Common Stock Legend: Professor Siegel’s Epiphany

On April 26, 2020 at the Milken Institute in Los Angeles, California, at the Milken Institute Global Conference for 2006, the topic “Baby Boom — Baby Bomb?” was debated by Michael Milken, Chairman of the Institute, and Professor Jeremy Siegel, of the Wharton School, University of Pennsylvania. The debate was moderated by Paul Gigot of the Wall Street Journal.

This debate was of such significance as to be featured in BusinessWeek on June 5, 2020, in the article, “When Boomers Cash Out: A buy-and-hold legend sees tough times ahead.”

The Guru of Common Stocks

Professor Jeremy Siegel is the Guru Maha Esa of the Common Stock Legend, having in 1994, during the rising euphoria of the Great Bubble, authored the run-away best-seller, “Stocks for the Long Run“, declaring, ex cathedra as it were, that based on ’scientific evidence’, it could be shown that stocks hold and gain value better than any other type of investment, with lower risk, long-term, than bonds, and that a strategy of buying-and-holding equity mutual funds was recommended for the ordinary man’s retirement savings.

This is the Common Stock Legend in its purest form.

This high-level academic endorsement of equity mutual funds influenced investment decisions of millions of Americans saving for retirement.

Two Pillars Support Stock Prices

The Common Stock Legend has directed the behavior of millions of investors in equity mutual funds and is one of the two pillars that have supported equity prices for a generation, the other being the massive corporate buyback programs that give value to executive stock options.

Now, anything that could possibly shake belief in the Common Stock Legend among the great masses of ordinary investors, poses a serious threat to price levels in the stock market, not in ten or twenty years when the Baby Boomers cash out, but today.

As shown elsewhere on this site, even after the Crash of 2000, stocks are still significantly over-valued in terms of historical perceptions of intrinsic value before the mass marketing of mutual funds to unsophisticated investors.

See: Valuation of Equities

Professor Siegel’s Epiphany

Professor Siegel is not just an academic in an ivory tower.

He is the “Wizard of Wharton”, featured on Yahoo! Finance and Kiplinger’s Personal Finance, considered by Jim Cramer of MNBC Mad Money as “one of the great ones”, hailed by the Financial Analyst Institute as someone “of such significance as to change the direction of the profession”, praised by none other than the Sage of Omaha, Warren Buffet, and lionized by countless TV financial newscasters.

When Professor Siegel speaks about the stock market, people listen.

In the Milken Institute debate, Professor Siegel explained that having spent years on the lecture circuit (often paid for by mutual fund marketers), he kept getting the same question from his audiences,

“What happens when the Baby Boomers retire and have to sell their assets?”

Finally, when he got around to thinking about this question, he experienced an epiphany, deciding that perhaps “stocks for the long run” were not such a good idea after all.

At the Milken Institute debate, he said that, according to his computer models, when Baby Boomers retire, stock prices could fall 40%-50% unless younger investors come from India and China to buy stocks from aging Americans.

He also said that he didn’t believe that either productivity gains or immigration could prevent this outcome.

It is not clear exactly how and when Professor Siegel came to his epiphany, for indeed, as recent as his March 2005 book, “The Future for Investors“, he still seemed to be of the opinion that the retirement of Baby Boomers would not cause the stock market to crash.

The Impact of Professor Siegel’s New View of Equities

No one can say for sure whether Professor Siegel will stick to his new, pessimistic view of the future of equities, and if he does, whether he will continue to have as much influence on investor behavior as before.

After all, from his web site it is evident that Professor Siegel is actively engaged in the business of selling speaking engagements.

I can not imagine that many sponsors of financial seminars will be excited about hiring someone who preaches that the market may fall as much as 50% when Baby Boomers retire, unless Chinese and Indian investors buy up their stocks.

In fact, if I were still a stockbroker, I would probably cross Professor Siegel off my speakers list as being bad for business. Why scare away the customers?

But Professor Siegel says he is writing a new book about his new views and he is likely to get it published.

As capital flow analysts, the thing we need to watch out for is any sign of a shift in investor behavior regarding long-term investment in stock mutual funds. In other words, will the Common Stock Legend continue to hold sway?

Note: I share Professor Siegel’s skeptical view regarding the future of much of the U.S. equity market, although I don’t follow his reasoning that salvation for unsophisticated American investors lies in selling over-priced stock with risible dividend yields to gullible Chinese and Indians. I believe that the Asian peoples are smarter than that.


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