The book focuses on the financial aspects of investing in stocks. The author’s main contentions are that long term investment in the stocks is cheap to the investor and yields higher income than short term investments. The author backs these sentiments with an in depth research and analysis that shows the strategies and steps that can be used to accumulate portfolio with high returns at low risk. These contentions are in tandem with the historical information, which the author has also presented. The historical records show how the long term stocks have turned out to be low risk and highly productive as well. The bond and stock record information stretch back to 1802. The main contention is that stocks are more profitable than bonds in the long run. The author further contents that after taxation on both stocks and bonds; the stocks are more beneficial to the investor. On the investment perspective of stocks, the author demonstrates how historical facts overwhelm fickle markets.
In the second part of the book, the focus is on global markets, valuation of stocks and investment styles. The author contents about the best measures and sources of market value. The best ways of valuing financial assets such as bonds and stocks are emphasized. There is also the aspect of how economic growth impacts on valuation of financial securities. The other contention is that in future, the developing world will grow faster and outperform the developed world in financial markets. In this case, the author considers the importance of dividend yields, size and earnings to price ratios. There is emphasis of China and India as the rising markets for global investments that investors can diversify their portfolio to reduce risk. The third main contention is about economic conditions and its impact on stocks.
The author gives a lot of focus on global investment. This is because of the need for investors to invest abroad as a way of diversifying and reducing risk. The American stock market today holds only slightly over a third of the equity capital of the world. The book gives investors the right avenues to follow when trying to make a portfolio that has a good balance of financial assets between the foreign and domestic markets. The book covers the allocation of the sector across the world. Investors will be best informed where they can find safe financial investments and where to find the financial assets with high returns.
The Stock for the Long Run also analyses the things that change or move the financial market and explains a lot more about the origins of big market changes. The author comprehensively explains what causes change in financial markets both at domestic and international level. He identifies investor strategies as one of the biggest causes. Investors can adopt strategies that can be used to take advantage of gaps and opportunities that arise in the world market.
The book contains fundamentally weighted indexes as well. Fundamentally weighted indexes are known historically to give higher rates of return and at lower risk compared to the capitalization weighted indexes. The investment analyst explains how the two kinds of indexes work and how they can be used to acquire high returns for the investor. There is historical evidence on how the fundamentally weighted indexes can yield higher returns than the capitalization indexes. There are numerical figures presented for easier understanding by the reader.
The book also focuses on the psychological and behavioral finance factors that influence some long term investors to make erratic and irrational investment decisions. The author discusses the various activities and behavior that investors indulge in that may lead them to make wrong investment decisions. Wrong investment decisions lead to financial losses and mismanagement of portfolio. The markets are described explicitly and the likely decisions by investors discussed. The author gives the possible solutions to wrong decision making when dealing with long term investments. The psychological factors are mentioned. There are several scenarios of psychological factors that mislead investors into making wrong investment decisions.
The author focuses on how the investment industry works. He cites technology, industrial expansion and fast growing economies that investors look for as factors leading to poor returns on investments. Investors can also be lured into investing in over-priced equities and very competitive firms leading to heavy losses. The author gives investors advice on how the investment market should be handled. How they can make rational decisions that will help them make profits. The author gives tips on which markets are ideal for investments in the current state of the economy.
The book also focuses into the future investment world. The author gives a true picture of how the global investment market will be. He uses the theory that the developing economies will possibly overtake the developed economies as safe investment destinations. There will be a shift, where investors will now prefer investing in the developing nations, because the developing nations are safer places to invest than the developed countries. Stock for the Long Run is a vital book for all investors to read. This is because it helps them to understand market behavior, past market trends and possible future impacts comprehensively. This knowledge will help investors in their quest to create long term portfolio, which will be secure, safe and profitable. The book touches on every aspect of long term investment. This includes stock returns, past verdicts on long term investments and wealth creation using long run stocks. Other aspects covered include; changes in stock valuation in the short term period and favorable investing environments for stock investment in the economy.
