ on a stock depends on an average purchase price and average sale price. So until you sell the stock, you have unknown returns. This partly explains why stocks are psychologically uncomfortable for some folks.

Stocks v. bonds
So which one should you own in your investment portfolio?
Well, let’s see, that’s a complicated question with many answers.
Let me tap out the tobacco in my pipe, my young friend, clear my throat heartily, and tell you in a deep voice that it depends on your time horizon, your risk appetite, your savings rate, plus a sophisticated calculation regarding the number of years until your retirement.

Haha just kidding, lolz.

You should own stocks.


Please see related posts:

Stocks vs. Bonds

Discounted Cash-Flow formula

Another discounted cash flow example


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