“the future for investors” by jeremy siegel kevin kranzler lisa lajeunesse ray ng john schmidt...
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“The Future for Investors”
by Jeremy Siegel
“The Future for Investors”
by Jeremy Siegel
Kevin KranzlerLisa Lajeunesse
Ray NgJohn Schmidt
Kevin KranzlerLisa Lajeunesse
Ray NgJohn Schmidt
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AgendaAgenda
Who is Jeremy Siegel? Part 1: “The Growth Trap” Part 2: “Overvaluing the Very New” Part 3: “Sources of Shareholder Value”
Part 4: “The Age Wave” Part 5: “Portfolio Strategies” Overall Book Review
Who is Jeremy Siegel? Part 1: “The Growth Trap” Part 2: “Overvaluing the Very New” Part 3: “Sources of Shareholder Value”
Part 4: “The Age Wave” Part 5: “Portfolio Strategies” Overall Book Review
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Jeremy Seigel, Ph.D.Jeremy Seigel, Ph.D.
Professor of Finance at the Wharton School of the University of Pennsylvania
Received many awards over his career
The Senior Investment Strategy Advisor of Wisdom Tree Investments Inc.
Professor of Finance at the Wharton School of the University of Pennsylvania
Received many awards over his career
The Senior Investment Strategy Advisor of Wisdom Tree Investments Inc.
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Part 1“The Growth
Trap”
Part 1“The Growth
Trap”
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The Growth TrapThe Growth Trap
Everyone wants to ‘beat the market’ & invest in the next big thing.
However, as Siegel points out, pursuing returns through growth continually disappoints investors.
Everyone wants to ‘beat the market’ & invest in the next big thing.
However, as Siegel points out, pursuing returns through growth continually disappoints investors.
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ExampleExample
Growth Measures IBM Standard Oil of NJ AdvantageRevenue Per Share 12.19% 8.04% IBMDividends Per Share 9.19% 7.11% IBMEarnings Per Share 10.94% 7.47% IBMSector Growth 14.65% -14.22% IBM
Table 1.1: Annual Growth Rates, 1950-2003
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What actually happened?What actually happened?
IBM: $1000 initial investment became $961,000.
Standard Oil of NJ: $1000 initial investment became $1,260,000.
IBM: $1000 initial investment became $961,000.
Standard Oil of NJ: $1000 initial investment became $1,260,000.
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How is this possible?How is this possible?
Return Measures IBM Standard Oil Advantageof NJ
Price Appreciation 11.41% 8.77% IBM
Dividend Return 2.18% 5.19% Standard Oilof NJ
Total Return 13.83% 14.42% Standard Oilof NJ
Table 1.3: Source of Returns of IBM and Standard Oil of NJStandard Oil of NJ, 1950-2003
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What matters!What matters!
Long-term returns on stock depends not on the actual growth of its earnings but on how those earnings compare to what investors expected!
Long-term returns on stock depends not on the actual growth of its earnings but on how those earnings compare to what investors expected!
