Three weeks ago, Alexander Green reminded us that stocks beat gold, bonds and real estate as the ultimate inflation hedge. Friday, the “Wizard of Wharton” presented yet another batch of proof…

Jeremy Siegel is a professor of finance at the Wharton School of the University of Pennsylvania. He’s also the author of two books, “The Future for Investors” and “Stocks for the Long Run,” which The Washington Post named one of the “10 best investment books of all time.”

He appears frequently on CNBC and other networks, besides writing regularly for Kiplinger’s, The Wall Street Journal, Barron’s and The Financial Times.

Last week at FreedomFest, Siegel lectured about the economy and the financial markets. His comments reinvigorated my confidence in America’s future and our stock markets…

The Wizard of Wharton’s Best Investment

The “Wizard of Wharton’s” message was loud and clear: “Stocks remain your best investment for the long run. Neither bonds nor gold can match stocks if you have an adequate time horizon.” Given the bank and mortgage defaults and the depressing results of stocks this summer, his message was reassuring and full of optimism.

Jeremy Siegel’s findings, which are the product of years of academic research, captivated the audience. Take a look at some returns that caught my eye…

His research proves that over time, stocks are a superior investment to all other asset classes. Over the long term, stocks have returned 6.8% per year after inflation. Whereas gold has returned -0.4% (failing to keep up with inflation) and bonds have only a 1.7% return. After taxes, the outperformance of stocks is even greater.

Siegel’s Favorite Ratio for Evaluating Stocks

Professor Siegel said that his favorite ratio for evaluating stocks is the expected rate of return. He calculated this with the formula 1/PE (Price to Earnings Ratio). For example, with General Electric (NYSE: GE) trading at a PE of 12.78, the expected return would be 1/12.78, or a 7.8% return.

Moreover, Siegel suggested buying high-dividend-yielding stocks. His research shows that much of the returns of the market are the result of compounding dividends. His example of a quality dividend paying stock was Philip Morris (NYSE: MO). It was an original member of the S&P 500 when it was created in 1957. And it’s the best performing stock in the index since inception…

Thirty-three shares of Phillip Morris, bought in 1957 would be worth $8 million today. It goes to show the power of dividend reinvestment.

-He argued that given a sufficiently long period, stocks are less risky than bonds.

-After a holding period of 10 years, the worst performance for stocks was -4.1%, and -5.4% for bonds.

-With a holding period of 20 years, stocks have never lost money according to his calculations.
So as the major indexes continue to touch multiyear lows, hang tight. No one can tell you when stocks will move higher again, at least not with precision. But history shows us it will indeed happen.

In the meantime, just be sure to mind your trailing stops to protect your wealth.

Good investing,

Floyd Brown
Investment U