Old Stocks Beat New Stocks, Says Wharton Professor Jeremy Siegel The Future for Investors Warns Against the “Growth Trap”
Do you wish you had bought Microsoft in 1986?
That’s not the way to build long-term wealth, according to the new book by Jeremy J. Siegel, Russell E. Palmer Professor of Finance at the Wharton School.
The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New(Crown Business, 2005) argues that investors overvalue, and therefore overpay for, companies that seem to be hot or cutting-edge. Siegel calls this tendency “the growth trap.”
In Siegel’s words: “The growth trap seduces investors into overpaying for the very firms and industries that drive innovation and spearhead economic expansion. This relentless pursuit of growth—through buying hot stocks, seeking exciting new technologies, or investing in the fastest-growing countries—dooms investors to poor returns.”
In fact, Siegel argues, “history shows that many of the best-performing investments are instead found in shrinking industries and in slower-growing countries.”
Tried and True Beats Bold and New
Siegel’s research demonstrates that an individual’s long-term investing success may not arise from the same sources as a country’s long-term economic growth: “Technological innovation,” he writes, “which is blindly pursued by so many seeking to ‘beat the market,’ turns out to be a double-edged sword that spurs economic growth while repeatedly disappointing investors.”
In fact, an individual investor may be the last person to benefit from new technologies: “the benefits of all this growth are funneled not to individual investors but instead to the innovators and founders, the venture capitalists who fund the projects, the investment bankers who sell the shares, and ultimately to the consumer, who buys better products at lower prices.
The individual investor, seeking a share of the fabulous growth that powers the world economy, inevitably loses out.”
It’s the older companies, often ignored by investors and analysts, that generate superior long-term results. “My research shows,” Siegel writes, “that not only do new firms and new industries fail to deliver good returns for investors, but their returns are often inferior to those of older companies established decades earlier.”
Exxon Mobil vs. IBM
Siegel compares the results of investing, in 1950, in either old-economy Standard Oil of New Jersey (now Exxon Mobil) or new-economy IBM. While IBM now seems like a behemoth, and the oil industry has endured many ups and downs over 55 years, Jersey Standard turns out to have been the better investment.
“Although both stocks did well,” he explains, “investors in Jersey Standard earned 14.42 percent per year on their shares from 1950 through 2003, more than half a percentage point ahead of IBM’s 13.83 percent annual return.
Although this difference is small, when you opened your lockbox fifty-three years later, the $1,000 you invested in the oil giant would be worth over $1,260,000 today, while $1,000 invested in IBM would be worth less than one million dollars, some 25 percent less.”
This long-term perspective makes The Future for Investors a fitting sequel to Siegel’s classic Stocks for the Long Run (McGraw Hill, 3rd edition 2002), first published in 1994. In that work, Siegel famously argued that, “over the last century, accumulations in stocks have always outperformed other financial assets for the patient investor. Even such calamitous events as the great stock crash of 1929 did not negate the superiority of stocks as long-term investments.”
In fact, Siegel went on to demonstrate that, “One dollar invested and reinvested in stocks since 1802 would have accumulated to nearly $8.80 million by the end of 2001. This sum can be realized by an investor holding the broadest possible portfolio of stocks … and does not depend on how many of these companies survive or not.”