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Looking for the Corporate El Dorado
Looking for the Corporate El Dorado
The Golden company that continually performs better than the markets
Siegel computed the P/E ratio for all 500 firms on the S&P and computed their prices
The Golden company that continually performs better than the markets
Siegel computed the P/E ratio for all 500 firms on the S&P and computed their prices
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What Siegel Found…What Siegel Found…
High P/E stocks earn lower returns and low P/E stocks earn high returns, on average
High P/E stocks earn lower returns and low P/E stocks earn high returns, on average
1957 Initial 2003 Investment Annual RateInvestment Value of Return
Highest Priced Stocks $1,000 $56,661 9.17%S&P 500 Benchmark $1,000 $130,768 11.18%Lowest Priced Stocks $1,000 $426,468 14.07%
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Characteristics of Corp El Dorado's
Characteristics of Corp El Dorado's
Earnings expectations are only slightly above average, but actual earnings growth was considerably large
No P/E ratio was above 27 All paid constant and rising dividends Most have high quality brand name recognized products that are marketed worldwide
Consumer have trust in their product quality
Earnings expectations are only slightly above average, but actual earnings growth was considerably large
No P/E ratio was above 27 All paid constant and rising dividends Most have high quality brand name recognized products that are marketed worldwide
Consumer have trust in their product quality
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Rank 2003 Name Accumulation Annualof $1000 Return
1 Phillip Morris $4,626,402 19.75%2 Abbott Labs $1,281,335 16.51%3 Bristol-Myers Squibb $1,209,445 16.36%4 Tootsie Roll Industries $1,090,955 16.11%5 Pfizer $1,054,823 16.03%6 Coca-Cola $1,051,646 16.02%7 Merck $1,003,410 15.90%8 PepsiCo $866,068 15.54%
S&P 500 $124,486 10.85%
Top Eight Performing Survivors, 1957-2003
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Sector GrowthSector Growth
Investment strategies based on industry/sector are growing in popularity
Morgan Stanley & Goldman Sachs
Investment strategies based on industry/sector are growing in popularity
Morgan Stanley & Goldman Sachs
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SummarySummary
Do not be seduced by that hot new company or investors
Overwhelming demand for stocks overvalues those stocks which lowers the return for investors
Do not be seduced by that hot new company or investors
Overwhelming demand for stocks overvalues those stocks which lowers the return for investors
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Part 2:“Overvaluing the Very
Few”
Part 2:“Overvaluing the Very
Few”
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How To Spot a BubbleHow To Spot a Bubble
1.) Valuations are critical 2.) Never Fall in Love with your Stock
3.) Beware of Large, Little Known Companies
4.) Avoid Triple Digit P/E Ratios
5.) Never Sell Short in a Bubble
1.) Valuations are critical 2.) Never Fall in Love with your Stock
3.) Beware of Large, Little Known Companies
4.) Avoid Triple Digit P/E Ratios
5.) Never Sell Short in a Bubble
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Response to Wall Street Journal Article
Response to Wall Street Journal Article
“Good morning, Mr. Siegel. I hope you’re happy. You cost me $14,000.00 for no reason! What do you have against this mammoth company? Are you jealous because you didn’t get in on the run-up? Did you want to buy in cheaper? You have no business making decisions like this. After all, you’re still a child when it comes to Internet knowledge.
“Good morning, Mr. Siegel. I hope you’re happy. You cost me $14,000.00 for no reason! What do you have against this mammoth company? Are you jealous because you didn’t get in on the run-up? Did you want to buy in cheaper? You have no business making decisions like this. After all, you’re still a child when it comes to Internet knowledge.
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Response to Wall Street Journal Article
Response to Wall Street Journal Article
“You’re a preschooler in diapers when it comes to recognizing opportunities. By the way, when was the last time you got laid? You’re a party pooper. Thanks a lot, jerk. I suggest you go to the streetadvisor.com to read about why you’re so wrong idiot. Do you even know how to get a Web site, you child?”
“You’re a preschooler in diapers when it comes to recognizing opportunities. By the way, when was the last time you got laid? You’re a party pooper. Thanks a lot, jerk. I suggest you go to the streetadvisor.com to read about why you’re so wrong idiot. Do you even know how to get a Web site, you child?”
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Investing in the Newest of the New
Investing in the Newest of the New
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IPO Relative ReturnsIPO Relative Returns
Figure 6.2 Annualized Returns on Yearly IPO Portfolios Minus Returns on Small Stock Index, Returns Measured Through December 31, 2003
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Creative Destruction Creative Destruction
“Innovative entry by entrepreneurs is the force that sustains economic growth”- wikipedia.com
Investors in IPO’s are actually not making money (the ground floor)
If the new are not making money for investors then who is attaining profits?
Venture Capitalists Investment Banks
“Innovative entry by entrepreneurs is the force that sustains economic growth”- wikipedia.com
Investors in IPO’s are actually not making money (the ground floor)
If the new are not making money for investors then who is attaining profits?
