Ladies and gentlemen, welcome to the World Heavyweight Title Fight and our main event of the evening. In the blue corner, weighing in at 132 pounds, wearing a gray flannel suit and wire-rimmed glasses, is Professor of Finance at the Wharton School of the University of Pennsylvania and author of Stocks for the Long Run, The Future for Investors, and several other publications, Dr. Jeremy J. Siegel.
In the red corner, weighing in at 160 pounds, wearing a navy blue suit, is Professor of Economics at Yale University and author of Irrational Exuberance, The New Financial Order: Risk in the 21st Century, and numerous other publications, Dr. Robert J. Shiller.
Gentlemen, this fight will last for 12 rounds, one year of market returns for each round. There will be no rabbit punching, kidney punching, or foul language of any kind.
Commentary
Folks, we may be about to witness one of the great battles in heavyweight history. Outside of the ring, these two men are known to drink Chardonnay together and play bridge with the likes of Milton Friedman and Alan Greenspan. In the ring, however, we find two men intent on making their view of the markets clear to the general public.
On the one hand, we have Jeremy Siegel, a perpetual bull, who claims that for any 30-year holding period, stocks have historically outperformed every other investment class and beaten inflation. He may be small and wiry, but he's also tenacious, backing up his claims with extensive data going back to 1802.
On the other hand, we have Robert Shiller, who has taken Alan Greenspan's statement of "irrational exuberance" in the markets and made it his mantra. Very bearish on the stock market, he also backs up his claims with over a hundred years of data. Compared to Siegel, he has greater height, reach, and pessimism. This should be an interesting contest to say the least. Let's go to the ring.
Rounds 1-6: 1994-1999
In Round 1, the two men approach each other cautiously, as you would expect. They seem to be sizing up the other man's argument, contemplating the current macroeconomic environment and centuries of data. I don't know how they manage to remain so calm under such pressure and immense intellectual stimulation.
Siegel enters the ring more confidently in Round 2, heading right toward his main argument: Equities are the best asset class for individuals with a long-term horizon. Out of nowhere, Jeremy Siegel lands a massive right hook with the publication of Stocks for the Long Run. Robert Shiller staggers back under the barrage of positive data. Siegel points out that stocks have outperformed bonds and T-bills in 99% of 30-year periods since 1802, and every 30-year period subsequent to the period ending in 1861. Even if the holding period is reduced to 10 years, stocks have been the best investment vehicle 80% of the time. Over the entire data set from 1802, equities deliver after-tax, inflation-adjusted, real returns in excess of 6% (depending on tax bracket) compared to bonds or T-bills, which languish at less than 3%, or gold, which produced 0% returns.
This is not what we expected at all. After an evenly matched first round, Shiller has been hanging on to the ropes, just trying to stay on his feet. Cisco Systems
|
Year |
S&P 500 Returns |
|---|---|
|
1994 |
-1.5% |
|
1995 |
34% |
|
1996 |
20% |
|
1997 |
31% |
|
1998 |
27% |
|
1999 |
20% |
Jeremy Siegel has completely dominated this fight. Dr. Shiller finds himself far behind on the scorecard. It looks like he'll need to deliver a knockout if he intends to win.
Rounds 7-9: 2000-2002
Here we are in the beginning of Round 7. Jeremy Siegel begins where he left off -- the market continues to outperform, but he begins to tire. Robert Shiller, smelling blood, publishes Irrational Exuberance. Oh, my, could it be? Has Shiller been doing the rope-a-dope? Has he let the bull market punch itself out, like Muhammad Ali did to George Foreman in Zaire more than 30 years ago? Shiller comes off the ropes swinging, delivering massive blows to the jaw of Siegel.
Siegel is staggering, admitting that the market had become overvalued, even publishing his own work suggesting that no large-cap stock has ever delivered superior returns after reaching a price-to-earnings ratio of 100. He appears ready to say, "No mas, no mas," and give the fight over to Shiller, as he tries to hold on in the corner.
