Investing Wisdom From the Book ‘Stocks For The Long Run’
INVESTOPAPER
‘Stocks For The Long Run’ is an investing book written by Jeremy Siegel. The book emphasizes that stocks have outperformed other investment alternatives throughout history and one should become a long term investor to ensure the maximization of wealth.
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Here are some of the best words of wisdom from the book. Hope it is useful.
Best Insights From ‘Stocks For The Long Run’
“Temptations to be a short term investors can overwhelm the need to be a long – term investor.”
“Successful investment management means understanding ahead of time how you will react to outcomes that are not only unexpected but unfamiliar. Although you might intellectually accept the reality of market volatility, emotional acceptance is far more difficult to achieve.”
“Uncertainty will forever be your inseparable companion.”
“Stocks have been chronically undervalued throughout the history. This has occurred because must investors have ignored their long- term record of steady gains. This short terms focus has caused investors to pay too low a price for shares, and therefore enabled long- term investors to reap superior returns.”
“Stocks are the best and, in the long run, the safest way to accumulate wealth.”
“The total return in equities dominate all other assets. Even the cataclysmic stock crash of 1929, which a generation of investors to shun stocks, appears as a mere blip in the stock return index. Bear markets, which so frighten investors, pale in the context of the upward thrust of total stock returns.”
“One dollar invested and reinvested in stocks since 1802 would have accumulated to nearly $7,500,000 by the end of 1997. Hypothetically, this means that $1 million, invested and reinvested during these 195 years, would have grown to the incredible sum of nearly $7.5 trillion in 1997, over one-half the entire capitalization of the U.S stock market.”
“The short-term fluctuation in market , which loom so large to investors, have little to do with the long-term accumulation of wealth.”
“Of course, if investors can identify peaks and troughs in the market, they can outperform the “buy-and-hold” investor. But, needless to say, few investors can do this . And even if an investor sells stocks at the peak, this doesn’t guarantee superior returns. As difficult as it is to sell when stocks prices are high and everyone is optimistic, it is more difficult to buy at market bottoms, when pessimism is widespread and few have the confidence to venture back into stocks.”
“A number of ‘market timers’ boasted how they yanked all their money out of stocks before the 1987 stock crash. But many did not get back into the market until it had already passed its previous highs. Despite the satisfactions of having sold before the crash, many of these ‘market seers’ realized returns inferior to those investors who never tried to time the market cycles.”
“The high prices that stocks reach during bull markets, which historians often characterize as filled with ‘undue’ or ‘unwarranted’ optimism, are in fact often justified on the basis of the long- term record of corporate earnings and dividend growth. Unfortunately, this long perspective does not interest most players in the market. Most investors roundly ignore forecasters who analyze the long run, but do not predict the direction of the market in the short run.”
“Life is not enough, human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by average man at a very high rate – J M Keynes.”
“Value investors are contrarians who believe that the swings of optimism and pessimism about the market and individual stocks are frequently unjustified, so buying out – of – favor stocks is a winning strategy. Since firms reduce cash dividend payouts infrequently, stock with a high dividend yield are often those that have fallen in price and are out of favor with investors.”
“It can be shown mathematically that a contrarian strategy of choosing stocks that have fallen in value works much better with firms that are likely to be ‘survivors’ that with firms that are not. Playing a contrarian strategy does not work if the firm you have chosen to buy is actually heading for oblivion.”
“John Maynard Keynes likened short- term investment strategy to a newspaper competition where competitors have to pick the prettiest faces from hundreds of photographs, the prize being awarded to the competitor who most nearly matches the average preferences of all the other competitors. Keynes stated that to win the contest- It is not a case of choosing those which, to the best of one’s judgment , are really the prettiest, nor even those which average opinion genuinely thinks the prettiest…. we devote our intelligences to anticipating what average opinion expects the average opinion to be.”
“Most of these professional investors and speculators are, in fact, largely concerned, not with making superior long term forecasts of the probable yield of an investment over its whole life, but with seeing changes in the conventional basis of valuation of a short time ahead of the public. They are concerned, not with what an investment is really worth to a man who buys it ‘for keeps’, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.”
“Some investors believe that can beat the market by basing their strategy on investor ‘sentiment’ instead of fundamentals such as earnings an dividends. They contend that most investors are unduly optimistic when stock prices are high and unduly pessimistic when they are low. It is difficult for even sophisticated investors to remain aloof of the prevailing sentiment. Rising prices breed excitement and those who have committed the most to the market realize the highest profits. When the market is falling, the opposite is true.”
“Whenever the index of investor sentiment is high, subsequent returns on the market are poor, and when the index as low, subsequent returns are above average.”
“Breaking from the crowd is often the best way to enhance long-term results.”
“Many investors think of small stocks as potential ‘growth’ stocks, hoping to catch one that will turn into a Microsoft or Intel. But most small stocks are not growth stocks.”
“Stocks that exhibit low price- to- book and low price –to- earnings ratios are often called value stocks. Our theory about why growth stocks have underperformed value stocks is that investors get over excited about the growth prospects of firms with rapidly rising earnings and bid them up aggressively. ‘Story stocks’ such as Intel or Microsoft, which in the past provided fantastic returns, capture the fancy of investors, which those firms providing solid, although uneven earnings are neglected.”
“Despite the higher returns provides by value-based firms, there is one class of stocks, distressed firms, that have among the highest returns of all. Many distressed firms have negative earnings, zero or negative book value, and pay no dividends. Research has shown that as the ratio of book value or earnings turn negative, the price of the stock becomes so depressed that the future returns soar.”
“Stocks with steady growth records are worth 30, 40, and more times earnings.”
“Diversification is a key to cutting risks and maintaining returns. No one stock or single industry is guaranteed to succeed. But good growth stocks, like good wines are often worth the price you have to pay.”
“Growth stocks do not necessarily have higher returns than value stocks because expected growth is already factored into the price.”
For investors with long-term horizon, hedging currency risk in foreign stock market is not important. In fact, there is recent evidence that in the long run, currency hedges might actually increase the volatility of dollar returns. In the long run, exchange rate movements are determined primarily by changes in local prices. Equities are claims on real assets that compensate the stockholders for changes in the price level. To hedge such a long-run investment would be self-defeating since by buying a real asset you automatically hedge a depreciating currency.”
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