Venture Capitalists Investment Banks
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Capital PigsCapital Pigs
Technology is a productivity creator, and a value destroyer
Profits reinvested into the company is money that is not paid out in dividends, destroying investor return
Fallacy of Composition
Technology is a productivity creator, and a value destroyer
Profits reinvested into the company is money that is not paid out in dividends, destroying investor return
Fallacy of Composition
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Capex RatioCapex Ratio
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Success Amongst Failure
Success Amongst Failure
Wal-Mart’s Strategy for Success
Southwest Airlines low cost structure
Nucor Steel use of new technology
Wal-Mart’s Strategy for Success
Southwest Airlines low cost structure
Nucor Steel use of new technology
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Winning ManagementWinning Management
“consistency of the company, and our ability to project its philosophies throughout the whole organization, enabled by our lack of layers and bureaucracy”
The business structure should look to always minimize costs Define the largest controllable cost and minimize it, this is a company’s competitive advantage
“consistency of the company, and our ability to project its philosophies throughout the whole organization, enabled by our lack of layers and bureaucracy”
The business structure should look to always minimize costs Define the largest controllable cost and minimize it, this is a company’s competitive advantage
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SummarySummary
Never forget the fundamentals of investing Watch out for bubbles IPO’s are a bad investment for investors,
Individual company analysis is important; look for Lower Capex Ratios Low P/E ratios Winning management
Never forget the fundamentals of investing Watch out for bubbles IPO’s are a bad investment for investors,
Individual company analysis is important; look for Lower Capex Ratios Low P/E ratios Winning management
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Part 3: “Sources of
Shareholder value”
Part 3: “Sources of
Shareholder value”
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Correlation between Dividends and Returns
Correlation between Dividends and Returns
Higher dividend paying companies provide greater returns
Lower dividend paying companies provide less returns
Not just due to extra cash flow
Higher dividend paying companies provide greater returns
Lower dividend paying companies provide less returns
Not just due to extra cash flow
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Dividends to Capital GainsDividends to Capital Gains
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Purpose of DividendsPurpose of Dividends
Provides credibility Indicates real earnings Shows strength in time of economic downturn Price drops and dividend yield goes up
Provides credibility Indicates real earnings Shows strength in time of economic downturn Price drops and dividend yield goes up
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Importance of Bear marketsImportance of Bear markets
One reason for the correlation (dividends/returns)
Reinvest (increased) dividends at lower price Cushions portfolio in decline Accelerates returns when price goes up
One reason for the correlation (dividends/returns)
Reinvest (increased) dividends at lower price Cushions portfolio in decline Accelerates returns when price goes up
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Phillip Morris Example Phillip Morris Example
Cigarette company facing lawsuits and fierce competition
Share price fell but dividends rose
Reinvested dividends (’92-’03) increased shares by 100%
7.15% annually – trailed market Prices recovered and returns magnified
Cigarette company facing lawsuits and fierce competition
Share price fell but dividends rose
Reinvested dividends (’92-’03) increased shares by 100%
7.15% annually – trailed market Prices recovered and returns magnified
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Measuring Earnings to Value a Company
Measuring Earnings to Value a Company
Net Income – sanctioned by FASB/GAAP
Operating Income – reconciles one-time cost/revenues More accurate - restructuring costs
Manager indiscretion - amortization
Net Income – sanctioned by FASB/GAAP
Operating Income – reconciles one-time cost/revenues More accurate - restructuring costs
Manager indiscretion - amortization
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Red flags to watch out forRed flags to watch out for
Option expenses Do not legally have to be recorded as expenses
Not accurate portrayal in Income statement
Pension Plan Structure Serious claim on future earning
High Accruals Indicate low quality earnings
Option expenses Do not legally have to be recorded as expenses
Not accurate portrayal in Income statement
Pension Plan Structure Serious claim on future earning
High Accruals Indicate low quality earnings
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SummarySummary
There is a positive correlation between dividends and returns
There are numerous ways to value a company
There is a positive correlation between dividends and returns
There are numerous ways to value a company
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Part 4:“The Age Wave”
Part 4:“The Age Wave”
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Baby Boomers – Baby BustBaby Boomers – Baby Bust
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ProblemsProblems
Lower productivity from decreased workforce
Increased demand from more retirees Retirees sell their assets during retirement Flood of financial assets on market Drive prices of equities and bonds down Securities’ value is determined by price buyer is willing to pay
Lower productivity from decreased workforce