Dr. Shiller is really laying it on, pointing out that the returns leading up to 2000 were unprecedented in market history. The speculative asset bubble was produced by a favorable business climate, falling inflation, and lower interest rates. These real, structural factors led to rising expectations for market returns from 0% in 1989 to 8.4% by 2001 -- one year after the bull market ended -- along with a belief that any stock market correction would be temporary and the bull market would continue. There was massive media coverage of the bull market, Internet trading, psychological factors such as magical thinking, and a belief that we were entering a new era where we would all become wealthy through outstanding market returns.
These arguments proved quite accurate, and after Round 9, Shiller has closed the gap with Siegel on the judges' scorecards and has actually taken the lead:
|
Year |
S&P 500 Return |
|---|---|
|
2000 |
-10% |
|
2001 |
-13% |
|
2002 |
-23% |
Rounds 10-12: 2003-2005
This is not the battle the fans expected, but a battle it has become. Despite being shaken, Siegel has revised his work, releasing the third edition of Stocks for the Long Run in 2002. Even after the brutal decline, he returns to his main argument that over long holding periods, stocks are the best asset class for investors. In fact, he's taking advantage of the decline to point out that stocks are a better value in 2003 than they were in 2000. The market rebounds in 2003 with a huge gain, and Siegel takes Round 10.
Even though we're in the final rounds, these two professors are going at it like two kids on the playground, throwing wild haymakers. Shiller fights back by publishing the second edition of Irrational Exuberance in 2005, suggesting that investors continue to have overly optimistic expectations for the stock market, and he now believes this irrational exuberance has moved into the real estate market as well.
Not to be outdone, Siegel publishes The Future for Investors: Why the Tried and the True Triumph over the Bold and the New in 2005 as well. After the bear market from 2000-2002, investors were asking, "I understand that stocks are great for the long run, but which stocks?" To answer this question, Dr. Siegel and his team of students analyzed returns between March 1957 and December 2003 for the original 500 companies in the S&P 500 compared to the continuously updated S&P 500.
The most striking finding in this study is the "growth trap." High-growth companies are frequently touted as the best investment vehicles, because the growth will power returns going forward. We all dream of owning the next Cisco Systems or Home Depot
Siegel has recovered well, and after taking Round 10, fights to a draw with Shiller in Rounds 11 and 12:
|
Year |
S&P 500 Return |
|---|---|
|
2003 |
26% |
|
2004 |
9% |
|
2005 |
3% |
The decision
At the end of the bout, both men remain on their feet, ready to go another 10 rounds. We have never seen anything like this. Dr. Shiller contends that investors remain overly optimistic and that the market remains excessively valued, even after the below-average performance of the past six years. He contends that expectations continue to be excessively optimistic, and this doesn't bode well for future returns.
Dr. Siegel believes the last six years have returned the market to its long-term average value, and he continues to believe that an investor with a long-term horizon will experience returns that beat inflation and other asset classes in the decades going forward. He doesn't believe that investors will sell their stocks down to single-digit price-to-earnings ratios as they have in past bear markets because, "People are just too smart today." His new work suggests that boring, cash-producing, undervalued sectors such as pharmaceuticals, railroads, tobacco, and consumer products have outperformed the market because they have historically been undervalued. This new focus on value is something both men likely agree upon.
The judges' scorecards have been tallied and the decision is -- a draw. We'll have to wait for the rematch.
For related Siegel and Shiller Foolishness:
- Beware of Magical Thinking
- The Greatest Investing "Secret"
- You Had It Right the First Time
- Irrational Exuberance, One Year Later
Dell is both a Motley Fool Inside Value and a Motley Fool Stock Advisor recommendation. Home Depot is a Motley Fool Inside Value pick.
There's one Fool with a great right hook and a penchant for buying boring, undervalued companies. Sign up for a free trial of Motley Fool Inside Value to see which companies Philip Durell has recommended to subscribers.
Fool contributor Robert Aronen owns none of the companies mentioned in this article. He is irrationally exuberant about the oil patch. Feel free to share your comments with him. The Motley Fool has a disclosure policy.
