In his 1994 best seller, Stocks for the Long Run, Wharton finance professor Jeremy Siegel shows that stocks are the most profitable long term investment, over cash and bonds, and makes a very compelling case for index-style investing. In his newest book, The Future for Investors: Why the Tried and True Triumph Over the Bold and New...he argues that it's not the hot, new-industry stocks that serve investors best. More likely, it's the humdrum, boring companies that sell cigarettes, oil, soft drinks, or gum. He concludes that investors can improve on index-style investing by also holding stocks with low P/E ratios and high dividend yields...boosting annual returns by as much as 100-200 basis points.
Since 1950, the top performing companies were National Dairy Products (now Kraft Foods) returning 15.5% annually; R.J. Reynolds Tobacco, 15.2%; Standard Oil of New Jersey (now ExxonMobil), 14.4%; and Coca-Cola, 14.3%. A $4,000 investment in the top four would have grown to $6.3 million today, versus $1.1 million for a similar investment in the stock market as a whole.
Why the out-performance of the old-style over the trailblazers? Siegel's answer...the Growth Trap. Investors have a tendency to pay too much for shares in fast-growing companies. Moreover, dividends matter a lot. Reinvesting dividends is a critical factor giving the edge to most winning stocks in the long run.
An observation. Many of the advisors who I work with today...especially the newer ones...have no answer when asked, "What stocks do you like?" They are more likely to expound on an investment process, or an asset allocation strategy, as opposed to individual equity ideas. Yet, as Jeremy Siegel points out, it is the boring, traditional, old-style ideas that BUILD WEALTH. In order to be of value to clients, and to be distinctive from every other opinion-less, equity-challenged advisor...advisors should have 1-3 core companies that fit the Jeremy Siegel-Tried and True formula. They should know the story for each of these companies up-and-down, backwards-and-forwards...and be able to tell a compelling story at the drop of a hat. This is not a revelation. Some of the old-timers in your office have known this for years.
Newer is not necessarily better.