By the Book: Tweaking a Well-Worn Investing Strategy

Wharton professor Jeremy Siegel is singing a new tune sort of. Siegel rose to prominence on the back of his book, Stocks for the Long Run (McGraw-Hill, 2002), which asserted that because stocks outdo bonds over long periods, investors should buy and hold broad portfolios, such as S&P 500 index funds. Now he's back with a new book, The Future for Investors (Crown Business, 2005), and a slightly new

Wharton professor Jeremy Siegel is singing a new tune — sort of.

Siegel rose to prominence on the back of his book, Stocks for the Long Run (McGraw-Hill, 2002), which asserted that because stocks outdo bonds over long periods, investors should buy and hold broad portfolios, such as S&P 500 index funds.

Now he's back with a new book, The Future for Investors (Crown Business, 2005), and a slightly new concept. Index funds are still a solid idea, he says, but investors can do even better investing in “tried and true” firms — dividend-paying companies that deliver strong earnings growth over long periods.

Siegel looked at the 50 stocks with the largest market capitalizations in 1950. Then he ranked them to show which produced the best total returns — including reinvested dividends — through 2003. The top performers were Kraft Foods, R. J. Reynolds Tobacco, ExxonMobil and Coca Cola. Market darlings, such as technology and telecommunications stocks, finished much lower in the standings.

The winning stocks are not known for generating technological breakthroughs. In fact, the companies generally produced the same products throughout the half-century of the study. The winners delivered quality goods with familiar brand names, and increased earnings by expanding into world markets.

Siegel concluded that technology and other glamour stocks get priced too high, so their long-term returns are weak. He believes investors should never pay price-earnings ratios of more than 30.

Jim Huguet, portfolio manager of Transamerica IDEX Great Companies, applauds Siegel's findings. Huguet favors companies with secure market niches and earnings. He only buys stocks with 50-year track records, such as Colgate-Palmolive and Procter & Gamble. “When a company has been producing superior earnings for decades, then there is a good chance that it will continue performing well,” he says.

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