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The NEXT Long Run
By Ritu Kalra
Professor Jeremy Siegel plumbs the past to find a global future for investors.
The Wharton School began in 1881,
but Wharton's Jeremy Siegel began
even earlier. When researching his
1994 bestseller, Stocks for the Long
Run, Siegel uncovered stock performance
data stretching back all the
way to 1802, revealing that stocks
have outperformed every other investment
class by a considerable margin.
This once-surprising truth is now
nearly universally accepted—a sign
of his wide influence.
This long view of financial history
makes Siegel, the Russell E. Palmer
Professor of Finance, an ideal commentator
on market performance
during Wharton's anniversary year.
An icon at Wharton and a guru of
equity investing, Professor Siegel
looks ahead at how the Age Wave
will affect the future for investors,
workers, and global economies.
Published in 1994, Stocks for the Long Run catapulted
Wharton Professor Jeremy J. Siegel from an esoteric
economist to a wizard of finance. And it ushered in
six years of the greatest boom market in history.
Siegel's latest book, The Future for Investors, stemmed
from two questions audiences persistently asked him on the
lecture circuit. Investors were sold on the notion that stocks
were the best bet for the long run, but wanted guidance on
which stocks. And with 77 million baby boomers eyeing
retirement, investors were fretting over the impact on the
financial markets as they aged.
As Siegel researched the answers, he found a crucial link between
the two seemingly-disparate topics. With the help of his
research assistant Jeremy Schwartz, another book was born.
Like Stocks for the Long Run, The Future for Investors began
with an astonishing lesson from history. From 1871 to 2003,
reinvested dividends accounted for 97 percent of the real
return of stocks. Capital gains contributed just 3 percent.
Siegel then applied that lesson to a future in which the aging
population will be, as he puts it, "the most critical long-term
economic issue facing the developed world."
While analyzing stock performance for The Future
for Investors, Siegel received a phone call from Jonathan
Steinberg, W'88. He wanted to create an index weighted
by dividends rather than market capitalization, and hoped
Siegel would help test the data.
Siegel went beyond testing the data. He joined Steinberg's
company, Wisdom Tree Investments, as a senior adviser.
This year, at age 60, after nearly 35 years of teaching and
with more 300,000 copies sold of one of the most influential
investment texts of all time, he took for the first time—and
passed—his Series 7 and Series 63 exams.
Wharton Alumni Magazine sat down with the Siegel in
his home overlooking the Atlantic Ocean in Longport, NJ,
to discuss the importance of history, his latest work, and the
opportunities and challenges facing investors ahead.
In your new book, you conclude that growth
does not guarantee returns. Why not?
It's a surprising result. When you look at the S&P 500 since
its inception, you see how much its sector weights have
changed over time. Information technology, health care and
financials were only six percent of the index in 1957 and
they're 50 percent of the index today. Materials and energy
were 50 percent then. They're only 12 percent today.
If you bought the original S&P 500 stocks, and held
them until today—simple buy and hold, reinvesting dividends—you
outpaced the S&P 500 index itself, which adds
about 20 new stocks every year and has added almost 1,000
new stocks since its inception in 1957.
Over the past 50 years, information technology and financials
were just mediocre in terms of their performance. Energy,
which has contracted, has outperformed. I've done the analysis
and it turns out less than one-third of a sector's return is due
to its expansion or contraction. In other words, less than one-
third of the return is explained by growth. The rest is the price
you pay and the dividend you receive. That's pretty amazing.
The problem is new firms are overvalued when they're put
in the index. People get excited about new stocks. People rush
to buy them for their portfolios. And they pay too much.
Why does the aging of the population have
such significant implications for global trade?
Throughout history, the old have sold to the young, and the
young work for the old and provide them goods. In the U.S.,
life expectancy has gone up while the retirement age has gone
down. The difference between life expectancy and retirement
age used to be 1.6 years in 1950. Now it's 14.4 years. That's a
huge difference.
Meanwhile, the number of workers per employee in the
U.S. has gone down dramatically, from 50 in 1950 heading
toward 2.5 in 2050. In Japan, the largest population by age
group in 2050 will be 75 to 80 years old. And the number of
workers per retiree goes down to almost one for one.
So the biggest questions facing the developed
world are, who's going to produce the
goods, and who's going to buy the assets?
If there are not enough people producing goods and generating
income, they're not going to be able to purchase the
assets. We're going to have to work much longer, and the retirement
age will go from 62 today to 73 or 74. It even goes
up more than life expectancy, and so for the first time in history
that gap will shrink, from 14.4 years to 9.2 years.
Now I ask myself, are there any solutions?
Faster productivity growth is one. But if I plug into my
model 3.5 percent productivity growth—that's 70 percent
above the long term average of 2.2 percent—I find it only buys
a little bit. And the reason is, wages are tied to productivity and
benefits are tied to those, so it doesn't produce a lot of margin.
Then I look at immigration and one model says we can
still retire at 62 if we bring in half a billion people over the
next 45 years. That's twice the population. I'm a liberal on
immigration, but that's a lot of people.
But if I look at India, and I look at the dynamic of its age
profile, the number of workers per retiree does go down but
it stays high during this critical time of our baby boomers
retiring. What I see happening in the world is that the older,
developed countries are going to sell their assets, and the
buyers are going to be developing countries.
The answer to our questions, who will produce our
goods and who will buy our assets, is the same. It's the developing
countries.
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