David Gardner: The title of your new book is The Future for Investors: Why the Tried and True TriumphOver the Bold and the New. What do you mean by "the tried and the true" and why will it win out in the end?
Professor Siegel: Well, my historical studies have shown that a lot of the new companies that have been added to the major indices over the last half-century have actually not done that well and some of the very best companies have been those tried and true companies -- Procter & Gamble
David Gardner: And how does this inform readers of your previous book, Stocks for the Long Run? I know you have written other things too, but Stocks for the Long Run is the one that we know best. Does this confirm what you were writing in Stocks for the Long Run and/or does it challenge any aspect of that work?
Professor Siegel: That is a good question. Stocks for the Long Run talks about the whole market, an indexed approach. Fully indexed is still very, very good and will reward investors, but I think there is a better way.
What I found out by looking at individual stocks in individual sectors is that there is a way that you could perhaps beat the market by maybe one or two percent a year. Certainly not every year, but concentrating for instance in high-dividend stocks, particular sectors that have done well decade after decade.
So in my final chapter of Future for Investors, I say half of your equity should be indexed but the other half, if you just tilt them towards some of these strategies, I think you can gain a competitive edge. It is a form of value investing that has done well and we do know in academia (that) value stocks in the long run do tend to outperform. I show that dividend-paying stocks in the long run tend to outperform. Consumer staples, as a sector, and health care, particularly the pharmaceuticals and the name brands, tend to outperform. My belief is that they will continue to outperform in the future.
David Gardner: Jeremy Siegel, one company you single out in your work is Yahoo!
Professor Siegel: Well, it is a kind of sad story because Yahoo! was admitted to the S&P 500 virtually at the top of the market. Also, between the time that the S&P announced that it was going to come in to the index and when it was placed in the index, and we are only talking about less than two weeks, the stock jumped by about 40 points, which made it even more overpriced.
This is one of the problems with the S&P 500. And by the way, they recognize that. When they announce that companies are going to go in, they jump in price. Secondly, when certain sectors come into favor, their market values go up and suddenly they qualify for admittance in the S&P 500. By the way, I have to congratulate S&P for keeping many Internet stocks out in the late '90s. They were under pressure to put more of them in. In fact, the Russell 1000 did put them in automatically. They were very reluctant to do so. Yahoo! was one of them, AOL a bit earlier, and then finally eBay
David Gardner: So even though Yahoo! has been a great buy-and-hold stock, if you had bought even at the IPO, it has been a wonderful stock for the long run. The reality is that it hasn't been a great stock for the S&P 500.
Professor Siegel: Yeah, and that is often the case because again, it has to get to a certain size to qualify and by that time -- it actually qualified earlier -- but by the time S&P said OK, we will let Yahoo! in, oh, that was in December of 1999. Not a good time to let an Internet company, or even any tech company into that index.
David Gardner: And now for our obligatory Google
Professor Siegel: I use it. I know there are other search engines that are coming up on there, but it is miraculous. Now, when I have a question in mind. I think of a few key words and I type it in Google. Nine times out of 10, I am going to get the answer. It is dramatic. And that technology we know is going to explode over the next 10 years. I can picture us speaking into a little mouthpiece. just mentioning that I want an answer to a question and we are going to get an answer to the question right back from the billions of pages that Google or some other search engine is going to have available to us. The knowledge that can be brought to bear on this is something that I think is absolutely spectacular.
David Gardner: Dr. Siegel, if we pointed a Nerf bow and arrow at your head and said you have to decide to buy or sell Google, will it beat the stock market averages or not over the next 10 years? What would you say?
Professor Siegel: Much as I love it, it is a bit pricey for me at the present time and, as I say, in the fast-changing world of technology, even insurmountable-looking reputations are built on sand. They can be overtaken by someone else.
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David Gardner is co-founder of The Motley Fool and is chief analyst of Motley Fool Rule Breakers. The Motley Fool isinvestors writing for investors.
