Ooops…Siegel Data Questioned
July 21, 2009 at 4:00 am 2 comments
Professor Jeremy Siegel is well-known in large part due to his famed book, “Stocks for the Long Run,” which Siegel uses as a foundation for his assertion that stocks have dramatically outperformed bonds since 1802. Siegel has four versions of his book, but the basic conclusion is that stocks have averaged about a 7% annual return (approximately 10% after accounting for inflation) versus around 4% for bonds, over a two hundred plus year timeframe. One problem – the validity of 69 years of the data (1802 – 1870) are now being questioned.
Any Utopian study or mathematical model is only as valuable as the data that goes into it. “Garbage in” will result in “garbage out.” According to a Wall Street Journal article (Does Stock-Market Data Really Go Back 200 Years?) written by Jason Zweig, the index data used by Siegel was too narrow on an industry basis and involved too few stocks (e.g., primarily banks, insurance and transportation stocks). In addition, the reliability of the conclusions is being second guessed because the data used by Professor Siegel starting back as far as 1802 were compiled decades ago by two separate economists, Walter Buckingham Smith and Arthur Harrison Cole.
According to Zweig, another area of concern is the fluctuating dividend yield used by Professor Siegel:
In an article published in 1992, he estimated the average annual dividend yield from 1802-1870 at 5.0%. Two years later in his book, it had grown to 6.4% — raising the average annual return in the early years from 5.7% to 7.0% after inflation. Why does that matter? By using the higher number for the earlier period, Prof. Siegel appears to have raised his estimate of the rate of return for the entire period by about half a percentage point annually.
I’m sure Professor Siegel has a rebuttal to all these accusations, but we’ll just have to wait and see how credible the response is. Maybe Siegel’s next book will be entitled, “Bonds for the Long Run”?
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
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Entry filed under: Profiles, Stocks. Tags: data, Jason Zweig, Professor Jeremy Siegel, Siegel, Stocks for the Long Run, Wall Street Journal, Wharton.
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1. Jeremy Siegel Digs in His Heels About Stocks | Reaction Radio | October 14, 2009 at 6:23 am
[…] Jeremy Siegel, Wharton University Professor and author of Stocks for the Long Run, is defending his long-term thesis that stocks will outperform bonds over the long. Mr. Siegel in his latest Financial Times article vigorously defends his optimistic equity belief despite recent questions regarding the validity and accuracy of his long-term data (see my earlier article). […]
2.
Siegel Digs in Heels on Stocks « Investing Caffeine | October 18, 2009 at 4:52 pm
[…] Jeremy Siegel, Wharton University Professor and author of Stocks for the Long Run, is defending his long-term thesis that stocks will outperform bonds over the long-run. Mr. Siegel in his latest Financial Times article vigorously defends his optimistic equity belief despite recent questions regarding the validity and accuracy of his long-term data (see my earlier article). […]