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Investment Strategies from Warren Buffet’s Advisor

Posted February 4, 2008

"When Jeremy Siegel speaks, Warren Buffett listens!" — Mark Skousen

by Mark Skousen, The Sovereign Society

Baltimore – (TFN):  I’ve met a lot of investment gurus over the years, but no one has impressed me more than Jeremy Siegel, known as the “Wizard of Wharton.” He’s an absolute genius in assembling financial data and coming up with surprising results.

I rank him right up there with Warren Buffett. (In fact, they are friends who get together every year to discuss the markets and the global economy. When Jeremy Siegel speaks, Warren Buffett listens!)

I first met Professor Siegel when I interviewed him for Investment U, and we hit it off right away. Last month, I stopped by his office in Philadelphia and he handed me an autographed copy of the 4th edition of his classic book, “Stocks for the Long Run.”

This handbook has quickly become the definitive guide for intelligent investing. It’s ten times better and more readable than anything Ben Graham wrote. It contains some of the most fascinating graphs you will ever see. And the 4th edition has plenty of new material.

Here are seven shocking conclusions that I gathered in reading it:

1. Investing abroad is essential. “Sticking only to U.S. equities is a risky strategy for investors.” A survey of stock markets of 16 countries showed that foreign stocks have equaled the long-term return of the U.S. market despite wartime dislocation, hyperinflation, and depression. “Stock returns in the United States, although quite good, were not exceptional.”

2. Don’t be too optimistic. With the increasing popularity of foreign investing, Siegel predicts that today’s globalized world will result in higher price-earning ratios, but as a result, average returns are going to be lower for foreign stocks.

3. This technical system works! The only technical system that has really worked to beat the market over the long run is the “Dogs of the Dow” strategy, picking the top 10 highest-dividend-paying Dow stocks. No system works every year, but Siegel found that this Dow 10 technique has staying power. (I've used a version of this strategy since 1992, and I agree, it really does work most of the time. See today’s Crib Sheet for the current top-paying stocks in the Dow.)

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4. Stay away from this popular stock category: tech and biotech (with few exceptions). “Most technology stocks have greatly under performed the market.” The few winners (such as Microsoft or Merck) can’t make up for the huge number of losers. Siegel calls this “The Growth Trap.”

5. Avoid most, but not all, IPOs. According to a study by Siegel of IPOs between 1968 and 2001, nearly 80% of new stock issues under-performed the stock market index. (The other 20%, of course, can make you a small fortune. These are companies that actually turn a profit, and put their IPO proceeds to good use, like MasterCard – up more than 300% since its debut in 2006.)

6. Dividends are a better indicator of future stock performance than earnings. Earnings can be manipulated by depreciation schedules, sales of assets, and other hidden factors. But dividends don’t lie. According to Siegel’s extensive studies, the best way to beat the market is to invest in high-dividend “value” stocks with low P/E ratios. “These high-dividend strategies have provided investors with higher returns and lower volatility over the past five decades.”

7. Use Exchange Traded Funds (ETFs) to increase and protect your profits. Siegel calls ETFs “the most innovative and successful new financial instruments” since stock options and commodity futures were created in the 1970s.

I agree 100% with Jeremy. I especially like the ETFs that specialize in shorting the market. Now you no longer have to open a margin account, borrow stock, or work with a broker.

ProShares specializes in these short ETFs, allowing you to conveniently short the market, even with leverage, in various country indexes and sectors, such as real estate, financials, China, etc. I used three of these short ETFs to make double-digit profits in January. Just go to www.ProShares.com to see their list of funds.

In short, sifting through tons of data has certainly paid off for Professor Siegel. And if Warren Buffett is listening to him, we should be, too.

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