When he was a kid, Wharton finance professor Jeremy Siegel liked to chart the growth of morning glories in his back yard; now he directs his keen attention to the rise and fall of the stock market.
By Susan Lonkevich | Photograph by Bill Cramer
When I enter Dr. Jeremy Siegel’s office in Steinberg Hall-Dietrich Hall on a Friday morning in late August, he glances over at his laptop computer, which is spewing out columns of financial market data by the second, and condenses the past week’s losses into one brief exclamation.
Wow.
You know the stock market is on a precarious ride when Siegel, the award-winning and immensely accessible Wharton School finance professor — who is listed in every business reporter’s Rolodex and was one of a handful of economists to address Federal Reserve Chairman Alan Greenspan, Hon’98, this summer — issues such a summary.
The day before our interview, the Dow Jones Industrial Average had plunged 357 points — its third-largest point-drop ever at that time — putting it nearly 1,200 points below its July 17 peak of 9,338. Siegel, who recently published the second edition of his popular investing guide, Stocks for the Long Run, andwho had remained optimistic throughout the year when others were calling, prematurely, for the end of the 16-year-long bull market, had started to shed his horns over the previous few weeks, while continuing to advocate long-term stock ownership.
Other than the White House sex scandal, the turbulence on Wall Street has been the news story of the summer and early fall, made more dramatic by the increasingly widespread investment in stocks. And so intertwined have the world’s economies become that financial crises in Russia and Asia have put serious dents in the investment portfolios of people a hemisphere away. All of this turmoil has kept Siegel busy lately doing what he loves best — explaining, offering perspective, and forecasting in op-ed columns, financial news shows, and lectures at Wharton and across the country.
To say that the stock market dominates Siegel’s life might be an exaggeration, though only a slight one. He collects intricately hand-blown glass; he’s risen to the level of a senior master at bridge; and he loves to eat out and travel. But Siegel is never far from news about the financial markets on any given day, nor out of reach of the reporters who cover them. Each August, he and his wife Ellen Schwartz, a speech pathologist, and their two sons rent a cottage in Ocean City, N.J., for a couple of weeks. “I don’t bring that,” he says, pointing to the Bloomberg terminal that runs constantly in his office, poised a few feet away from him on a work table. “But I have CNBC on all the time. People say, ‘Don’t you want to escape from it?’ I say no. I take long walks on the beach with my wife or I go to the boardwalk with the kids. When I’m back at home, CNBC is on in the background.” As a result, he says, he’s constantly forming and fine-tuning his positions about where the market is heading. “I feel when you’re away from the market for awhile,” Siegel explains, “you begin to lose the thread of the arguments and the talk and the psychology of the investors. You can’t stay too close. You have to have an objectivity. So I try to strike a balance.”
Siegel suddenly lowers his voice to a whisper. “Ohhh, look. The Dow is down 24 points right now. This is sort of fascinating. I’ve just been watching it crumble from the time you came in here. It was up 80, now it’s down 26. That’s about a 100-point swing in about 10 minutes.”
Siegel’s intensity and careful observations have paid off, notes Dr. Krishna Ramaswamy, professor of finance at Wharton, who calls him “one of the clearest-thinking economists,” and adds, “I must say there isn’t a colleague who has as clear and as intuitive an understanding of markets — not just financial markets but all aspects of markets and their functioning. He has a very wonderful memory for price movements and recent events, and for historical events, as well. It is like a scalpel, how his mind works on these things.”
Stock-market history informs Siegel’s book, Stocks for the Long Run (McGraw-Hill), which put him on the media’s contact list when it was first published in 1994. In his book Siegel uses data dating back to 1802 (10 years after the opening of the New York Stock Exchange) to lay out his case for the consistent superiority of long-term investment in stocks over other financial assets.
