Steve Forbes Interview: Jeremy Siegel, Investing Guru And Author ? ~ MAKE MONEY BLOG$

Stocks For The Long Run

Steve Forbes: Jeremy, very nice of you to come by. Good to have you with us.

Jeremy Siegel: Thank you.

Forbes: You wrote a classic book called Stocks For the Long Run. And in this environment, that sound has a ring to it that people say no, that doesn’t work anymore.

Siegel: Yeah, that’s right.

Forbes: Can you define your basic strategy?

Siegel: The first edition came out actually in 1994, and it was based on research that I had done in the late ’80s and early ’90s. And yeah, there’s no question the most trying time for the long-term investor has been the last two years. What is interesting as I’ve updated all my data is that all the long-term parameters still hold.

The last ten years have been a horrible ten years. There’s no question about it. They were preceded by the best 20 years in stock market history, where we got overvalued at the top of the tech boom in 2000. If you just take the last 20 years, interestingly enough, the returns in the stock market are dead even with the long-run average. So, you know, two great decades, the ’80s and the ’90s, got to an overvalued position, corrected down on the next decade, the 20-year look is still very healthy, by the way, over six and a half percent after inflation as a 20-year return on the market today.

Forbes: So the bottom line is, stick with it?

Siegel: I think stick with it. And even though the market is up, you know, almost 100 percent from its March lows, my analysis says it’s still undervalued. So you missed some of the big gains. But I tell investors, “You have not missed everything by any means.” And it’s still a good investment.

P/Es Are Attractive

Forbes: Let’s go into that. Historically, the PE ratio’s been 15. What is it now? And then make your case: it should be higher than 15?

Siegel: Well, it’s lower than 15, which makes it attractive now. Right now on the basis of 2011 earnings, we’re at 13. On the basis of 2012, but we all know there’s a lot of uncertainty actually about ‘12 or ‘11 and a half, but let’s stick with this year. We’re over half the year over already in 2011 and we’re getting more and more sure of what these earnings are gonna be. We’re at 13 times earning. Now you say but that’s not so undervalued compared to long-run history. But the truth is when we’ve had interest rates as low as they are now, this is an extremely attractive valuation. Because when we had single-digit P/E ratios in the ’70s and ’80s, that’s when we had double-digit inflation and double-digit yields on treasuries.

And that made big competition for stocks. In fact, what I’ve looked at is, what is the average PE when interest rates are below eight percent? We’re nowhere near that today. And it actually happens to be 19 in the last half-century. So in a low-interest-rate environment, I certainly still believe that we have very attractive valuations.

Forbes: So even though these rates are artificially suppressed because of circumstance in the Fed, you would argue even if, say, the 30-year goes to six percent, these stocks are still a bargain?

Siegel: Yeah. Even the 30-year at six percent, which is a more normal interest rate, six to seven actually over the whole period, then you could argue the 15 yield on the S&P. And we’re nowhere near that. Those people tell me, “Well Jeremy, the interest rates can only go up. Should I buy stocks when interest rates go up?”

And the first thing I tell them is that well, if you look at history, in the early stages of fed tightening, that’s not bad for the market. It’s the later stages that gets the market. So don’t worry about, you know, the first set of increases the fed undertakes, whenever that might be which of course seems to keep on being pushed further and further back as the economic data comes in.

Good Earnings/Bad Economy

Forbes: Why are earnings doing so well when the economy isn’t?

Siegel: GDP is not earnings. And there’s a number of reason for that. First of all, 40 percent of the S&P profits come from abroad. And we know emerging markets are doing extremely well. We know Europe is in trouble but emerging markets are doing extremely well. Secondly, the tax rate on these ever-increasing foreign earnings is lower.

And we have one of the highest corporate taxes in the world. So as that increased amount of profits comes from abroad, after-tax revenue goes up. Something else is also very, very important. As a country, we are hurt by higher oil prices because of the fact that we import two-thirds of our oil. But for the S&P 500 which has a lot of oil firms that have reserves around the world, it turns out they’re not hurt by that.

So you have a stake in the material sector, the energy sector with those prices high, the margins are very, very high in those. And that’s another reason why they’re doing so much better. Technology was another thing. Historically, technology has, as we know, much higher margins than the traditional other sectors. And technology is a growing part of our economy. So there’s a lot of reasons why we can still do well with earnings, even though our GDP is lagging.

Forbes: So in terms of profits, because it’s from overseas, big chunk, technology’s doing well, energy’s doing well, other sectors are doing well. So GDP can still lag and stocks can still go up?

Siegel: That’s right. I mean, that’s one of the reasons why it’s been really most remarkable. Earnings projections for 2011 — and now it would take a disaster for it to break what I’m going to say — have surpassed all-time high, was reaching the 12 months ending on June of 2007 at the peak of the market and the peak of the economy. So even though we know unemployment, employment, a lot of other factors are lagging, we are going to have record profits this year. And, you know, the bottom line is there’s two major factors that figure into stock prices. It is earnings and it is interest rates. And both of those are very favorable for stocks at the present time.

Tech Bubble?

Forbes: Talking about technology, do you think we’re developing another bubble with these valuations?

Siegel: Well, it’s sort of, I’ve been talking to some of the people in the area. And, you know, the Twitters and the Facebooks, they do seem pretty rich. But interesting what people tell me, and when I look at the data, I also say that’s not true of the more traditional tack. In fact, by some criteria, Google, Microsoft.

Forbes: Cisco.

Siegel: Cisco, Intel, I mean, you could go on, are much cheaper than they normally are. So in contrast to 2000 where we had the crazy internet bubble and the regular tech firms were so high, I mean, the average P/E ratio of tech firms I think was about 80 in 2000. I mean, the average PE of the tech firms are in their low 20s, which is very reasonable for faster growing firms. And on a basis of cash flows, actually lower. So, you know, yeah. There’s always going to be some little area that catches the fancy of investors. Might be nanotechnology, it could be social networks, et cetera. But I don’t think that that’s endemic of the technology sector, and certainly it’s not endemic of the market.

People Overpay For New

Forbes: Now, with your focus on what might call more traditional companies, does that mean investors would miss out on younger companies, smaller companies? Or do you feel that you want to do fine, you don’t have to go in that?

Siegel: Well, you know, my last book which I wrote 2005, The Future for Investors.

Forbes: Why the Tried and True Triumph Over the Bold and the New.

Siegel: Right. The tried and true. Historically, historically people have overpaid for.

Forbes: The new?

Siegel: The new. And I mean, Twitter, you could say Twitter and Facebook are the new. And historically, and historically, the technologies over 20-30 years have not been great investments of technology sector, even though it’s the fastest growing. Because people put too high a valuation on.

Now as I mention to you right now outside of the social networking, I think the valuations are getting much more reasonable there. So I’m not going to make a blanket statement. But over time, they get infatuated with the new. I think we all do. They tend to overpay. You know, you ask an average investor, you know, “Tell me the fastest-growing company, I wanna buy it.” Hey, I can tell you those things. Are you going to look at the price? I mean, that’s the key variable. I can give you fast-growing companies but they’re way too expensive to buy. So you have to look at both those parameters when you’re making investments.(continued)

source: forbes.com
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