1-Sentence-Summary: Stocks for the Long Run delves into the subject of investing and the implications that come with picking securities, whether they’re stocks, bonds, or commodities, having in mind the generally higher returns of stocks over the years and how to build a balanced portfolio that can face times of crisis.
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Favorite quote from the author:
The economy is an ever-evolving mechanism that changes a lot throughout time. People have been making money from all sorts of activities, from work to politics, and recently, from i
nvesting in stocks. The stock market is a very volatile environment. It has the power to turn hundreds of dollars into thousands, and thousands into millions.
However, with a high return comes high risk. In this case, it’s the risk of losing all your savings on the back of one poor decision. Therefore, one must pick their stocks wisely and consider all variables before placing a trade. For this reason, Stocks for the Long Run explores how we can make wise investment decisions, pick winning stocks, and focus on the long-term rewards in the market.
History proves that stocks averaged a higher annual return than bonds over the past 210 years. In the last 60 years, and even more prominently after 2011, stocks have been rising at a remarkable pace. This phenomenon turned investors into millionaires in a relatively short time frame. This is a result of a balanced portfolio, good investment management, and time in the market.
For now, here are my three favorite lessons from the book:
- Although they are generally considered riskier investments, stocks can prove to be less risky than bonds.
- The price of stocks doesn’t necessarily reflect their intrinsic value.
- ETFs and value stocks are among the best investment opportunities.
Now, let’s take a look at each of these lessons and see what they have to offer!
Lesson 1: Stocks may not be as risky as they seem if you give the market sufficient time to prove their worth
In finance and economics, there is a universal conception that bonds are safer investments than stocks. If you look at them from a volatility ratio perspective, stocks will definitely fluctuate more than bonds, with no promise to deliver returns. In contrast to that, they can even wipe out your life savings if you’re not careful.
However, there are many factors to consider when investing in stocks over bonds. To start with, they’ve proven to be better investments over prolonged time frames, delivering higher returns than bonds, after inflation. Given a period of twenty years, Siegel suggests that any decent company will deliver positive returns for its investors.
Essentially, bonds are less volatile, but they deliver fewer profits over time, while sometimes they can’t even keep up with inflation. That’s because bonds move according to the interest rate, which sometimes doesn’t work in the investor’s favor. Let’s take the 1946-2001 time frame. During this period, stocks have produced an average return of 6,8% and gold had a -0,1% return. Meanwhile, bonds had an annual real return of -2,8%. Moreover, the data doesn’t include the average dividend rate of 4,6% annually.
Although it seems that stocks have more ups and downs, they are definitely less risky. That’s because the other securities can’t always keep up with the inflation rate. Let alone deliver a positive return for investors. Isn’t placing a possible winning trade less risky than placing an undeniably losing one?
Lesson 2: Stocks are not always priced according to their underlying value
The market is an efficient mechanism for placing trades
and finding stocks of all sorts. However, when it comes to the price of stocks, it may not always show the true value of a security. Investors have a tendency to switch from over-optimism to exaggerated pessimism, thus the volatility of this industry.
As such, an instrument has an intrinsic value, given by the value of the company (revenue, management effectiveness, profit margin, cash flow, and many other aspects) and the value of its stock price, which doesn’t necessarily reflect the first. A company listed on the stock exchange is rarely properly valued, and it is the investor’s job to determine whether a stock is worth buying or currently undervalued.
Stocks fluctuate for numerous reasons. Siegel suggests that the “noisy market hypothesis” is a good potential explanation for this. It states that stocks are being pushed away from their real prices by investors trading for unrelated purposes. These include tax harvesting, rebalancing portfolios, cutting losses, taking profits, and so on. One is better off keeping their money invested in the long run instead of panic selling in times of loss.
Lesson 3: Keep your money invested in ETFs and find value stocks
ETF stands for Exchange Traded Fund. It is a security that tracks an index, a commodity like gold or silver, or an industry. It also tracks other types of assets. This security trades like a stock and is publicly bought and sold on a stock exchange just like other regular shares.
The main advantage of such a security is its ability to withstand a market pullback, while also delivering remarkable returns for investors. For example, by investing in an ETF tracking an index made of companies, such as the famous S&P 500, you don’t just buy the shares of one company, but a small fraction of all 500 companies from the index. You can buy and sell an ETF during the market hours just like you buy a stock, and expect it to replicate the index perfectly, without you worrying about a thing.
Another type of investment the author praises is the value stock. Unlike a growth stock, which many expect to beat the market and grow exponentially, deliver remarkable returns, and usually overvalued so it presents a great risk, a value stock has other attributes. It is a stock of companies that have not yet been discovered, have strong and promising figures, stable management effectiveness and growth over the years, and most importantly, trade under their fair price.
Finding a value stock can be challenging. Especially so with all the funds and retail investors keeping an eye on the markets 24/7. You may think that there is no way to discover a value stock before it becomes mainstream. But if you look around for your favorite shop, service providers, promising businesses, or simply find companies that are publicly traded and look up their numbers, you’d be surprised of how much valuable information you can find.
The Stocks for the Long Run Review
Stocks for the Long Run is a must read for everyone who wants to take charge of their finances and become a good investor. The book comprises information that serves all beginner and intermediate investors, as it explains the basic principles of investing in securities on the money market, but also information on how to trade successfully and find winning stocks. If you’re ready to put your savings to work, invest in stocks, learn more about finance, and become a better money manager, this is the book for you.
Who would I recommend the Stocks for the Long Run summary to?
The 26-year-old who managed to save some money and wants to learn how to invest it early, the 22-year-old finance student who wants to expand their knowledge in the field, or the 45-year-old person who has their money in the market and wants to learn how to adjust their portfolio to withstand a crisis.