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2006 Speaker Series: Dr. Jeremy Siegel

Minneapolis Portfolio Management Group (MPMG), a value-based money management firm with over 400 million in assets under management, welcomed the firm’s clients, valued members of the brokerage community, and the investment community of Minneapolis to the inaugural M PM G speaker series event featuring Dr. Jeremy Siegel on May 18th 2006. Just as MPMG has been dedicated to enriching the financial security of the firm’s clients, the purpose of this event was to begin an annual event aimed at enriching the financial security of the Twin Cities by bringing speakers of Dr. Siegel‘s prominence to the community to share their insights, knowledge and wisdom.

Below is a summary of the May, 2006 event. For more information about MPMG or the M PM G Speaker Series, please contact the firm at 612-334-2000.

Dr. Jeremy J. Siegel–Biography Jeremy Siegel is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania. He graduated from Columbia University in 1967, received his Ph.D. in Economics from the Massachusetts Institute of Technology in 1971, and spent one year as a National Science Foundation Post-Doctoral Fellow at Harvard University. Prof. Siegel taught for four years at the Graduate School of Business of the University of Chicago before joining the Wharton faculty in 1976.

Prof. Siegel has written and lectured extensively about the economy and financial markets, has appeared frequently on CNN, CNBC, NPR and others networks. He is a regular columnist for Kiplinger’s and Yahoo! Finance and has contributed articles to The Wall Street Journal, Barron‘s, The Financial Times and other national and international news media. Prof. Siegel served for 15 years as head of economics training at JP Morgan and is currently the academic director of the U.S. Securities Industry Institute.

Prof. Siegel is the author of numerous professional articles and three books. His best known, Stocks for the Long Run, which published its third edition in 2002, was named by the Washington Post as one of the ten-best investment books of all time. His current book, The Future for Investors: Why the Tried and the True Triumph over the Bold and New, was published by Crown Business in March 2005 and was named one of the best business books published in 2005 by Business Week, the Financial Times, and Barron‘s magazine.

Prof. Siegel has received many awards and citations for his research and excellence in teaching. In November 2003 he was presented the Distinguished Leadership Award by the Securities Industry Association and in May 2005 he was presented the prestigious Nicholas Molodovsky Award by the Chartered Financial Analysts Institute to “those individuals who have made outstanding contributions of such significance as to change the direction of the profession and to raise it to higher standards of accomplishment.”

Past awards include the Graham and Dodd Award for the best article published in The Financial Analysts Journal in 1993 and the Peter Bernstein and Frank Fabozzi Award for the best article published in The Journal of Portfolio Management in 2000.

In 1994 Professor Siegel received the highest teaching rating in a worldwide ranking of business school professors conducted by Business Week magazine and in 2001, Forbes named JeremySiegel.com as one of the “Best Business School Professor” websites.

Stocks still the right choice for the long run

Prof. Siegel wrote one of the quintessential investment guides of the booming 1990s, “Stocks for the Long Run.” While the 2000s have not been as kind to stocks as the 1990s were, Prof. Siegel maintains this is still the place to be.

He has studied the history of investments going back to 1802, far beyond any other studies that have been conducted. He points out that from 1802 through 2005, $1 invested in the markets grew to:

  • $1.62 if invested in gold
  • $293.00 if invested in U.S. Treasury bills
  • $1,083 if invested in long-term government bonds
  • $666,180 if invested in stocks

total real return indices

It should be noted that all of these figures are adjusted for the effects of inflation. In other words, rising living costs are deducted throughout the calculation.

Don’t overstate the risk of stocks

The general consensus is that stocks are a risky asset compared to bonds or other types of investments. Prof. Siegel points out that in given short run periods, the average annual return on stocks can be volatile:

But over time (and most investors in stocks have a long timeframe in mind), the volatility really is no greater than with bonds, what many perceive as a safer asset class.

The information in this table is taken from Prof. Siegel’s research. Return numbers are stated in real terms, meaning the effects of inflation are deducted from the number. This data is through the end of 2005.

table showing stock and bond returns

Notice that in long stretches of time (represented by the major sub periods) annualized returns of stocks have been fairly consistent, more stable than bonds.

The S&P 500 ain’t what it used to be

Every year, Standard and Poor‘s revises the list of stocks that make up the benchmark S&P 500 stock index. The changes are not dramatic. Sometimes, they reflect the fact that one company has merged into another. Sometimes, a stock is outright replaced by another stock seen as more reflective of the market as a whole.

