9. The work has survived only thanks to a Japanese reprint.
10. Charles Jones, Introduction to Economic Growth, 2nd ed. (New York: W. W. Norton & Company, 2002), 16.
11. E. Einstein, The Printing Press as Agent of Change: A Communications and Cultural Transformation in Early Modern Europe (Cambridge: Cambridge University Press, 1979), 11.
12. Michael Rotschild, Bionomics (New York: Henry Holt, 1990), 8–9.
13. Hume, quoted in Simon, Ultimate Resource 2, Chapter 26.
14. Jared Diamond, Guns, Germs, and Steel: The Fates of Human Societies (New York: W.W.Norton,1997), 412.
15. Jones, Introduction to Economic Growth, 88.
16. Letter to Robert Hooke, 5th February 1676.
17. Lee Gomes, “A Beautiful Mind from India Puts Internet on Alert,” Wall Street Journal, November 4, 2002.
18. Quoted in Thomas Friedman, “Is Google God?” New York Times, June 29, 2003.
19. Ministry of Information Industry, Tenth Five-Year Plan (2001–2005), available in English at http://www.trp.hku.hk/infofile/china/2002/10-5-yr-plan.pdf.
20. Mary Meeker, Lina Choi, Yoshiko Motoyama, “The China Internet Report,” April 14, 2004, Morgan Stanley Research, 6.
21. Vogelstein, Fred, “How Intel Got Inside,” Fortune, October 4, 2004, 134.
22. Thomas Friedman, “Origin of Species,” New York Times, March 14, 2004.
23. These relative incomes are quoted on a purchasing power parity (PPP) basis.
24. Yasheng Huang, “China Is Just Catching Up,” Financial Times, June 7, 2004.
25. Dominic Wilson and Roopa Purushothaman, “Dreaming with BRICs: The Path to 2050,” Global Economics Research Paper no. 99, Goldman Sachs, October 1, 2003.
26. Michael Shari, “Indonesia: Consumer Heaven?” Business Week, March 24, 2003.
27. Thomas Hout and Jim Hemerling, “China’s Next Great Thing,” Fast Company, March 2004; Dennis Eng, “Levi’s, Pillowtex Deals Worth Billions to Li & Fung,” The Standard: Great China’s Business Newspaper, January 9, 2004.
28. See Gabriel Kahn, “Chinese Firms Buy Rights to Famous Trademarks,” Wall Street Journal, December 26, 2003.
29. See George Wehrfritz, “China: Going Global,” Newsweek International, March 1, 2004, and Clay Chandler, “Inside the New China,” Fortune, October 4, 2004, 98.
30. See Constance Sorrentino and Joyanna Moy, “U.S. Labor Market Performance: International Perspective,” Monthly Labor Review (Bureau of Labor Statistics), June 2002, and Bureau of Labor Statistics, “Comparative Civilian Labor Force Statistics: Ten Countries, 1959–2003,” June 2004.
31. See Bureau of Labor Statistics, “Occupational Employment and Wages, 2002.”
32. Matthew Spiegelman and Robert H. McGuckin III, “China’s Experience with Productivity and Jobs,” report R-1352-04-RR, The Conference Board, New York, June 2004.
33. Allan Blinder, “Free Trade,” The Concise Encyclopedia of Economics, available at http://www.econlib.org/library/Enc/FreeTrade.html.
34. Thomas Friedman, “What Goes Around …” New York Times, February 26, 2004.
16: Global Markets and the World Portfolio
1. Eighteen of these firms had B shares that were available to overseas investors.
2. Marc Levinson, “China’s Now the Straw That Stirs the Asian Drink,” Newsweek, December 13, 1993.
3. I first showed this negative relation between economic growth for both developed and emerging countries in Stocks for the Long Run (New York: McGraw-Hill, 1998), Figures 9–2, 130.
4. Elroy Dimson, Paul Marsh, and Michael Staunton, Triumph of the Optimists. They have no ready explanation for this phenomenon and suggest that some of the early GDP data were of poor quality and that fast-growing countries did not have strong institutions that protected shareholder rights.