The book has many strong points. It is actually a very comprehensive and informative guide to all investors. First, the book refers to historical analysis of financial data such as stock and return information to decide which strategies are the best. The strategies are decided upon after referring to the historical information, meaning they are well researched and calculated. The data may be used to make forecasts because there are trends that can be derived from the historical information. The book is also refers to the stock market information for over 200 years. This is a long time, implying that investors can study the available financial and stock market information over very long periods. The investors will be able to acquire the information they need easily because the stock investors are rarely interested in financial information spanning beyond ten years. This means any investor will study the information within his time period of interest. Therefore, this book develops practical strategies for the investors and financial market stake holders. The real practical information from the past financial periods allows the author to make appropriate inferences and conclusions. The strategies are suitable for investors from all over the globe and not only America.
The author uses the indexing approach to value the rate of return of different kinds of stock. This valuation method originates from comprehensive and elaborate study of the historical stock-return information. It informs the investor on how to plan and execute a successful long term investment. The book allows the investor to study the potential pitfalls and risks in the long term stocks investments. The author also provides appropriate advice to the investor on the various known investment challenges.
The diversification of investments and the historical information shows that investors should try and invest outside America with a proportion of their financial assets. The book provides strong evidence of how the stocks market in America has disintegrated. This has left the financial and stock market in America risky for investors. The investors can diversify by investing in external stock markets on the globe such as in China, Japan, United Arab Emirates and other developing or developed economies. This will significantly reduce the chances of the investors making losses in case there is a collapse in the American stocks market.
The other strong point is that the investors have relevant stocks to refer to when trying to identify somewhere to invest in. the book contains the information about almost all kinds of stocks in the American stocks market. The author gives an insight about the impacts of investing in the different kinds of stock. He relates the various stocks in a way which a potential investor will be able to assess the profitability of each stock. The historical information helps the investors make predictions of where the stock valuation will be headed in future. The author finally gives a comprehensive outlook of how the financial and stock market will be. This is important because investors will brace themselves for the potential hard times and prepare appropriate strategies to cope during those times.
However, the book has been in for a lot of criticism as well. Despite having a lot of historical information, the book does not give a clear picture of the stocks market. There are so many analysis errors in the book. The author’s wrong analysis of the stock market is likely to discourage investors from investing. The book was written back in time when the financial and stock market environment was quite different. That same analysis cannot be used in analyzing the stock market in 2011, after the 2008 global financial recession. Times have changed significantly, new market conditions have emerged hence; there should be new ways of analyzing these markets.
The author makes some theoretical assumptions which are not true in reality. The assumption that the more an individual or firm invests in stocks, the less risky it becomes is wrong. The investors should all be cautious with how they invest in these markets. Stock markets range from high risk to low risk depending on the kind of stock an investor buys. The more an individual buys a risky stock, the more risky it becomes. The more an individual buys low risk stock, the lower the risk compared to risky stock. Therefore, there is no relationship between quantity of the stock and its riskiness being inversely related.
The book alters how I think of long term stocks in several ways. First, that investing in long run stocks is more profitable than investing in bonds. Initially, many people thought that bonds are the best long run financial assets. However, with the well compiled historical information about stocks and bonds over the past two centuries, the idea of stocks being better than bonds in the long run is proved beyond doubt. The book also changes how I think of the subject of long run stocks through the styles of investment, valuation and global markets. Through this book, on is able to learn how to measure market value of bond and stocks. On learns how stocks change in value over time and due to what reasons.
The book also changes the mentality that the developed nations have the best financial markets. The book gives a clear explanation of how emerging financial markets such as China and India are growing fast and will be safe for American investors to invest abroad so as to diversify their portfolio in future. Finally, the books changes how I think about stocks by explaining how the environment of the economy affects stocks. Economic activities and results such as currency value, monetary policies and inflation result in different ways to the value of stocks. For example, inflation causes the currency to lose value. Subsequently, the valuation of stocks will fall since investors will make losses if they trade with a weak currency. There is also the emphasis on how world events and activities affect stocks. Bad events such as terrorist attacks will result in stocks losing value. The author also describes how stocks fluctuate in the short run. This changes the perspective that long run stocks yield a constant rate of return throughout the life of the stocks.
Works Cited
Siegel, Jeremy J. Stocks for the long run: the definitive guide to financial market returns and long-term investment strategies. 4, illustrated. London: McGraw-Hill Professional, 2008.
