Investments: Stock Market Essay

John Pierce ACG 6636 Book Review
The Future for Investors
I decided to read this book because I double majored in finance and accounting here at UCF, and have always been interested in the investment strategies. I have been investing in the stock market for almost three years and plan on getting my series seven later in life to invest clients’ money. So when I first saw this book at my parents’ house, and noticed it was endorsed by the one and only Warren Buffett, I thought it would be perfect.
The author of this great book is Jeremy Siegel. This book is organized into five parts. In part one and two you will learn about the growth trap and come to understand which investment characteristics you should seek and which you should avoid when buying stocks. In part three you will learn why dividends are crucial to your success as an investor. In part four you will see my vision of the future for our economy and financial markets, while part five will tell you how to structure your portfolio to prepare for the changes that we shall encounter.
In a world that stands on the brink of a radical transformation, the future for investors establishes a consistent framework for understanding world markets and offers strategies designed to protect and enhance your long-term capital.
In part one of the book author gives us the idea of the growth trap which means you need to look beyond the popular ratios about growth, company earnings, and future growth remember everything you and the world knows about a company is already priced into the stock. The author wants us to use dividend yield and price to earnings to find lower value stocks. The key to the authors theory is always be “reinvesting your dividends” when reinvesting your dividends in these low priced stocks your returns grow much larger. History shows this in the 1950’s – the early 2000’s. The author found that the stocks with the lower P/E ratio and higher dividend yields performed the best. S&P 500 began in 1923, in 1957 they had 500 stock from then till 2003 they average about 20 new stocks added each year. The author does research about the original 500 stock in his first portfolio “survivors” he sells the stocks that are taken out of the S&P 500 and reinvests the proceeds in the original stocks, his second portfolio “Direct descendants” he includes all merged firms but the others are sold and reinvested in the ones left, his third portfolio”total descendants” he never sells any of the original 500. He concluded from his research that these 3 portfolios beat the S&P500 by about 21%-26% from 1957-2003. Why did this happen? How could the new companies that fueled our economy growth and made America the preeminent economy in the world underperform the older firms? The answer is simple. Although the earnings, sales and even market values of the new firms grew faster than those of the older firms, the price investors paid for these stocks was simply too high to generate good returns. These higher prices meant lower dividend yield and therefore fewer shares accumulated through reinvesting dividends. Overpricing of stocks is key to the growth trap. Key point to the author’s theory over the 50 year study window is that even though the market cap is growing larger doesn’t mean our return on investment is growing. The basic principle of investor return states: the long-term return on a stock depends not on the actual growth of its earnings, but on the difference between its actual earnings growth and the growth that investors expected. We can conclude from this that we want to pick stocks with low P/E ratios. In the 50 year study the author found that the stocks with the lowest P/E ratio outperformed the index by 3 and ½ times greater than the wealth accumulated in the market. The stocks with the highest P/E ratio underperformed the index by about half. Dividend magnify effect: the power of the basic principle of investor return is magnified when the stock

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