5. Alison Rogers, “China’s Stock Market Crush,” Fortune, September 7, 1992, 8.
6. Charles P. Thomas, Francis E. Warnock, and Jon Wongswan, “The Performance of International Portfolios,” Federal Reserve Working Paper 2004–817, September 2004.
7. Qi Zeng, “How Global Is Your Industry,” U.S. and the Americas Investment Perspectives, Morgan Stanley, New York, June 30, 2004.
8. The global sectors and their corresponding ticker symbols are energy (IXC), financial (IXG), health care (IXJ), technology (IXN), and telecom (IXP). These sectors are based on the S&P Global 1200, which approximates the 1,200 largest stocks in the world market.
9. John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936), 158.
10. Furthermore, if everyone fails, the government may come to the rescue. A severe bear market in U.S. stocks, which is apt to precipitate a recession, is more likely to induce governmental tax relief than a bear market in foreign stocks, which impacts relatively few domestic investors. The reduction in the dividend and capital gains tax followed the severe bear market of 2000–2002, but the bear markets that hit Japan after their bubble burst in 1989 did not result in beneficial legislation for U.S. investors.
11. See John Bogle, Common Sense of Mutual Funds (New York: John Wiley and Sons, 1999); John Bogle, John Bogle on Investing (New York: McGraw-Hill, 2001); Jeremy Siegel, Stocks for the Long Run, 3rd ed. (New York: McGraw-Hill, 2002).
12. Developed Europe covers Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. These proportions are quoted as of April 30, 2004, and will vary over time.
13. Japan and developed Asia, which includes Australia, New Zealand, Hong Kong, and Singapore.
14. Because the Morgan Stanley indexes target 80 percent of the market value of each country, they naturally hold the largest stocks in each country. This means that the indexes are subject to the same distortions that impact the S&P 500 or the Russell 2000. In 2002 Morgan Stanley took steps to reduce the turnover of shares in its index to minimize this distortion.
15. The following funds can be purchased separately. The European fund costs 0.32 percent per year, the Pacific fund 0.29 percent, and the emerging-markets fund 0.53 percent.
16. Vanguard does not literally hold all the stocks in the Wilshire Index, but uses sophisticated statistical techniques to replicate its returns. As a result, there is some small tracking error in the returns on this fund, but its tracking error has gone down significantly in recent years.
17. Although in some aspects it is more restrictive than Standard & Poor’s indexes by excluding the Bermuda-based firms Tyco and Schlumberger.
18. In recent years the Russell 2000 index has been subject to the same “gaming” problems that have plagued the S&P 500 Index, as speculators have bought and sold stocks ahead of the changes in the index capitalization.
17: Strategies for the Future: The D-I-V Directives
1. The Reward-Risk ratios are the Sharpe Ratios, developed by William Sharpe, and represent the expected return on the strategy (the arithmetic mean) minus the risk-free rate divided by the risk, or standard deviation of the strategy. See William Sharpe, “The Sharpe Ratio,” Journal of Portfolio Management, Fall 1994.
2. E. Dimson, P. March, and M. Staunton, Global Investment Returns Yearbook 2004, ABN-AMRO, February, 2004, p. 34.
3. Quoted in David Eisner, “It Works: Buying $1 for 40 cents,” Chicago Tribune, December 8, 1985, section 7, 1.
Appendix
1. Thatcher Glass actually saw the end of the milk bottle coming and diversified into plastics and glass bottles for drugs, which is a major reason Rexall purchased it in 1966.
2. Nabisco was founded as the National Biscuit Company in 1898.
3. Under the procedures for calculating the returns of the Total Descendant portfolio, an investor takes the cash from a privatization and places it in an S&P 500 Index fund. If and when the privatized firm is resold to the public, the accumulation from the index fund is used to purchase these newly issued shares.
4. In July 2004,
it was reported that KKR finally sold Borden Chemical, the last piece of its investment in RJR Nabisco. The investors in its 1987 fund reportedly lost $730 million on the buyout but, because of other successful investments, the fund had a compound return of about 10 percent, which matched the S&P Index over that period. See “A Long Chapter Ends for Kohlberg Kravis: Fund Books Loss on RJR after 15 Years,” International Herald Tribune,” July 9, 2004.
