Friday, January 21, 2005

The New York Times > Opinion > Op-Ed Columnist: The Free Lunch Bunch

I think Paul Krugman is getting better as he gets back to his economics roots, and away from political speculation. As far as I can see, the whole point of him writing a column for NYT is to cover economics issues for the paper, not foray into politics. He has been lucky lately, as the Administration makes Social Security moves that are right up his alley to counter, debunk, and deride.

A lucid column from him today [free registration required]: The New York Times > Opinion > Op-Ed Columnist: The Free Lunch Bunch. One thing that lept out to me was:

Fifty years ago most people, remembering 1929, were afraid of the stock market. As a result, those who did buy stocks got to buy them cheap: on average, the value of a company's stock was only about 13 times that company's profits. Because stocks were cheap, they yielded high returns in dividends and capital gains.

But high returns always get competed away, once people know about them: stocks are no longer cheap. Today, the value of a typical company's stock is more than 20 times its profits. The more you pay for an asset, the lower the rate of return you can expect to earn. That's why even Jeremy Siegel, whose "Stocks for the Long Run" is often cited by those who favor stocks over bonds, has conceded that "returns on stocks over bonds won't be as large as in the past."



I do not recall Prof. Siegel's book perfectly, but I seem to recall that he covered stock performance periods from well before 1929 as well. In fact, it seems that Krugman is being really disingenious with his quoting Prof. Siegel.

Krugman wrote,

Jeremy Siegel... has conceded that "returns on stocks over bonds won't be as large as in the past."



But this is the actual full quote from the Forbes article Siegel is being quoted from:

SIEGEL: I agree that returns on stocks over bonds won't be as large as in the past. But I'm more optimistic than Rob. Looking over the next quarter-century, I see a 5%-to-6% return on stocks, adjusted for inflation. I'm pessimistic about real bond returns. I think they're likely to be in the 0%-to-1% range over the next five years, and closer to 3% after that.



As far as Siegel is concerned stocks are still the place to be, which he basically reiterates towards the end of the discussion.

FORBES: How is your own money invested right now?

SIEGEL: Pretty much where I've been recommending. Mostly in stocks, with a tilt away from technology and toward dividends. I'm also moving more into international stocks. I also hold REITs, junk bonds and a small amount of TIPS.



It is fair to disagree with Jeremy Siegel (at your peril financially perhaps), but I do not think it is honest to excise quotes that way.

Perhaps I am just biased. I nthe interest of full disclosure I took his Finance 101 class nearly 10 years ago, and if that is not the best introduction to finance you can find in college - I do not know what is.

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