Prof. Siegel’s research has uncovered a surprising fact. If you bought a portfolio of stocks that represented the S&P 500 in 1957, the year it was created, and held that portfolio without making all of the changes that occurred in the index in subsequent years, you would come out ahead.

The Existing S&P 500 (Portfolio Adjusted Regularly) Can‘t Keep Pace with the Original S&P 500 List of Stocks

The reason, according to Prof. Siegel, is that many stocks added to the Index come in at an over-valued basis. If the stock is expensive to start with, it does not offer as much upside potential as a comparable stock that is available at a more attractive price.

Fast-growing companies aren’t necessarily the best

One of the most fascinating findings in Prof. Siegel‘s recent research is that contrary to popular belief, it isn’t always the most exciting and fastest-growing companies that make the best investments.

While many investors hope to find the next hot company or the fastest-growing sector, Prof. Siegel’s studies show that over the long run, fast growth doesn’t always equate into positive stock performance.

For instance, the sectors of the S&P 500 that have grown the fastest in the last half century (this specific measure runs from 1957 through 2003) haven‘t always delivered the best performance. Some sectors that actually lost market share within the S&P 500 still delivered superior returns, as this table indicates. For instance, consider the Information Technology and Energy sectors. From a market value standpoint, they moved in virtually the opposite direction. Everybody considered technology the hot sector of the late 20th century, and energy a suffering industry during that same time period. Yet their stocks performed almost identically.

sector change in market

Prof. Siegel also points out that without the impact of IBM on the information technology sector, the return from that group of stocks would be noticeably lower.

What was the best-performing stock in the S&P 500 since its inception in 1957? Phillip Morris (now known as Altria, and part of MPMG‘s portfolio). While battling all of the troubles associated with the tobacco industry in recent decades, this stock generated a return nearly double that of the S&P 500 Index. Prof. Siegel says through 2005, $1,000 invested in the S&P 500 in 1957 would have grown to $145,352. That same $1,000 invested in Phillip Morris at the same time would have grown more than $7,000,000.

High-dividend stocks make a difference

What factors affect a stock’s price? A company‘s ability to increase earnings is only part of the story. Prof. Siegel says two other important but often overlooked factors are:

  1. Investor expectations

He suggests that stocks like Altria perform so well because expectations for the company are so low. By contrast, some very trendy companies may see their price expectations reach too high of a level. Therefore, the return potential for most investors is limited, because they paid too much for the stock in the first place.

  1. Dividend yield

Prof. Siegel‘s research, shown in this chart, indicates that stocks paying the highest dividend yields each year generated the best return within the S&P 500. The 100 best-yielding stocks in every given year between 1957 and 2003, on average, generated a return that exceeded the index as a whole, as well as each other group of 100 stocks ranked by dividend yield within the index (see chart).

Stock Performance Based on Rank of Dividend Payout S&P 500

Troubling trend – the aging population

Prof. Siegel’s latest book, The Future for Investors, explores some of the major issues that are on investors‘ minds about the years to come. The most important of these is the aging population in developed nations.

He points out that while we all know about how the aging of the huge baby boomer generation in America will put a strain on programs like Social Security and Medicare, that only scratches the surface. The “age wave” is even more pronounced in Europe and Japan.

This raises two major questions, according to Prof. Siegel: 1. Who will produce the goods to support an older population 2. Who will buy the financial assets that older investors will seek to sell?

The hopeful solution? Developing markets

Prof. Siegel is optimistic that the solution to the challenges created by an aging population does exist – in developing markets of the world.

For example, he points out that one of the most populated nations in the world – India, has a fast-growing younger population.

As economies develop in these newer capitalist societies, the gross domestic product (GDP) growth will also continue to rise dramatically. While more than 80% of the world’s population is, and will continue to come from, developing nations, only 44% of the world‘s economic activity comes from those markets. By 2050, Prof. Siegel projects the GDP impact from developing nations to be almost 77%.

This is a development he suggests is quite positive for the world.

Percent of World Population and GDP from Developing Nations

Projected Stock Market Capitalization

Although world stock markets are quite vibrant today, the U.S. still accounts for more than 40% of the value of all stocks listed on public exchanges around the globe. Add in other major developed markets like Europe, Japan, and the number rises to 92%.

But change is underway. Prof. Siegel suggests that by 2050, developing markets will account for 2/3rds of the world‘s stock market capitalization. That‘s why he is optimistic that growth in newer economies will prove to be beneficial for markets like the U.S., Japan and Europe, where populations are rapidly aging.

The Financial World is Moving in the Direction of Developing Markets

“America on the Block”, StarTribune 5/28/06