By Chris Taylor
NEW YORK Feb 11 There are countless thousands
of investing books out there, but precious few that could be
considered true classics.
Some of the obvious titles include Benjamin Graham's "The
Intelligent Investor," of course, one of the bibles of value
investing and a favorite of gurus like Berkshire Hathaway's
Warren Buffett. Maybe books like Burton Malkiel's "A
Random Walk Down Wall Street," or "Beating the Street" by former
Fidelity Magellan manager Peter Lynch should also be included on
But no such list would ever be complete without "Stocks for
the Long Run," by Jeremy Siegel, a finance professor at the
Wharton School of the University of Pennsylvania.
Hard to believe, but 20 years have passed since that
classic's first publication back in 1994. Now there is a new
edition of the book, analyzing the 2008 financial crisis that
shook investors to their core, and providing fresh forecasts for
the years ahead.
Reuters sat down with Siegel to chat about the wild ride of
the last two decades - and about what twists and turns are still
Q: Twenty years have passed since you published your book,
but long-term stock returns have remained the same. Do you see
those findings as a validation of your earlier work?
A: Stock returns through 2013 have averaged 6.7 percent per
year, which is exactly the same as I reported in the first
edition of "Stocks for the Long Run" back in 1994. Of course
there has been quite a bit of volatility over the past couple of
And over the short run, equities are indeed a very volatile
asset class. But over the long run, perhaps the most stable
asset class of all, delivering the highest returns.
Q: You are not quite as hopeful for bondholders, though.
A: They have had some great years, but right now it looks to
me like the environment of the early 1960s. I don't think we
will end up with inflation rates like we had in the 1970s, which
got up into the double digits, but I do think 10-year interest
rates on bonds will get to 4 or 5 percent. Not this year, maybe,
but in 2015 or 2016. And that obviously does mean a tougher time
for bondholders ahead.
Q: Your new edition analyzes the roots of the financial
crisis of 2008-9. What is your take?
A: I don't blame (former Federal Reserve chairman) Alan
Greenspan for keeping interest rates low. I don't think that is
relevant. But I do blame him for not seeing the buildup of risky
assets on the balance sheets of critical financial institutions.
When Lehman Brothers and Bear Stearns started levering
themselves up 50-1 or higher, on risky real estate securities
that were wrongly stamped triple-A by (Standard & Poor's) and
other ratings agencies, he should have sounded the alarm on
Q: Looking ahead for our society, one point you make is that
retirement ages have to change.
A: When programs like Medicare and Social Security started,
the average life expectancy was 67. But the world is changing.
Back then, the costs of programs like that were tiny fractions
of what we are now expecting today. Now we are much healthier,
and 70 is the new 60 or even the new 50. There is no reason why
we shouldn't work longer. If the retirement age doesn't change,
that is not going to be good for equity returns going forward.
Q: It seems you are quite bullish on emerging markets, which
are going through a rough patch at the moment.
A: Emerging markets valuations this year are going so low
that I believe it is a very unique opportunity right now.
Companies in emerging markets are selling at 10 or 11 times
earnings; in some places like China valuations are even lower,
at seven times earnings. This is remarkable.
These are opportunities you do not get very often. It is
part of a common cycle, swinging between optimism and pessimism.
If you recognize that, you go in. Just know that you might take
some further short-term losses, before those markets hit
Q: What does all this mean for allocation for individual
A: If you are an aggressive investor, you might look at an
equity allocation of one-third U.S., one-third developed ex-U.S.
markets like Japan and Europe, and one-third emerging markets. I
don't see much of a future in bonds, cash is yielding virtually
zero, and commodities don't seem very attractive. My feeling is
that stocks still offer the best long-run prospect for future
returns. And if we were looking back at this market's
price-earnings ratios two or three years from now, we would
probably be very happy to get in on it.
Q: If you had to predict what your next book update is going
to discuss in a few years - what would it be?
A: Normally I do an update to "Stocks for the Long Run"
every four years or so. So four years from now, in 2018, I
honestly don't foresee having had another crisis like the one we
just saw. You have to go back to the 1930s to see something like
that. That was not just a once-in-a-generation thing: It was a