The Future for Investors: Why the tried and true trump over the bold and new is a book by Jeremy Siegel. Here are my notes from the book.
We often fall into the ‘growth trap’. We think fast growing companies will give us good returns. They do give us good returns by giving us more comforts and facilities but they do not give us good financial returns. This is because the long-term return on a stock depends not on the actual growth of its earnings but on how those earnings compare with what investors expected.
New firms that are added to the S&P 500 index under perform the original firms. If you had all the firms of the S&P 500 individually and never sold it, then you would have outperformed most over a long-span of more than 50 years.
Dividends are important because they can be reinvested to buy more shares. They show that a firm has earned money and you can buy more stocks with the money. They are bear market protectors and return accelerators.
IPOs are dreadful investments
The growth trap holds for industry sectors as well as countries.
With the developed world aging, the people of the developing world will buy and produce the assets which the developed world will consume.
The best performing firms for investors have been those with strong brands in the consumer staples and pharmaceutical industries. They have had:
- Slightly higher than average P/E ratios(not greater than 27)
- Average dividend yields
- Much higher than average long-term earnings growth
Investing in the lowest P/E shares(say bottom 20%) outperformed those with higher P/E ratios.
There are five lessons to escape from the bubble trap:
- Valuations are critical
- Never fall in love with your stocks
- Beware of large little-known companies
- Avoid triple digit P/E ratios
- Never short sell in a bubble
For the best firms, technology plays a supporting role, enhancing the company’s core competencies. Capital is the source of productivity but must be applied in moderation. Too much capital spells the death of profits and the destruction of value.
The high dividend yield strategies are:
- Dogs of the Dow: Ten highest yielding stocks of the Dow 30
- The S&P 10: Ten highest yielding stocks among the 100 largest firms of the S&P 500
- Dow core 10: Ten highest yielding stocks of the Dow 30 that have not reduced dividends in their last 15 years
- S&P core 10: Ten highest yielding stocks among the 100 largest firms of the S&P 500 that have not reduced dividends in the last 15 years.
- Top yielders: Highest 20% yielding stocks in the S&P 500.
The best performing stocks are not in cutting-edge industries; they are often in industries in stagnant or declining industries. But they have efficient managements and competitive niches that enable them to reach commanding positions. These are often undervalued by the market and these are what you should buy.
Dollar cost averaging can help only if the firm is a long-term survivor.
REITs(Real estate investment trusts) and high yielding(junk) bonds can also generate cash and give a good return. Invest part of your portfolio in them.
Earnings can be faked. Dividends cannot be faked. So play close attention to them.
TIPs( Treasury-inflation protected securities) can help with inflation better than any other asset.
Hold 40% of your equity assets in international markets outside the US.
S&P global 100 exchange fund can be a choice for those who want to invest in global companies. Other choices are buying diversified multinational equity firms and the Dow Jones Global Titans.
The valuation strategies are:
- Invest in Berkshire Hathaway
- Invest in 20 best performing survivors of the original S&P 500 stocks
- Invest in lowest 20% of P/E ratios of S&P 500 stocks
- Invest in the heath care sector, consumer staples sector and energy sector of S&P 500.