He found, for instance, that the “real,” annual return of stocks averaged seven percent over the 195-year period — twice the return of long-term government bonds. Indeed, one must go back to 1831-1861 for the most recent 30-year period when bond returns exceeded those of stocks. And stocks held for 20 years or more have never returned less than inflation; the same cannot be said of fixed-income assets, although they have traditionally been viewed as safer investments. Based on total return indexes, a single dollar invested in stocks since 1802 (and adjusted for inflation) would have grown to more than half a million dollars by 1997. In contrast, the same dollar invested in bonds would have grown to only $803.
Before Siegel’s ideas found their way into Stocks for the Long Run, they were published in academic journals. Part of his incentive to incorporate them into a book came from peers and colleagues who thought they would make an interesting study. The rest, he says, came from students who were looking for something else instructive to read after they had finished Burton Malkiel’s influential bestseller, A Random Walk Down Wall Street. “I couldn’t point to a book out there,” Siegel says in his disarmingly easy-going Midwestern accent. “Everything was either too technical or was junk, written by people in the market on how to make a million and all that sort of stuff. So I decided, hey, there is a need for a book that has good academic grounding but speaks to the average investor.” Although Siegel’s book contains some investment strategies for those who enjoy the thrill of trying to “beat” the market, the primary mantra running through its pages is “buy and hold.”
Publishing the second edition of his book this year gave Siegel the opportunity to update his charts and to add new sections based on questions he’d been asked during the scores of lectures he gives each year to brokers and their clients. One of the greatest concerns expressed by audiences in recent years is the predicted phenomenon known as the “Age Wave” — that there will not be enough Generation Xers with enough money to pick up the voluminous stock-and-bond portfolios of baby boomers when they retire. The solution to this problem, Siegel believes, lies in the population trends of emerging markets such as Southeast Asia.
“I think there’s going to be more integration around the world, and more capital flows,” he says. “We talk about capital flows today being massive — it’s going to be a fraction of what takes place in 20 or 30 years, and there’s going to be so much cross-ownership of shares and firms, the shareholders will be worldwide. I see the developing countries, as their young population today moves into middle age, being massive acquirers of capital and of U.S. shares toward the middle of the next century.”
Until its midsummer swoon, the market’s robust performance was a financial-book-writer’s dream. Since publication of the first edition of Stocks for the Long Run four years ago, the Dow had risen from 3,700 points to its record high of 9,338. “No one could have predicted the astronomical rise of more than doubling the market,” Siegel says. “It certainly has been a favorable market climate for my book and the ideas in it.” The two editions have sold about 100,000 copies to date. “I was amazed. I think my publisher told me that the average sales of an economics business book over its lifetime are something like 3,000 copies.” Siegel says he isn’t worried about the market’s recent downturn spoiling his message. “I can still be bullish in the long run even though I’m pessimistic in the short run.'”
Dr. William Goetzmann, professor of finance and real estate and director of the International Center for Finance at the Yale School of Management, doesn’t argue with Siegel’s claims that stocks make good long-term investments. But he believes that Siegel’s analysis presents “too rosy a view of the future of stocks,” because it only looks at 195 years in the history of the U.S. market — the champion of all the world’s stock markets. “If you’ve got 40 markets and you say, ‘I’ll take the very best market out of the 40 and use that as the measure [of stock returns],’ you have to believe you’re overestimating the future,” Goetzmann says. “In terms of making a forecast of future stock-market returns, you probably should be a bit more conservative than the historical equity premium.”
Though Siegel does admit that the United States has been “a survivor country” compared to the markets of some other nations, he notes that many of the foreign markets that he examined experienced returns that were “remarkably close” to those in the United States.
