The Future for Investors - Siegel - Group 4.ppt
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Transcript The Future for Investors - Siegel - Group 4.ppt
“The Future for
Investors”
by Jeremy Siegel
Kevin Kranzler
Lisa Lajeunesse
Ray Ng
John Schmidt
Agenda
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
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.
Part 1
“The Growth Trap”
The 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.
Example
Table 1.1: Annual Growth Rates, 1950-2003
Growth Measures
IBM
Standard Oil of NJ Advantage
Revenue Per Share
12.19%
8.04%
IBM
Dividends Per Share
9.19%
7.11%
IBM
Earnings Per Share
10.94%
7.47%
IBM
Sector Growth
14.65%
-14.22%
IBM
What actually happened?
IBM: $1000 initial investment became
$961,000.
Standard Oil of NJ: $1000 initial
investment became $1,260,000.
How is this possible?
Table 1.3: Source of Returns of IBM and Standard Oil of NJ
Standard Oil of NJ, 1950-2003
Return Measures
IBM
Standard Oil
Advantage
of NJ
Price Appreciation
11.41%
8.77%
IBM
Dividend Return
2.18%
5.19%
Total Return
13.83%
14.42%
Standard Oil
of NJ
Standard Oil
of NJ
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!
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
What Siegel Found…
High P/E stocks earn lower returns and low
P/E stocks earn high returns, on average
Highest Priced Stocks
S&P 500 Benchmark
Lowest Priced Stocks
1957 Initial
Investment
$1,000
$1,000
$1,000
2003 Investment Annual Rate
Value
of Return
$56,661
9.17%
$130,768
11.18%
$426,468
14.07%
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
Top Eight Performing Survivors, 1957-2003
Rank
2003 Name
Accumulation
of $1000
1
Phillip Morris
$4,626,402
2
Abbott Labs
$1,281,335
3
Bristol-Myers Squibb
$1,209,445
4
Tootsie Roll Industries
$1,090,955
5
Pfizer
$1,054,823
6
Coca-Cola
$1,051,646
7
Merck
$1,003,410
8
PepsiCo
$866,068
S&P 500
$124,486
Annual
Return
19.75%
16.51%
16.36%
16.11%
16.03%
16.02%
15.90%
15.54%
10.85%
Sector Growth
Investment strategies based on
industry/sector are growing in
popularity
Morgan Stanley & Goldman Sachs
Summary
Do not be seduced by that hot new
company or investors
Overwhelming demand for stocks
overvalues those stocks which lowers
the return for investors
Part 2:
“Overvaluing the Very
Few”
How 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
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.
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?”
Investing in the Newest of the New
IPO Relative Returns
Figure 6.2 Annualized Returns on Yearly IPO Portfolios Minus Returns on Sm
Stock Index, Returns Measured Through December 31, 2003
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
Capital 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
Capex Ratio
Success Amongst Failure
Wal-Mart’s Strategy for Success
Southwest Airlines low cost structure
Nucor Steel use of new technology
Winning 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
Summary
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
Part 3:
“Sources of Shareholder
value”
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
Dividends to Capital Gains
Purpose of Dividends
Provides credibility
Indicates real earnings
Shows strength in time of
economic downturn
Price drops and dividend
yield goes up
Importance 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
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
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
Red 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
Summary
There is a positive correlation between
dividends and returns
There are numerous ways to value a
company
Part 4:
“The Age Wave”
Baby Boomers – Baby Bust
Problems
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
More 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+
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
Possible Solutions
Increase Immigration
Increase productivity
400 million people will be required to offset
the population wave
The 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
The Global Solution [2]
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
Summary
Baby boomers retirement poise a
difficult transition period for investors
Investors must seek a global solution
Part 5:
“Portfolio
Strategies”
Global Market Trends
Growth Prospects in China & India
Growth Trap
Example: Brazil vs. China
Emerging Chinese Economy
Home Equity Bias
Correlation of US & World markets
World 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
Global Investment Tools
MSCI EAFE Index
Dow Jones Wilshire Total Stock Index
Vipers
Spiders
Cubes
Diamonds
MSCI EAFE Index
Future Strategies
Future is bright for investors
Growth in emerging markets
Future stock performance
Stocks to purchase
Initially broadest index possible
D-I-V Directives
D-I-V Directives
Dividends
International
Buy stocks that have sustainable cash flows
and return dividends
Recognize shift of economic power
Valuation
Accumulate shares with reasonable valuations
relative to expected growth
Avoid IPO's, hot stocks, “must-have”
investments
Table 17.4 Valuation Strategies,
1957-2003
Summary
Summary
Overall 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