STOCKS FOR THE LONG RUN REVIEW
“It is interesting that an investor who has some knowledge of the principles of equity valuations often performs worse than someone with no knowledge who decides to index his portfolio.”
Jeremy Siegel born in 1945 is professor of finance at the University of Pennsylvania in Philadelphia. He also appears on networks such as CNN, CNBC etc. In his book Stocks for the long run he talks about the complicated socio economic systems and knowledge can improve your finance. The book throws light on the performance of stock market in short and long run, what led to 2008 recession and what is needed for long – term investing success. The author explains that how the economic environment affects stocks.
The author devotes few chapters about the 2008 recession.
The prime factors which caused the 2008 recession were regulatory failures and overleveraged subprime mortgages.GDP growth fell by a record 4.3% from the end of 2007 to mid-2009. This pushed the US economy into its second-longest recession. Siegel explains here the state of current stability and instability of the financial system. Further he states the option of value investing as a long-term strategy. The author talks about the inflation which has changed drastically after the World War 2. He also says how does gold prices have effect due to this inflation. Gold standard restricts the supply of money and hence the inflation rate.
Jeremy says that in the long run, gold offers protection to investors during inflation. Whatever hedging property precious metals possess, these assets will exert a considerable drag on the return of a long-term investor’s portfolio. If you are a long term investor, your focus should be on growth of the purchasing power. Risk of stocks depends upon your period of investment – long term or short term. The superiority of stocks to fixed-income investments over the long run is indisputable.
Risk and Return
Jeremy says that risk and return are the most crucial part of finance and portfolio management. For determining the best portfolio for investor, one needs to specify the risk and return of each asset. According to Jeremy, one of the biggest mistakes which investors do is underestimate their holding period. He explains that the holding period which is relevant for portfolio allocation is the length of time the investors hold any stocks or bonds. It doesn’t matter how many changes are made among the individual issues in their portfolio.
Jeremy says that in order to be a successful investor, you need to understand your total real return – income produced as interest and dividends, along with any changes in capital value. To achieve efficiency, investors must compare historical data, in relation to total real returns from different combinations of assets over single or multiyear periods up to 30 years.
Modern Portfolio Theory
Jeremy further explains modern portfolio theory, in which efficient frontier plays a major role.It states the minimum risk an investor can achieve. It can be done through combination of varying proportion of stocks and bonds. Changes in managed portfolios yield different return and risk profiles, so that investors can get a better idea of the standard deviation of their average annual return. One should also consider tax and dividend. Stock prices are determined by the future value of dividends. Earnings reflect many ordinary and nonrecurring expenses over varying time periods as they are the source of dividend payments.
The author also talks about diversified portfolio. Such type of portfolio can minimize risk which is independent of the market. What does diversification include? It involves investing in bonds, all types of equities etc. The author stated in the context of long term investors that they choose to buy shares of mutual funds. But when these investors compare the long term returns, they tend to get demented. On this, Jeremy advices the long term investors to instead calculate the average annual performance of all publicly traded funds because that will actually show which funds beat a particular index.
Investors might not know that their trading and management cost hurt their long term returns. Further Jeremy says about ETFs, also called as ‘spiders’. These are more attractive than mutual funds because investors can trade them anytime and sell them short. In addition to this, they are also tax efficient.
From this book you will truly understand the forces that move today’s markets trends. And this will help you develop a sound and profitable long-term portfolio. To sum up, this book is a perfect guide to navigate markets and for sound investment strategies. The author throws light on principles of investment strategy to be guided by long – run investments. There are a few books in finance which are must read, and Stocks for the long run is one of them. If you are a DIY investor, this book is truly the best one for you.