The phone rings. It’s a New York Times reporter who wants to pick Siegel’s brain about the implications of the Russian and Asian economic crises for diversified stock portfolios. Siegel cheerfully complies, leaning back in his office chair and gesturing with his arms as he expounds on the significance of “three-quarters of the world’s population [moving] from being under a Communist/socialist economy where the West and Western goods were effectively totally shut out, to now being part of a global market where Western goods are not only available, but almost revered … ”
“My feeling,” Siegel explains later, “is that one of my functions is to be a teacher for the students here, but my second function is to try to educate as many people who want to learn. Whereas many of my colleagues are wary of the financial press, I have welcomed the financial press.” So when Siegel’s vacation coincided with the first 300-point decline of the Dow in early August, it was characteristic that he left his forwarding number at the shore for reporters. “I got calls from CNBC, CNN, NPR, and from virtually all the major newspapers — The Wall Street Journal, The New York Times, Investor’s Business Daily … ”
One of the things that reporters expect scholars like Siegel to do is to offer definitive explanations for this dip and that rally — even when there don’t appear to be any. He writes at length in his book about this “deep psychological need to find fundamental explanations for why the market is doing what it is doing.” Researching the past 123 major movements in the market (plus or minus five percentage points in one day) since the Dow Jones averages were first formulated in 1885, he found that fewer than one in four were associated with specific news events. “It is very hard,” Siegel explains, “for the human mind to accept that much of the world is random and has no plan and is by chance. So you feed them explanations, and many of the smarter ones nod their heads. Deep down they know it’s probably not right,” he chuckles, “but it helps them that someone has an answer.”
Siegel leans toward the terminal again and announces that the Dow has dropped 64 points. “There is a serious deterioration of the market,” he whispers, sounding as if he’s observing a surgical operation unfold through the computer screen, and the patient is hemorrhaging. “The bull is over.” Later, the Dow gains back a couple dozen points, but Siegel isn’t encouraged. “It’s not going to hold. There’s going to be another attack on the market before this day is out.”
And he’s right. The Dow will close down 114 points, at 8,051.68, for the day. By early October, it will have fallen 18 percent from its peak. “See how you get to know the market, to predict the movements?” Siegel says. “It’s like, almost, it’s not a living thing, but the essence of all the psychology around the world. And I tell you, no one will ever figure out the human mind, but the closer you are to [the market], you get some insights into its internal dynamics.”
To become as entranced as he has by the market, one might think that Siegel had been strongly influenced by some person during his childhood. But the 52-year-old suburban Chicago native, whose family owned a small lumber business, says his parents distrusted stocks. Both had grown up during the Great Depression, and, when Siegel was very young, his mother lost most of her savings on a mining stock. Siegel was nevertheless captivated by the fluctuations of the market. “I liked charts and graphs. I liked things that changed from day to day,” he says. “I remember once when I was very young that we had a couple of morning-glory vines outside the breakfast window. Every day the morning glories would bloom and they would only last for a day, and then they would die.” The seven-year-old Siegel would go outside each morning to count the flowers, neatly tracking their number with colored pens on graph paper.
Siegel showed a facility for math early on and decided one day that he was going to double enough numbers to reach what’s known as a vigitillion (one with 63 zeros after it). He carried around a roll of adding-machine tape on which he wrote his calculations (“one plus one is two, two plus two is four, four plus four is eight … “) until he finally reached the impressive figure. “My third-grade teacher looked at me rather oddly,” he recalls.
Rather than discourage his interests, his parents bought him a share each of about 20 different blue-chip stocks when he was a young teenager. (“This could be done pretty cheaply back then.”) Siegel soon discovered, however, that it was the market as a whole that intrigued him more. “I never had as much interest in picking individual stocks, which is of course the way that most people get into the market. In a way I regarded that as too complicated.”
Then, when he was a sophomore at Highland Park High School, Siegel read up on the stock market crash of 1929 and gave a talk on it for speech class. “I just loved it,” he recalls. “I guess I [already] knew I liked teaching in a way because I did tutoring a lot in math and chemistry and other subjects, and I would love to explain things to people, but this was the first time it wasn’t one on one.”
