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  • "The market can remain irrational longer than you can remain solvent" - John Maynard Keynes

    Wednesday, April 23, 2003

    Having recently read the latest work based on Jeremy Siegel's Stocks for the Long Run, I read an interesting (and wrong headed) article Should you give up on stocks?. I was trying to get my head around why Zvi Bodie was asserting that you shouldn't investin in stocks, that there was only 120 years of data on the markets and that a bear market could go on indefinitely (like tossing a coin 20 times and always getting tails). Well the coin toss gave it away; Zvi is talking about efficient markets. He is assuming that each year a bear 'v' bull market is based on some probability and not valuations. He is suggesting that stocks are very risky and over long periods of time you could reasonably end up with significantly less capital than you started with, he then suggests that you consider TIPS instead.

    I was concerned to see that the article states the historical market average is 10.7%, Siegel doesn't think so (7% per year). Near the end of the article he asserts that most companies over estimate their pension returns and therefore they should be invested in TIPS. I think TIPS are a great idea (not necessarily great investment); I'm curious if based on back testing TIPS would provide a better or worse return than a standard bond laddering strategy. TIPS pay a fixed percentage and based on inflation they pay an additional interest rate. None the less the returns of $1 invested in Bonds since 1801 was $1070, stock was $462,502 in 1801 dollars. Bodie could have taken a few minutes to read Jeremy's book.

    Bodie also suggests "look for jobs that offer traditional pensions". With all of the changes that the government is instituting in pension plans I would be very worried. In addition many large companies have under funded pensions, If I was a CEO I would be (or will be in the future) lobbying to get the law changed to support occasional erosions in these pension plans eventually leading to much lower returns for retires than currently promised. Aside from the fact that Ivory Tower Bodie is pushing people into the Steel, Airline, Textiles or other similar failing industry; there isn't likely to be any money left in these industries in 30 years time.

    If you can't manage your own money then you have far to little control over your life, if there is any education everyone should have, it is at least the capability to evaluate investments. Rich Dad Poor Dad, advocates financial education and provides a reasonable framework to evaluate your financial options. Having read John Reed's and Slate's critique of Rich Dad, I am a lot less enamored by it. I still think however, that there is a lot of value in the core messages.

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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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