Wall Street Journal reporter Jason Zweig wrote an article attacking the 200+ years worth of stock market return data used in Jeremy Siegel's classic book, Stocks for the Long Run. The piece got wide play especially online at market-timing advocacy blogs and among active money managers. These are folks that love any news that supports market timing and which destroys the notion of buying and holding good investments. This made me suspicious about Zweig's piece, especially because I know WSJ reporters always have writing deadline pressures and Zweig admits in his original piece that Siegel didn't get back to him in time for Siegel's response to the accusations.




Here's the background. In Zweig's article, he states, "There is just one problem with tracing stock performance all the way back to 1802: It isn't really valid."

Zweig discussed two supposed problems with Siegel's data from the 19th century:

• it's based on too few stocks in too few industries
• it overstates stocks' actual returns 

Zweig summarizes: "What, then, are the odds that stocks will continue to lag behind bonds for the long run? The sad truth is that history can't tell us the answer. The 1802-to-1870 stock indexes are rotten with methodological flaws. So we have only the period since then, or four distinct and complete 30-year stretches of stock returns, to base our long-term investment decisions on. Another emperor of the late bull market, it seems, has turned out to have no clothes."

That's a mighty bold and condemning statement. Zweig dismisses more than a third of the 200 year period of stock market return data used by Siegel is his book.

Since I've read and reviewed Siegel's work and books for nearly two decades, I called Siegel to ask for his response. Siegel sent me the following response and supporting analysis which pretty much demolishes Zweig's original piece:

 
Recently Jason Zweig (July 11) has questioned the quality of my early 19th century stock data that I use in my book, Stocks for the Long Run.  Although he has no problems with the data or my analysis of the stock market since 1871, he oddly concludes that "the emperor of the late bull market has no clothes."

But it is Zweig who is running naked as he shows his ignorance of the recent research on historical US stock data. My first studies were indeed based on the path-breaking research of Prof. William Schwert of the University of Rochester, who published a paper in 1991 entitled, "Index of U.S. stocks prices from 1802 to 1897."

Admittedly Schwert's data, as Zweig indicates, has been questioned before. That is until two of the top researchers in the field of US stock return, Bill Goetzmann and Roger Ibbotson, have published a more recent article entitled "A New Historical Database for the NYSE 1815 to 1925: Performance and Predictability". This work is by far the most thoroughly documented research on early US Stock returns, collecting monthly price and dividend data on more than 600 individual securities over more than a century of data.

This was a prodigious effort.  They reported that it took their research team more than a decade of effort to track down individual share prices and dividends, mostly from original publications found in Yale's Beinecke Rare Book Library.  The data that they collected is free from the survivorship bias and other problems that Zweig cites in his critique of Schwert's data.

Ibbotson and Goetzmann determined that the biggest source of uncertainty in these early data is the dividend yield, since many of the sources from which they obtained stock prices did not report dividends.  As a result they formed two series of dividend yields, one assuming that those stocks for which they could not find dividends had zero dividends (their "low income" estimate), and another which uses the dividend yield of those stocks for which they could find dividends (their "high income estimate").

They write, "The low income returns from the pre-1871 period is 3.77% per year. .... When we consider only the dividend paying stock during that era, however, we estimate much higher income returns: 9.27% per year.  This higher income return estimate is consistent with the practice of paying out profits to keep stock prices in the early period trading near par values. The true dividend return to a capital-weighted investment in all NYSE stocks is undoubtedly somewhere in between these two extremes."

This midpoint of their high and low estimates is 6.52%. The dividend yield for the early data that I published in Stocks for the Long Run, and which Zweig criticizes is 6.4%.  Furthermore, their estimate of the capital gains of stocks during the period is actually slightly higher than the 0.3% per year estimate that I used.

I state in Stocks for the Long Run that the last 30-year period in which bonds beat stocks was from 1831 through 1861.  No data have ever contradicted that. Furthermore, stocks, in sharp contrast to bonds, have never over any 20 year period or longer given negative after-inflation returns.

That is quite a record, and Zweig does not disagree with either of these statements.  Nor does he disagree with any of my analysis of the data over the past 130 years.  




 

Copyright Eric Tyson, 2008 - 2010 all rights reserved.

Eric Tyson is the only best-selling personal finance author who has an extensive background as an hourly-based financial advisor and who does not accept speaking fees, endorsement deals or fees of any type from companies in the financial services industry or product or service providers recommended in his articles, books and his publications.