Paging Mr. Siegel

By Bob Wood, MMNS

I realize that the stuff I fill this page with runs contrary to conventional wisdom. I know that when you compare the investment advice you read on this page to what you hear from the financial media, Wall Street, and most brokers and financial advisors, it must seem as though we’re talking about two different subjects. This week, I’ll try to widen that gap even more.

In previous articles, I’ve made statements that may have raised a few eyebrows, most notably when I pronounced the stock market a scam and noted its similarities to places like Las Vegas — they can be a lot of fun, but ultimately, most people lose money there.

Of course, this flies in the face of what notable academics like Jeremy Siegel have made a comfortable living on — expounding on the wonders of long-term investing, having wrung every last drop of value from his theories by revising his famous Stocks for the Long Run book into four updated editions. As I’ve said in the past, the man is a hack and not to be taken seriously.

Fortunately, unlike Mr. Siegel, I can actually prove my point. Let’s start with a basic observation I’ve mentioned here before:

Successful long-term investors are hard to find.

How many people do you personally know who’ve gotten rich by investing in stocks over time? How many have you heard of in your lifetime? Who are the great investors of our day, those who’ve made their fortunes investing their own money in stocks? I’ll wait while you think about it.

Stock market promoters can easily do what Mr. Siegel does — data mine the history of the markets to come up with what sounds like reliable information. They cite average annual returns that look great on the surface, and then remind us that there’s never been a ten-year period in which stocks have lost value…that is, until this decade.

But again, where are these successful investors that have prospered over time? Where are their yachts? Why is it such a struggle to find anyone who credits the stock market with having generated their wealth and assured their financial security?

Let me see if I can clear this up a bit. First, let’s look at some basic facts about stock market performance. The Dow Jones Industrial Average, which began the year 1900 at 66, stands at 8,403 as I write this. If that increase truly represented a return of 127 times your investment, that would look pretty impressive, right?
The problem, of course, is that it took so long for the Dow to reach that point. The average annual compound gain is a mere 4.57%. I’m not including dividends, but I’m also leaving out the drag of taxes, management fees, and trading costs. The effects of inflation are also left out. And I’m assuming that all investors were passive index types.

If someone came to you today and wanted to invest your life savings in risky assets that offered a gross return of just over 4.5%, how eager would you be to accept that offer? After paying taxes and fees, and feeling the effects of inflation at roughly 3% per year, what would you expect to gain over time?

Here’s another interesting item I came across this week on Doug Short’s website, This works very nicely with another concept I keep hammering you with in these articles — the importance of understanding the power of secular trends.

What Mr. Short discovered was this: Since the year 1877, there have been 10 long-term trends in the domestic stock market. Long-running bull markets have been invariably followed by long-term bear markets. Recall the huge rally from 1982-2000, followed by the bear market that began in 2000 and still lingers today. Now consider Japan’s market from 1975 to the present, 34 years running and still going. If anything puts the lie to the whole “stocks for the long run” argument, this is surely it.

Mr. Short went back and observed that the secular bull markets over that period sported gains of 333%, 396%, 266%, 413%, and even 666% for the latest bull cycle ending in 2000. Pretty smart-looking gains, aren’t they? Who wouldn’t have gotten rich after enjoying gains like those? As it turns out, far too few did.

We’ve been convinced that remaining fully invested is the time-proven way to achieve stock market riches. But as surely as night follows day, bear markets follow bull cycles, and those bear markets were killers. The lavish gains cited above were followed by bear markets that ended with index losses of 69% in 1921, 81% in 1932, 54% in 1949, 63% in 1982, and 58% as of the recent March low.

The average gain for the bull cycles was a hefty 415%. The average loss during the bear cycles was 65%. Secular bull markets lasted for 80 years, while bear cycles lasted 52. So far, that looks okay, doesn’t it? Somewhere I sense the loud rejection from a Math major out there.

What the Math wizard has most likely noticed is that when all was said and done, any hypothetical investor who actually managed to live long enough would have ended that 132-year time span boasting a 1,300% total gain. That looks great until you notice that it took 132 years to get there, bringing the average gain down to a mere 1.96% since then.

Again, this is a gross return number, not including dividends, taxes, management fees, and trading costs, which used to be much higher than they are today, and of course, inflation. Using this set of data, do you believe long-term investors come out ahead? It sure doesn’t look like it!

Maybe more than anything, this calculation supports my steady harping on the importance of secular, or long-term trends, in the stock market. After reviewing the data above, it’s readily apparent that lots of money can be made in stocks. It’s just that over time, long bear markets ensue, and take back most of those gains.

For most who have tried their hand at it, this market has been a dead loser for decades, if not the entire history of publicly traded markets. And that doesn’t take into consideration the scores of investors who invested outside the indices in managed funds or individual stocks. We know that most investors don’t beat the markets over time, even the professionals who make their living doing it. So what were the real world results for investors over the long run?

Most importantly, let’s get back to my reasons for not investing one dollar in today’s domestic stock market. We’ve discussed how secular bear markets are the killers of investor hopes and dreams. And with the S&P 500 about 40% lower today than it was at the beginning of this decade, is there any doubt that we’re in a secular bear market?

Lucky for us, we can review the calculations above and not only surmise that secular bull markets are where investors can really stand to profit, but also enjoy the great fortune to be able to look around the world for better places to invest. Just take a look at a few charts for markets in China, India, Brazil, and Russia, and you’ll see that they’re all higher today than they were at the beginning of this decade. Ding! Big clue there, secular bull markets in force! Gold, silver, and oil prices are also much higher today than they were in 2000. Bingo! Secular bull markets in force!

I know that what you read in this space is far from conventional, in fact inviting ridicule from most other investors, professionals included. But take a moment to look at the cold, hard data and let it point you in a better direction. With so many conventionally invested professionals losing their shirts over the past eight years, at some point you’d think they’d find a better way.

Find the secular bull markets and load up in them. Find the secular bear markets and get as far away from them as you can. The theory is supported by plenty of data, not to mention a healthy dose of common sense.

Mr. Siegel? Paging Mr. Siegel?…
Have a great week.


Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc.,


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