It wasn’t until Siegel was a junior at Columbia University that he took his first economics course. “I started as a math major,” he says. “Three weeks into [macroeconomics], I knew I wanted to be an economist. It so captivated me. I had a wonderful teacher, Professor Peter Kenen — he’s now at Princeton. It was a big lecture hall with 350 people, but macro — what made the economy go up or down — wow! That was what I loved.” Siegel went on to earn his Ph.D. at the Massachusetts Institute of Technology, where he became friends with economist Dr. Robert Shiller. They met on the first day of school, while lining up alphabetically for the required chest x-rays. “He seemed to know a lot about the market and was argumentative in class,” recalls Shiller, The Stanley B. Resor Professor of Economics at Yale University who previously was on the faculty at Penn. “When the professor said something he regarded as wrong, he wouldn’t let go. He was a lot of fun.”
Siegel still likes to argue, and when their families vacation at the Jersey shore together, he and Shiller quibble over premiums during long walks along the beach. “He has been bearish for years and I’ve been bullish for years,” Siegel says. “What’s funny is that we’ve often been put at opposite ends [in the media], and yet they don’t know that we are the closest friends.”
Today, Siegel still asserts that, even bought at the market peak, stocks are a superior long-term investment. Shiller, on the other hand, argues that stocks have been dramatically overvalued in recent years. In a study conducted with Dr. John Campbell of Harvard University last winter, he concluded that if the price/earnings ratio and dividend yield of stocks reverted to their historic norms over the next 10 years, the market would drop some 40 percent (a finding that Siegel politely disagrees with).
“He’s made the point very forcefully that investors have to watch out about [getting in and out of the market] too often,” says Shiller of Siegel. “That they should be long-term investors. He doesn’t want to get involved in ever changing that message. He may be right in the long run. I’m saying, I don’t see why you should be in it right now. Why buy something that’s so overpriced? It just doesn’t look like a good gamble. There’s a lot of volatility and no expected return for it.
“I guess it’s like when people give medical advice,” he concedes. “It has to be very simple.” Yet for all of their disagreements, Shiller adds, “His thinking has shaped mine so much, and these walks on the beach have been very helpful to me. I’ve learned so much from him.”
After teaching for four years at the University of Chicago, where he says economist Milton Friedman was a mentor, Siegel joined the faculty at Wharton in 1976. “He’s deeply committed to understanding the macro-financial sector and its constant change. This makes him an outstanding teacher,” says Dr. Anthony Santomero, the Richard K. Mellon Professor of Finance who serves as director of the Wharton Financial Institutions Center. “He’s excited, he’s up to date … There is also an intensity of feeling and commitment. Every subtle nuance has been considered.”
Siegel’s teaching skills — and the range of audiences eager to hear him — are on display in two lectures:
The first takes place on a warm, late-summer day at an inn in Avalon, N.J. Some 60 men dressed in knit shirts and shorts — branch managers in the investment firm of Janney Montgomery Scott — are in town for a two-day seminar mixed in with fishing and golf. Siegel, his gray suit jacket folded on a chair in the dining room where they’ve gathered, is pacing energetically in front of a slide projection of one of the charts from his book. He speaks, among other things, about how the risk of stock ownership decreases as the length of the holding period increases.
“Want me to be frank? Here is where I think our profession has led Wall Street wrong,” he tells his audience. “When we measure risk, what holding period do we assume? Almost universally, annual returns. It’s only appropriate for the investor who, one year from now, is going to liquidate all of their assets. I would dare say that probably no one in this room in 12 months has clients who are going to liquidate all of their financial assets.”
Siegel goes on to discuss the relative performance of bonds. “[If you’ve used] bonds for diversification, I’ll bet your client has been really happy about that over the last month or two,” he says. Then he drops this warning: “Over 30 years, a 100 percent stock portfolio has a higher rate of return and lower risk than a 100 percent bond portfolio. Tell me,” Siegel asks, “what is the world going to look like in 2028?” It didn’t take long to develop double-digit inflation in the 1970s, he reminds them. “Could it happen again? Most certainly it could happen again. No one knows.”
