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Jeremy Siegel: Part 2 of Investment U’s Interview with Wharton’s Top Financial Economist and His #1 Long-Run Buy

Jeremy Siegel: Part 2 of Investment U’s Interview with Wharton’s Top Financial Economist and His #1 Long-Run Buy

by Mark Skousen, Chairman, Investment U
Saturday, September 30, 2006: Issue #587

Last week, we looked at the first part of my interview with Wharton’s top financial economist, Jeremy Siegel, author of two best sellers, Stocks for the Long Run and The Future for Investors. Professor Siegel confirmed his bullish outlook on the buy-and-hold strategy, and warned investors of what he calls the “growth trap” – buying high-growth companies that don’t measure up over the long run against established, dividend-paying blue chips.

Today he takes a look at several fixed-income investments… and at just how well they perform against stocks…

Skousen: You seem to argue that the higher the dividend, the better, when it comes to maximizing long-run returns in the stock market. If dividends are so important, how about loading up on mortgage real estate investment trusts (REITs) and Canadian oil & gas trusts?

Siegel: I like REITs, but I like equity REITs better than mortgage REITs. Mortgage REITs crashed in the 1970s and then again in the last two years. In [the management company] Wisdom Tree’s dividend-weighted index, we include REITs. Canadian oil and gas trusts might also have a place; they are pass-through trusts.

Skousen: Which offers a better return over the long run: buying a diversified portfolio of junk bonds, or buying T-bonds?

Siegel: Junk bonds, definitely, if you have a diversified portfolio. I owned a Vanguard high yield fund and reinvested the dividends, and did very well. They probably haven’t done better than stocks, but their return has not been bad.

Skousen: What do you think of the Dogs of the Dow 10 or S&P 10 strategies?

Siegel: They’ve done very well, although there was a period a few years back when they didn’t do well. But now they’re back. No strategy works every single year, but overall, it’s a good strategy.

Skousen: Does your high-dividend strategy work in foreign stocks?

Siegel: European stocks tend to pay higher dividends than U.S. stocks. Japan and India don’t pay much in dividends, but Hong Kong and Australia do. I see on my Bloomberg that New Zealand pays 8% – wow. I think you can use this dividend strategy with emerging markets.

Skousen: How bad is Sarbanes Oxley for U.S. firms and investors today?

Siegel: It’s a big burden and hassle for smaller firms, but we are adjusting. They need to ease some of the burden.

The Best Way to Buy Commodities

Skousen: What’s your opinion of buying gold stocks and commodity investing in general? They’ve had a heck of a run since 2001. Will it last?

Siegel: First of all, I’ve always liked the stocks better than the underlying commodity. I’m not a big fan of the commodity funds; it’s not going to be a rewarding asset class. We know that gold has a long-run real return of about zero. Gold maintains its purchasing power, but that’s about it. Commodity stocks are likely to do better, and pay dividends, too.

Skousen: Is there a simple formula to determine the true value or intrinsic value of a stock?

Siegel: I look primarily at dividend yield and the P/E ratio relative to the market. Book-to-market value is an academic favorite, but there are a lot of problems with measuring book value. A lot of companies own assets where the market value is very different from their book value.

Skousen: What about present value of future cash flows?

Siegel: That’s the definition of true value, but that requires a long-term prediction about the future of a company, and that’s tough.

Skousen: Would you hold off buying a tech stock until it starts paying dividends?

Siegel: The truth is that the return on non-dividend paying stocks is not that great. Early-stage and small-cap stocks are much more risky. If you want to invest in growth stocks, I suggest you limit yourself to growth stocks that pay some kind of dividend.

Skousen: Your book is optimistic about the future, and you dismiss the argument that the baby-boomers will cash in their pensions and this will hurt the stock market. But your latest Wall Street Journal article [“Gray World,” Sept 20, 2006] was rather pessimistic. What gives?

Siegel: I’m glad you brought that up. I am optimistic, but if we don’t keep our capital markets open to investors, it’s not going to be good for investors or retirees. That was the thrust of my Wall Street Journal article. If we become “Fortress America” and close our borders and engage in trade wars and protectionism, it’s going to be a tough future for our country. But if we keep the capital markets open, I see so much growth abroad that our investment capital can keep growing.

Skousen: I was surprised to see you dedicated The Future for Investors to Paul Samuelson and Milton Friedman. Aren’t they opposites on the political spectrum?

Siegel: Yes indeed. I consider both friends. I didn’t have much of a political philosophy until I read Milton Friedman’s Capitalism and Freedom when I was an undergraduate at Columbia. But I also went to graduate school at MIT under Paul Samuelson, who was a Keynesian. But my sympathies were with Friedman and the monetarists, and after graduation I taught at the University of Chicago. I became a libertarian. Still, I have enormous respect for Samuelson, who is a genius in economics.

The “Extraordinary” Long-Term Investment

Skousen: You have done years of research on investing. What is the most important lesson to our readers from your work?

Siegel: I would go back to the title of my first book, Stocks for the Long Run. The extra return you earn in equities in the long run, diversified worldwide, compared to fixed income, is extraordinary. That’s the best investment strategy for the long run.

In my new book, The Future for Investors, the number one mistake investors make is chronically overpaying for growth stocks. I think in the last 40 years, tech stocks were undervalued only once or twice, in the early 1990s and perhaps in 2003.

Skousen: Thank you, Professor Siegel.

Good investing,


Today’s Investment U Crib Sheet:

  • Top Investment U Interviews… Earlier this week, Siegel pointed out that dividend-paying stocks are better long-term investments than growth stocks. Find out why in part one of the interview. And to get your copy of The Future for Investors, find it here on Amazon.
  • Shock Stocks In the News: Shares of Global Payments, Inc. (NYSE: GPN) were up 12% this morning, after the company reported strong quarterly results. Its earnings per share were 51 cents, beating estimates by 9 cents. And profit increased 35% on $260 million in revenue compared to $224.5 million a year ago. By 10:45 a.m., volume had more than doubled its daily average.
  • 7 More Momentum Stocks… GPN wasn’t the only fast gainer today – 16 U.S. stocks were up more than 10% this morning. Oxford Club Investment Director Alex Green specializes in finding these types of plays – companies accelerating their earnings and reflecting the positive action in their shares. In fact, he’s found seven companies that will all be winners, or he’s willing to pay you.

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