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Any thoughts on Jeremy Siegel's (sp?) book The Future of Investing?

Peace,
Nate
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Any thoughts on Jeremy Siegel's (sp?) book The Future of Investing?

I enjoyed the book and would recommend it to my friends, but there is one thing that the Professor doesn't seem to grasp - basing everything on long-term returns ignores the short-term gains you can get in certain stocks at certain times.
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Author: Barolo97 | Date: 7/28/05 12:53 PM | Number: 62
Any thoughts on Jeremy Siegel's (sp?) book The Future of Investing?


I just finished this book a couple of weeks ago. Here are some of the key topics:

* In a lot of ways, this book picks up where Siegel's previous book 'Stocks for the Long Run', left off. However, he has changed his view a bit saying he now believes that you may be able to beat the TSM (Total Stock Market) Indexes by purchasing high dividend, older established companies, and you reinvest all dividends and holding on to all distributions.

* He emphasizes repeatedly how important it is to reinvest all dividends and retain all distributions, and never sell a single share of stock. He shows that in the bad times, the dividends usually remain safe for biggere established companies, and that you can buy more shares with each dividend. This is the classical 'dollar cost averaging' strategy applied to dividends.

* His statement is that the 'Tried the true will beat the bold and the new'.

* The Growth Trap. This is what you fall into when you buy a 'hot' high growth tech stock. He compares IBM to XOM, pointing out that IBM has had much higher growth in earnings and price over its history. However, with dividends reinvested, you would have done much better with XOM. This is because the market bids up the price of fast growing stocks like IBM, and you end up paying too much for each share that you buy. He shows that this greatly decreases the total return over the long term.

* He shows how the Growth Trap applies to sectors and even countries. He shows that even though China has been the fasted growing economy over the last five years or so, and you would have made much more money in other more established, older economies.

One question I had while reading this book is, what about people who are not reinvesting dividends? Like retirees who are spending their dividends? Would they still be better off with the 'tried and the true'? Or would they be better with the 'bold and the new'? There is no indication of the answer to this. This book seems to be aimed exclusively at the accumulation phase of life.

Russ
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The Growth Trap. This is what you fall into when you buy a 'hot' high growth tech stock. He compares IBM to XOM, pointing out that IBM has had much higher growth in earnings and price over its history. However, with dividends reinvested, you would have done much better with XOM. This is because the market bids up the price of fast growing stocks like IBM, and you end up paying too much for each share that you buy.

fwiw, this is precisely what annoyed me most about the book - S seems to imply that investors are incapable of 1) identifying an attractive entry point and 2) identifying an attractive exit point. His is the essence of top-down thinking, when you examine broad trends instead of the specifics of individual companies. As such, his teachings - while very relevant to the average person looking how to invest with a minimum of work - have little to do with what results a smaller investor willing to slog thru the spreadsheets of individual companies might achieve...
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Author: IllustratedMan | Date: 7/30/05 4:58 PM | Number: 65
>>The Growth Trap<<

fwiw, this is precisely what annoyed me most about the book - S seems to imply that investors are incapable of 1) identifying an attractive entry point and 2) identifying an attractive exit point. His is the essence of top-down thinking, when you examine broad trends instead of the specifics of individual companies. As such, his teachings - while very relevant to the average person looking how to invest with a minimum of work - have little to do with what results a smaller investor willing to slog thru the spreadsheets of individual companies might achieve...

Yes, but he is not a stock trader. He is talking about a buy-and-hold strategy. He does not believe that it is possible to reliably pick an entry or exit point for any stock.

And, fwiw, neither do I.

To me trading is specilating; ie, gambling. Investing is buying for the long run and never selling unless a company is in trouble. That way you capture the market and maybe a bit better.

Russ
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So one shouldn't wait for an appropriate price to buy a stock, simply purchase the stock of a good company and all will be well? And what of small caps and other stocks where dividends are not really part of the return expected from the investment?

Peace,
Nate
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Author: Barolo97 | Date: 7/30/05 5:40 PM | Number: 67
So one shouldn't wait for an appropriate price to buy a stock, simply purchase the stock of a good company and all will be well? And what of small caps and other stocks where dividends are not really part of the return expected from the investment?



According to Siegel, if you stay away from the high growth stocks (that he says are always priced too high), and buy only the 'tried and the true', you don't have to worry about when you buy it. You just buy and hold it forever, always reinvesting dividends.

This book doesn't talk much about small caps, except to say that they are almost always priced too high.

Russ
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To me trading is specilating; ie, gambling.

Well, to be frank I'm not here to convert, but one can at least gamble by looking at the cards. I ought to admit I do this for a living, so I'm a bit biased by history and by inclination...
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Author: IllustratedMan | Date: 7/30/05 7:34 PM | Number: 69
Well, to be frank I'm not here to convert, but one can at least gamble by looking at the cards. I ought to admit I do this for a living, so I'm a bit biased by history and by inclination...


I agree that after sufficient experience, and access to the vast amount of information available at a money management company, that it is possible to successfully choose winning stocks based on fundamentals. And, a professional stock picker would have the greatest advantage when picking small high growth stocks.

However, I do not believe that this approach would be best for most people who are managing their own portfolios. They would be creating an extremely high risk portfolio that could implode at any time.

Russ
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I agree that after sufficient experience, and access to the vast amount of information available at a money management company, that it is possible to successfully choose winning stocks based on fundamentals.

Russ, if it matters, I am a one person firm and while I now have access to conference call transcripts, this wasn't available before. Times have changed - the internet is a great equalizer, and the 'vast amount of information' is now freely available for those who care to use it.

That said, like you I would tend to not recommend this for many investors not because I don't think the average person can achieve good results but because most folks don't bother to compute their own returns so have no real knowledge of how they are doing, and more importantly reviewing the average financial statement - on a continuous basis - isn't something that interests most people. Plus, as we all know, the indexes can be tough to beat sometimes...
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I was mostly disappointed by the book because I don't think it lives up to its billing. I find the subtitle "Why the Tried and True Triumph Over the Bold and New" misleading.

That said, there is some truth to the growth trap if you don't sell soon enough and I do agree that you should be wary of paying too much for a stock.

In my opinion the books has a serious flaw in its methodology. The study shows that the original members of the S&P 500 index outperformed the new additions but the study ignores the special treatment that the original members of the index got. When the index was first created there were no index funds mimicking the S&P 500. After the index got going, funds appeared to take advantage of it. Today, when a new stock is to be added to the index, the S&P 500 committee announces it ahead of time and the funds buy the stocks driving up the price at which it enters the index. The original stocks were not driven up in this manner when the index was created so they entered the index without the bias. Their prices were driven up as the index funds were started, i.e. after entering the index. There is a simple way to correct this issue, the S&P 500 committee should not pre-announce the entry of new issues into the index.

The last disappointment is that at the end of the day the book does not provide a reasonable investment strategy, IMO.

Denny Schlesinger
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Could someone that have the book handy please send me or post the formula and criteria that he used to calculate whether a stock is good value?? I take down some notes but lost it.

Thanks in advance...

KlangFool
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