Increased demand from more retirees Retirees sell their assets during retirement Flood of financial assets on market Drive prices of equities and bonds down Securities’ value is determined by price buyer is willing to pay
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More ProblemsMore Problems
Retirement age is decreasing People are living longer
Results in longer non-working time
Greater pension/planning needs Fastest age bracket growth is age 100+
Retirement age is decreasing People are living longer
Results in longer non-working time
Greater pension/planning needs Fastest age bracket growth is age 100+
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Possible Solutions Possible Solutions
Reduce benefits of pension plans Decrease the standard of living Creates generational conflict
Increase Productivity Offsets the population imbalance Difficult to create/predict/depend on
Reduce benefits of pension plans Decrease the standard of living Creates generational conflict
Increase Productivity Offsets the population imbalance Difficult to create/predict/depend on
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Possible Solutions Possible Solutions
Increase Immigration Increase productivity 400 million people will be required to offset the population wave
Increase Immigration Increase productivity 400 million people will be required to offset the population wave
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The Global SolutionThe Global Solution
Developing countries have opposite population wave than the Developed countries
India and China can support the western countries with goods and services/buy assets
Maintain the standard of living in developing countries
Developing countries have opposite population wave than the Developed countries
India and China can support the western countries with goods and services/buy assets
Maintain the standard of living in developing countries
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The Global Solution [2]The Global Solution [2]
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The Global Solution [3]The Global Solution [3]
Enable aging nations to enjoy longer retirement
Communications revolution will aid in economic growth – free flow of information
Free trade will become increasingly important
Advance the globalization of the world’s economic system
Enable aging nations to enjoy longer retirement
Communications revolution will aid in economic growth – free flow of information
Free trade will become increasingly important
Advance the globalization of the world’s economic system
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SummarySummary
Baby boomers retirement poise a difficult transition period for investors
Investors must seek a global solution
Baby boomers retirement poise a difficult transition period for investors
Investors must seek a global solution
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Part 5:“Portfolio Strategies”
Part 5:“Portfolio Strategies”
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Global Market TrendsGlobal Market Trends
Growth Prospects in China & India Growth Trap
Example: Brazil vs. China
Emerging Chinese Economy Home Equity Bias Correlation of US & World markets
Growth Prospects in China & India Growth Trap
Example: Brazil vs. China
Emerging Chinese Economy Home Equity Bias Correlation of US & World markets
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World PortfolioWorld Portfolio
Recommended Allocation 60% American-based equity 40% foreign-based equity
How to Invest Abroad Global Index Funds
Low cost and excellent returns Morgan Stanley Capital International Index
Most inclusive non-U.S Indexed Fund
Recommended Allocation 60% American-based equity 40% foreign-based equity
How to Invest Abroad Global Index Funds
Low cost and excellent returns Morgan Stanley Capital International Index
Most inclusive non-U.S Indexed Fund
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Global Investment ToolsGlobal Investment Tools
MSCI EAFE Index Dow Jones Wilshire Total
Stock Index Vipers Spiders Cubes
Diamonds
MSCI EAFE Index Dow Jones Wilshire Total
Stock Index Vipers Spiders Cubes
Diamonds
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MSCI EAFE IndexMSCI EAFE Index
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Future StrategiesFuture Strategies
Future is bright for investors Growth in emerging markets Future stock performance
Stocks to purchase Initially broadest index possible
D-I-V Directives
Future is bright for investors Growth in emerging markets Future stock performance
Stocks to purchase Initially broadest index possible
D-I-V Directives
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D-I-V DirectivesD-I-V Directives
Dividends Buy stocks that have sustainable
cash flows and return dividends International
Recognize shift of economic power Valuation
Accumulate shares with reasonable valuations relative to expected growth
Avoid IPO's, hot stocks, “must-have” investments
Dividends Buy stocks that have sustainable
cash flows and return dividends International
Recognize shift of economic power Valuation
Accumulate shares with reasonable valuations relative to expected growth
Avoid IPO's, hot stocks, “must-have” investments
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Table 17.4 Valuation Strategies, 1957-2003Table 17.4 Valuation Strategies, 1957-2003
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SummarySummary SummarySummary
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Overall Book ReviewOverall Book Review
Overall the book provided many facts
Has practical lessons to utilize in today’s market
This book emphasizes everything you learn in University when it comes to investing
Allocation portfolio a useful strategy given a long time horizon
Overall the book provided many facts
Has practical lessons to utilize in today’s market
This book emphasizes everything you learn in University when it comes to investing
Allocation portfolio a useful strategy given a long time horizon