Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies 5th Edition

The basic theme throughout is simply that stock returns (in all developed nations, though at differing slopes, pp. 88-90) regress to a mean, as bonds, and all other investment alternatives, do not. That’s one point. By taking the long historical view (from the dawn of the American republic), Siegel also demonstrates (Chapter 6, pp. 93-103) that in this country over periods of five years and longer, real stock returns (after inflation) stray from our mean return (6.5%) less and less, until at thirty years the observed deviations are half what standard statistics expect. So stocks are both much more volatile short-term—cf. Mandelbrot and Hudson, The (mis)Behavior of Markets—and much less volatile long-term, than Modern Portfolio Theory says they should be. That’s point #2. And, his third crucial point, value strategies (Chapter 12, pp. 173-193, on low-P/E, high-dividend stocks) consistently surpass the market indices by 2% or more in annual compounded returns. I know of no other book which has made any one of these three points so clearly and demonstrated them so forcefully with historical data and mathematical analysis. Ben Graham, to be sure, made the case for value investing decades ago, and does a better job of understanding and presenting the process than anyone else before or since, but of course he couldn’t come close to the range and depth of modern databases and computing power to undergird his argument. Siegel has written the one book since Graham’s Intelligent Investor that everyone should read and re-read before presuming to buy any security other than an index fund.So, for instance, I needed to know that stocks have never failed to offer a positive real return over any period of seventeen years or more. Long-term bonds, in contrast, since the Civil War have outperformed stocks in just one 30-year period (by a minuscule .05% per year!), as interest rates fell from 16% in late 1981 to 2% in 2011—but the real return on these “safe” investments was negative for the entire post-war period before that, and likely will be for years to come. And Siegel repeatedly makes the point that especially when we think about retirement the only safety that matters is the assurance of rising purchasing-power over spans of decades.The book is not without its limitations. I don’t think Siegel understands options or other derivatives; his faulty discussion of stock index options in the 4th edition has been abbreviated, but his remaining remarks are misleading at best. Consequently the major new sections in this edition, which deal with the recent financial crisis, while fairly sound (e.g. showing how slight a role Fannie and Freddy played), understate the impact of synthetic credit default swaps, which by the time the fever broke had made the subprime mortgage market five times larger than the mess the bankers and mortgage brokers had created in the first place. Hence next to no one had any idea how immense the problem really was, though a few (see M. Lewis, The Big Short) saw enough to profit hugely.Other material in Siegel’s 378 pages adequately and sensibly covers major areas of historical interest (the primary stock indices, money, monetary policy and the gold standard), analyzes other financial and economic crises, surveys current issues (the business cycle, market responses to current events) and concerns (the developed world’s retirement “crisis”, on which he is quite optimistic), and I could cavil here and there or suggest other specialized treatments. But what he has to say on these topics is sufficient (and his history of the S&P 500 is excellent) for firmly embedding the three points with which I began, which are points every investor should ponder long and hard.But how many of us will profit from them? On p. 97 he mentions the allure of “safer” alternatives which do after all outperform stocks, over periods of one or two years, nearly 40% of the time. I don’t know that he sees how deep the pain goes for individuals watching dollars vaporize by the thousands, dollars which a bank account would at least have preserved and guaranteed. Nor, I think, does he see how hard it would be for asset managers to follow his principles when markets soar and “irrational exuberance" reigns triumphant; sticking to a long-term strategy is impossible when benchmark risk means your assets are marching out the door. Siegel’s work will most benefit those who know not just the concepts but themselves. It hurts to play from behind, alone, trusting the odds, trying to trust yourself. Long-term investment is a discipline less of intellect than of temperament and character. But the discipline of study and thought is still part of it, and Siegel’s history and mathematics keep me mindful of what the true odds are. In this and earlier editions, Stocks for the Long Run is one of just six books (cf. my review of M. Mauboussin More Than You Know) which have decisively shaped how I think about what I do.

Here's another gem I started reading from a copy at my library and finished up with my personal copy purchased here on Amazon. The book doesn't pummel you with too many low level details about markets and market theory although it does have some to give you context. For example, I enjoyed reading about the recent financial crisis, business cycles, and the age old story of stocks vs. bonds. However, I found some chapters difficult to read. Maybe I was just tired or in a bad mood that day. Chapter 21, Calendar Anomalies, felt like it meandered about good seasons and bad seasons with charts galore. It could have been summarized in 2 - 3 pages with a simple table. Chapter 22, Behavioral Finance and the Psychology of Investing, was written as a fictional narrative about the "dot com" tech bubble. Having lived through it and read about it ad nauseam I felt like the chapter was just too corny to take seriously. I was a young boy in my 20s without any serious cash on hand to participate but I watched as my classmates in university "invested". At the time I felt like I was missing out on something in life. I knew the bubble burst not by any index or anything numeric. Everyone started selling their BMW 3-series couples. You could buy one for a song and a dance. All I had was a song on hand ... so, no deal in my case.Another book I read that runs similar to this is Burton Malkiel's, "A Random Walk Down Wall Street". I read that book first and then read this one. My recommendation is to do the opposite. Read "Stocks for the Long Run" first. You will see almost the same topics in "A Random Walk Down Wall Street" but explained in much greater depth and detail.On the other hand, reading "Stocks for the Long Run" after "A Random Walk Down Wall Street" will give you a chance to review the concepts a second time from a different voice. Sometimes that's all you need to have an "ah-ha" moment.Both books will highlight international investing but I am still not a fan. Consider this : if you should buy what you know and stay within your circle of competence then you must ask yourself do you really know what you are buying? Do you know the target country's tax laws, economic health, and culture well enough to invest in it? Can you keep up with the foreign companies you would be investing in, or at least the foreign companies the ETF or mutual fund is investing in? I can barely keep up with US companies and all the laws and cultural influences that sway a company. If the US markets are completely exhausted then I can see a case for foreign investment. From what I can see, even in dark times, the US market is still a great place to invest in. Consider down prices as buying opportunities to load up on high quality companies.So, overall, I would give this book a solid 5 stars. You will be told plenty in a way that is easy for the non-finance person to ingest and you will have lots to think about in regards to your own approach.