Stocks for the Long Run (Jeremy J. Siegel)

• Stock outperform bonds in the long run because equity risk premium.
  • 2008: long period of stability -> reduction of risk premiums -> overleveraging -> boom.
  • Demographical problem: aging population, too many people retired, productivity of the developing world might not be sufficient.
    • I think automation will fill the gap, if developing world can't.
  • When balancing stock-bond portfolio for risk-adjusted return, the longer the time horizon, the higher will be the share of stocks.
  • When you add taxation, stocks look even better.
  • Indexes (DJIA, S&P500).
  • How stock price depends on earnings: discounted cash flows, Gordon Growth formula.
  • More valuation methods: CAPE, comparison to bond returns.
  • More on valuation: P/B, P/E, dividend yield, liquidity, growth vs. value.
  • Developing country stocks might have higher returns but also higher risk. Notably, correlation between real GDP growth of the country and stock returns is negative for both developed and developing countries (because investors overpay for growth).
  • Stocks are the best inflation hedge. For the long term they even work!
  • Stocks are correlated with the business cycle, in fact they usually anticipate it (although it's more likely that they predict it, not cause it). Anticipating the business cycle could lead to higher returns, and some people clearly do it (because the stocks move), but it's hard.
  • Other major market movements are sometimes related to world events, but there are also many moves that are harder to explain. In any case, anticipating those moves is even harder (generally).
  • There's also technical analysis and momentum investment. Both work in some cases for some people but generally you would be worse off. Lots of people do it nevertheless, and knowing that many investors do is useful.
  • Social dynamics, investor sentiment, mood, etc. affect the stock market, sometimes to a large extent. Paying attention to this and/or playing contrarian against the crowd can be a good strategy, but it's an advanced technique.
  • Matching the market returns is easy these days: index funds. It's possible to beat the market by picking stocks, narrow ETFs, etc., however most investors fail. Particularly, "a little learning is a dangerous thing".