ACKNOWLEDGMENTS
There is no question that an author is reliant on many individuals in the production of a book such as this. But I can honestly say that one person, Jeremy Schwartz, stands above all others in importance. Jeremy, a 2003 graduate of the Wharton School, not only has extraordinary skills in research and computing, but also the rare ability to organize and express ideas in a way that is accessible to both professional and nonprofessional readers.
Jeremy’s capacity to work hard is as great as mine. He not only convinced me that tracing through the returns on all the original S&P 500 firms from 1957 forward was possible, but he obtained all the data and created the algorithms that carried all these calculations to completion. Using our laptop computers, we stayed in constant contact through many long evenings, on weekends, and during my heavy travel schedule. I continually relied on being able to filter both my ideas and rough drafts through his superb judgment. I can say without hesitation that without Jeremy’s involvement over the last three years, this book would never have come to fruition.
John Mahaney, my editor, also played an extremely important role in encouraging me to emphasize the bottom line of my ideas to the reader. It is not easy for an editor with no professional training in finance or economics to guide an author who already has written a bestselling book on the subject. But John did it with extraordinary skill and finesse, and the book is unquestionably better because of his guidance. I also wish to thank Wes Neff, my agent, who not only led me to the right publisher but also kept my spirits up when the effort needed to synthesize the research and complete the manuscript seemed insurmountable.
My gratitude also goes to those who have read early versions of the book and provided extremely important feedback. Professor Jay Ritter of the University of Florida, the leading expert on initial public offerings, provided invaluable advice and detailed comments on the manuscript. Randy Kessler of Lazard Freres provided early feedback that helped organize and bring out the major ideas of the book. Dan Rottenberg and David Conti also made invaluable suggestions on early versions of the manuscript.
My close friend and colleague, Robert Shiller of Yale University, author of the bestselling Irrational Exuberance, was an enthusiastic supporter of the thesis of this book. Bob and I often sparred on the stage, I taking the bullish and he taking the bearish position on the stock market. But after reading a draft of this book, he exclaimed that our ideas about how investors should approach the market, particularly avoiding stocks with high valuations, are far closer than many realize.
I am blessed to have access to such talented Wharton students to assist with the massive research needed to complete this book. Leonard Lee, a 2002 graduate, did some of the very early work on long-term returns from 1950 onward. Particular credit goes to Ryan Hinkle, a 2003 Wharton undergraduate who did a superb job of programming the demographic model of world consumption that enabled me to evaluate the solutions to the age wave crisis. I also wish to thank Jason Spindel and Stephanie Weiss, who helped gather and evaluate the original S&P 500 firms, and Shaun Smith, Ana Nekhamkin, Andrew Rosner, and Bonnie Schein, who worked and commented on various parts of the manuscript.
I am also indebted to Howard Silverblatt, Howard Bernheim, and Andy Halula from Standard and Poor’s Corporation, who have been extraordinarily helpful at providing us with data that helped us calculate these long-run returns. David Blitzer and Robert Friedman filled me in on the background and details of the formulation of “core earnings,” a breakthrough concept in achieving uniformity and clarity in corporate earnings.
One’s family is always a part of the book-writing process, both in providing encouragement and tolerance of the long hours needed to research and compile this project. Like a family on a long car trip asking “Are we there yet?” I often received the question “Are you done yet?” My wife, Ellen, and my sons, Andrew and Jeffrey, reminded me that I could always work a bit longer to perfect the manuscript, but there was a time to lay down the pen (or in our twenty-first century, close our laptops) and declare the project done. I hope what I produced is worthy of their love and forbearance.
ABOUT THE AUTHOR
JEREMY J. SIEGEL is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania. Dr. Siegel received his Ph.D. in economics from M.I.T. and is the author of the classic and influential Stocks for the Long Run. Professor Siegel writes and lectures about the economy and financial markets and has appeared frequently on CNN, CNBC, NPR, and other networks. He is a regular columnist for Kiplinger’s and has contributed op-eds and articles to the Wall Street Journal, Barron’s, the Financial Times, and other national and international news media.
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