Siegel’s overall message was a welcome one for broker Phil Kontul. “I think he makes a compelling argument for buying stocks for the long term,” he says during a coffee break at the seminar. “As a stock broker it’s comforting to see some of these statistics. We’ve had some high volatility recently, but we really have to keep this in perspective.”
A couple of turbulent weeks later, in late September, about 250 Wharton MBAs and undergraduate students have packed a lecture hall seeking explanations for this global financial upheaval from Siegel, who isn’t teaching classes this semester. They fill every seat, leaning against the walls, with bookbags still strapped to their backs, and crouching in the aisles. They spill out into the hallway and peer in from an outside exit. “We figure he might have better answers than we do,” explains Robb LeMasters, a Wharton senior who’s worried about how the turmoil will affect the job market when he graduates.
“Let me give you sort of an executive summary,” Siegel teases the crowd in his introduction. “Things are bad. And they’re going to get worse before they get better.” Siegel quickly moves to his argument in favor of dramatically lowering interest rates — for starters, a one percentage-point drop at the September 29 meeting of the Federal Reserve policy making committee (a position he’d also stated in Avalon) — in order to stave off a recession. He then proceeds to dissect one of the leading financial news stories of the week — the $3.5 billion bailout of Long-Term Capital Management, “the gold-plated hedge fund” which produced enormous profits through speculative investments before its near collapse and which, in Siegel’s view, “is going to cause an agonizing reassessment of how we describe risk in correlation to returns in financial markets throughout the entire world.”
It is partly Siegel’s ability to navigate between a narrow topic and the larger picture, to link textbook theory with current events, that has earned him a succession of teaching awards (which he proudly displays in his office) over the past seven years. In 1994, he was also named the top business school professor in the country in a student survey conducted by Business Week. “What he has is a gift for connecting it all up,” says Robert Shiller. “There’s a bias in academia to get very specialized and focus on some mathematical model, or the like. These models are more useful if they can be put in a broader context, which is what he does.”
When Siegel teaches, he seems to throw his whole upper body into the act, nodding his head, snapping his fingers, and sweeping the air with his arms to make a point. And with an oratorical pace that is alternately urgent and leisurely, he gives the impression of actively pondering and working things through while explaining them to others. “It is almost a kind of transformation of someone, much the way an actor who steps on the stage gets animated when taking on the role of their part in the play,” observes Anthony Santomero. He “becomes extraordinarily active and excited when he walks into the classroom.”Such is Siegel’s teaching reputation that 565 Penn undergraduates registered for 15 spots in a preceptorial on “The Stock Enigma” led by him this fall. Preceptorials are informal, non-credit courses organized by the Student Committee for Undergraduate Education, and they offer undergraduates a rare opportunity to interact with a professor like Siegel, who predominantly teaches MBA students. “The MBA is what makes us famous,” Siegel says, “but the undergraduate has always been dear to my heart, even though I like teaching MBAs — I love it.”
“He was really probably the best professor I had in business school,” recalls Dr. Howard Forman, WG’96, vice chair of the diagnostic radiology department at Yale University School of Medicine. Forman, who also teaches health economics to undergraduates, says he tries to model his own teaching approach after Siegel’s. “He had kind of an infectious enthusiasm for macroeconomics as well as finance, and he had a genuine interest in what he was teaching, as well as trying to make sure he was teaching in a way that got across the material” by linking it to current events.
To Forman, Siegel’s enthusiasm is apparent even outside of class. “I call him up every month or couple of months just to chat, and we’re both sitting at the Bloomberg terminals so we can keep track of what is going on at that moment. What I appreciate is, despite the fact that his training is not only different from mine, but his years of experience are far greater than mine, he will say, ‘What do you think about this or that?’ He will respect the fact that everybody’s opinion has some weight, even if [they’re] not as learned as the others. He has a great respect for people.”
The following week, the Federal Reserve does lower interest rates, but — to Siegel’s disappointment — only by a quarter of a percentage point. The Fed’s policy-making committee wasn’t scheduled to meet again until November 17. “Once you’ve waited too long,” Siegel had warned in his Avalon lecture, “you’ve lost your leverage.” That’s what happened, he says, when the Fed failed to respond swiftly to the stock crash of October 1929, and the United States sank into the Great Depression.
