Tuesday, 6 May 2014

Book Review: Stocks for the Long Run (5th ed) by Jeremy Siegel

SfLR is a classic, a book that every self-directed investor should read. Primarily history, but with a good dose of explanation, and primarily about the USA, it's the best overview of the equity side of investing one can find. It's a book about stocks in the broad collective sense, not about individual stocks or analysis thereof. Anything you wanted to know about stocks (see the table of contents in the Amazon preview of SFLR) and were wanting to ask and get a succinct intuitive (non-academic, non-mathematical) answer, this is the book.

The mere fact the book is now in its 5th edition twenty years on from initial publication is testament to its enduring well-earned popularity. Author Siegel has not rested on reputation, the main update being an account of the 2008 financial crisis and its aftermath in the first 70 pages.

It's hard to say these are criticisms, but here is what I would like to see expanded (I'll gladly take another 100 pages despite the book being already almost a brick at 400 pages):

  • Central thesis past vs future? - The fact in the following quote accounts for the fame, and the title, of the book "... stocks, in contrast to bonds or bills, have never delivered to investors a negative real return over periods lasting 17 years or more" (going back to 1802 up to 2012 in the USA). OK, so how about the future? What are the chances this streak will continue and what are the factors to support the expectation? Is it just that the USA is lucky, as the-world-is-random folk believe? Siegel does address this crucial question to some degree - yes, since i) emerging markets country investors will buy up the assets of the boomer generation as they sell to finance retirement, ii) prosperity comes from productivity growth in the USA, which will continue. This is not totally convincing. How have stocks done around the world? The experience of other countries is not examined to any degree (Canada itself gets a couple of insignificant mentions), especially those where stock investors lost everything. Others like Elroy Dimson, Paul Marsh and Mike Staunton in Triumph of the Optimists and in their annual Credit Suisse Global Investment Returns Yearbooks have taken a much more extensive long term look. Siegel really considers only volatility risk since that is all that has transpired in the USA. It would be helpful for him to consider other long run equity risk, such as William Bernstein does in Deep Risk (which I discussed here). 
  • Investing strategies beyond cap-weight and fundamental weight? - As his own dissection of the Dow Jones Industrials and S&P 500 stock indices makes clear, cap-weight indices and the funds that implement them are strategies themselves, with significant inefficiencies, despite being miles better than actively managed mutual funds. There are better alternatives but he covers only one - fundamental weighting. Siegel describes small size, value and momentum factors but neglects low volatility and then misses the chance to tie all that together by describing the current state of the art indices/strategies being developed in places like the EDHEC Risk Institute in Smart Beta 2.0, such as maximum diversification, efficient maximum Sharpe, maximum decorrelation, minimum portfolio volatility, risk parity etc.
Nevertheless, it's hard to knock Siegel too hard for the tremendously useful contribution this book makes to investing knowledge. 

There's plenty of footnoting for further reading of sources. There are lots of charts and tables. The lengthy 17 page index is excellent. The writing is clear and jargon-free for the ordinary investor though it helps to have basic knowledge of investing. It's a book one can return to again and again. It gave me plenty of blog post ideas.

Rating: 4.5 out of 5 stars.

Disclosure: The publisher provided me with a copy of the 5th edition for review.

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