An Interview With Jeremy Siegel: Masters in Business (Audio)

Episode Summary

Executive Summary: Barry Ritholtz interviews Jeremy Siegel about long-term investing, market valuation, and the case for equities. Siegel argues that while macro shocks matter, patient investors usually benefit from staying invested, especially when valuations and interest rates are considered. He explains why CAPE looks distorted by accounting changes, defends dividend income, critiques IPOs and excessive regulation, and praises the Fed’s crisis response. He also makes the case for global and emerging-market exposure and for fundamental indexing over cap-weighted portfolios in overheated markets.

Main Topics: Long-term investing and macroeconomics (Priority: 5/5): Siegel says macro shocks like recessions and financial crises matter greatly in the short run, but long-term investors benefit from patience, indexing, and avoiding panic selling. Market valuation, bubbles, and interest rates (Priority: 5/5): He argues current market valuation is only modestly elevated, and low rates make equities relatively attractive versus bonds; he cites tech bubbles as examples of true excess. CAPE ratio criticism and accounting distortions (Priority: 5/5): Siegel explains why he thinks Shiller’s CAPE has overstated overvaluation in recent years due to mark-to-market accounting and unusually depressed recession-era earnings. Stocks for the long run: diversification, mean reversion, and dividends (Priority: 5/5): He reiterates that stocks outperform bonds over long horizons, can be less volatile over long periods, and that dividends plus buybacks are central to total return. Fundamental indexing and smart beta (Priority: 4/5): Siegel defends capitalization-weighted indexing as efficient in normal markets but argues fundamental indexing better avoids overconcentration in overheated sectors. Market structure, IPOs, and regulation (Priority: 4/5): He is skeptical of IPOs as a group, says going public has become more burdensome, and believes regulation and compliance may be weighing on productivity and market dynamism. Fed crisis response and policy lessons (Priority: 4/5): Siegel strongly credits Bernanke and the Fed for preventing a second Great Depression by supplying liquidity and stabilizing banks and markets.

Key Arguments: Macro matters because recessions and financial crises hit both GDP and asset prices, but investors who hold diversified portfolios for decades can still do very well. True market bubbles can be identified by extreme multiples; Siegel cites Nasdaq’s 600x earnings level in 2000 as clearly unsustainable. Low bond yields raise the equity risk premium, making stocks comparatively attractive even when valuations are above average. CAPE became less reliable after accounting changes in the 1990s, especially mark-to-market rules that depressed recession earnings and distorted the denominator. Stocks have historically returned about 6.5% to 7% after inflation over long horizons, and over long holding periods they can become safer than bonds due to mean reversion. Fundamental indexing is not active stock picking, but a rules-based alternative that reduces exposure to overpriced sectors and better tracks economic fundamentals. Dividends are preferable to buybacks, but buybacks are better than wasting cash on empire-building acquisitions; ideally dividends should be taxed more favorably. IPOs as a broad category have not beaten small-cap indexes after accounting for losers, and the burden of going public plus compliance may be discouraging public listings. Bernanke’s Fed response during 2008-09 was crucial in preventing systemic collapse; liquidity backstops and emergency lending were necessary. Emerging markets may be attractive when currencies and valuations are both low, especially for a 3- to 5-year horizon.

Data Points: Years teaching: 44 years - Siegel says he has taught for 44 years and is now on reduced teaching load. Students taught: Over 10,000 - He estimates he has taught more than 10,000 students over his career. Wharton tenure: 40th year - He says he is in his 40th year at Wharton. Financial crisis equity decline: 65% - Siegel cites the stock market decline from October 2007 to March 2009. Great Depression stock decline: 85% to 90% - He references the 1929-32 collapse as the worst in world history. S&P 500 P/E: About 16 to 18 times earnings - He describes the market as only slightly elevated, depending on the earnings estimate used. Nasdaq P/E in 2000: About 600 times earnings - He uses this as his example of a real bubble. S&P 500 earnings outlook: 120 to 125 next year - He says this forecast would imply a more normal valuation multiple. Expected stock return: Around 6% real - His forward-looking estimate after inflation. Expected equity risk premium: About 5% - He says the margin over bonds is currently above the historical average. Historical equity risk premium: 3% to 3.5% per year - He cites the long-run average spread of stocks over bonds. Long-run real stock return: 6.5% to 7% - Historical after-inflation return cited from his research. Dividend payout ratio historically: Two-thirds of earnings - He says firms used to pay out much more of earnings as dividends before the 1970s/80s. Current dividend payout ratio: One-third of earnings - He says buybacks have replaced dividends over time. S&P 500 dividend yield: About 2.1% - Current dividend yield mentioned in the discussion. 10-year Treasury yield: About 2.1% - Used to compare stocks versus bonds in a low-rate environment. 30-year Treasury yield: A little over 1% - Siegel cites this as supporting the attractiveness of equities. CAPE coverage period: 1871 onward - He notes the CAPE methodology relies on a long earnings series back to 1871. CAPE valuation distortion period: 2008-2009 earnings near zero - He argues recession accounting rules distorted the denominator. CAPE-based scorecard: 16 of the last 309 months below historical average - A data point from his research team showing CAPE’s limited recent usefulness. S&P 500 return since that period: 925% total return - Used to argue CAPE signaled overvaluation too often. Student debt: $1.2 trillion - He cites rising student debt as a burden on younger workers. Previous student debt level: $300 billion - He says student debt roughly quadrupled over about a decade. WisdomTree assets: $55 billion to $60 billion - Siegel discusses the firm where he is an advisor and shareholder. WisdomTree market cap: About $2.2 billion - He references the company’s public valuation. Index Development Partners stock price: 4 cents to $1.50 the next day - He recounts the early market reaction after joining the firm. Index Development Partners later price: Up to 27; down to 40 cents in the crisis; about 15 later - He describes volatility in the company’s stock over time. Crisis liquidity support: About a trillion dollars - Siegel says Bernanke flooded the system with liquidity through Fed facilities.

Pivotal Quotes: "you can't give him 12 seconds for a soundbite. He needs a little time to flesh out an answer." — Barry Ritholtz: Barry explains why Siegel’s depth works better in podcast format than on television. "CAPE has done a fantastic job at forecasting 10-year returns until the last 10 years when I think it has gone off the rails." — Jeremy Siegel: He summarizes his criticism of the CAPE ratio’s recent reliability. "we will not make that mistake again." — Jeremy Siegel: He quotes Bernanke’s 2002 pledge, which Siegel sees as central to the Fed’s crisis response.

Implications: For investors, the episode reinforces staying diversified, watching valuation, and not overreacting to macro noise. It also suggests that rules-based fundamental indexing, global diversification, and a focus on dividends may be better long-term tools than chasing hot sectors or IPOs.