Siegel’s book revisits this era and purposely draws parallels to the workof a 1920s financial analyst and money manager, Edgar Lawrence Smith. As Siegel reports, stocks were dismissed by conservative investors until the early 20th century, and then embraced after Smith, researching stock returns since the Civil War, showed that stocks outperformed bonds regardless of whether prices were rising or falling. Smith’s downfall was, of course, the crash of 1929. Stock prices didn’t rebound until 15 years later — long after Smith’s reputation had been ruined.
“Ahhhhh, Edgar Lawrence Smith,” Siegel muses with a mischievous smile, as if the late analyst’sghost could be hovering in the office with us. He pulls down a slim blue book with yellowed pages from the shelf above his desk — Smith’s 1925 treatise, Common Stocks as Long-Term Investments. “You know what’s fascinating about this? This book came out four years before the peak of the bull market [in 1929]. My book came out in 1994, and we are now four years … ” His eyes twinkle with the possibilities implied.
Could Siegel be Smith reincarnated? “I don’t want to be, that way, because then we’re headed for another 10 years of a really bad market,” he says. (Of course, as Siegel has pointed out in his book and in the press, many of the conditions that paved the way for the 1929 crash — such as the lack of minimum margin requirements for individual stock purchases — were different from today). But reading through the literature of Smith’s time, Siegel noticed that his predecessor had an impact on the market in the twenties similar to the impact he himself has had in the nineties. “I get a lot of references to [my book being] the ‘bible of the bull market.'” Just like Smith. “I just hope we don’t end up the same way,” he jokes.
But in the long run, Siegel points out triumphantly, “He was right! Even though when a bear market came upon investors in the thirties, and he got thrashed and rejected by such luminaries as Graham and Dodd [proponents of the value-oriented approach to investing] and others, in the long run he was right. In the long run his insights about the market were accurate. That might not help in the short run when someone is taking a big hit in their portfolio, but the philosophy was very sound and accurate.”
Siegel, who grew up in a ranch-style home, has been fascinated with heights ever since he moved into a high-rise at Columbia University. “Since I was 17,” he says, “I have never lived below the eighth floor of any building.” His spacious, 30th-floor perch in Society Hill Towers, a condominium complex where he’s spent the last 23 years, certainly meets the altitude requirement. With its ceiling-to-floor windows offering a nearly 270-degree panorama of Philadelphia (“We don’t have the river yet.”), it’s a fitting dwelling for someone who has made a mark with his long view on the financial markets.
But peering into the not-so-distant future, he realizes, can be a riskier activity, especially during times of such great volatility. This morning, on the last day of September, finds Siegel in his home packing for another business trip. It’s his busiest time of the year for speaking engagements, and he’ll have much to talk about over the next month when he travels to places like Salt Lake City, Jacksonville, Chicago, and Dallas. “I have a hard time believing the market is going to new highs until more of the economic uncertainty is resolved,” he ventures. “I believe there are going to be more earnings downgrades. But I don’t think the market is going to crash because interest rates are so low and stock owners don’t have a good [alternate] place to put their money. My gut feeling is that we are in a bear market, but returns will not be devastated,” Siegel adds. “The market’s just not going to go upward and onward at the same pace as before.” Even so, as he wrote in a Wall Street Journal opinion column a couple of weeks earlier, stocks “still emerge as the long-run asset of choice” and figure to “beat bonds yielding 5% by at least one to two percentage points a year.”
This morning Siegel will be flying to Latrobe, Pa., where he has been invited to deliver the biannual McKenna Lecture in economics at Saint Vincent College. The title of his talk, given the turmoil of the past few months, is a timely variation on his best-selling book: “Are Stocks Still Right for the Long Run?”
One hardly needs to speculate on Siegel’s answer.
