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Investors
by Jeremy Siegel
Kevin Kranzler
Lisa Lajeunesse
Ray Ng
John Schmidt
Agenda
Who is Jeremy Siegel?
Part 1: The Growth Trap
Part 2: Overvaluing the Very New
Part 3: Sources of Shareholder
Value
Part 4: The Age Wave
Part 5: Portfolio Strategies
Overall Book Review
Part 1
The Growth
Trap
Example
Table 1.1: Annual Growth Rates, 1950-2003
Growth Measures
IBM
Standard Oil of NJ Advantage
Revenue Per Share
12.19%
8.04%
IBM
Dividends Per Share
9.19%
7.11%
IBM
Earnings Per Share
10.94%
7.47%
IBM
Sector Growth
14.65%
-14.22%
IBM
2.18%
5.19%
Total Return
13.83%
14.42%
Standard Oil
of NJ
Standard Oil
of NJ
What matters!
Long-term returns on stock
depends not on the actual
growth of its earnings but on
how those earnings compare to
what investors expected!
1957 Initial
Investment
$1,000
$1,000
$1,000
Characteristics of Corp El
Dorado's
Earnings expectations are only
slightly above average, but actual
earnings growth was considerably large
No P/E ratio was above 27
All paid constant and rising dividends
Most have high quality brand name
recognized products that are marketed
worldwide
Consumer have trust in their product
quality
Annual
Return
19.75%
16.51%
16.36%
16.11%
16.03%
16.02%
15.90%
15.54%
10.85%
Sector Growth
Investment strategies based
on industry/sector are
growing in popularity
Morgan Stanley & Goldman
Sachs
Summary
Do not be seduced by that hot
new company or investors
Overwhelming demand for
stocks overvalues those
stocks which lowers the
return for investors
Part 2:
Overvaluing the Very
Few
Creative Destruction
Innovative entry by entrepreneurs is
the force that sustains economic
growth
- wikipedia.com
Investors in IPOs are actually not
making money (the ground floor)
If the new are not making money for
investors then who is attaining
profits?
Venture Capitalists
Investment Banks
Capital Pigs
Technology is a productivity
creator, and a value destroyer
Profits reinvested into the
company is money that is not
paid out in dividends,
destroying investor return
Fallacy of Composition
Capex Ratio
Success Amongst
Failure
Wal-Marts Strategy for
Success
Southwest Airlines low cost
structure
Nucor Steel use of new
technology
Winning Management
consistency of the company, and our
ability to project its philosophies
throughout the whole organization,
enabled by our lack of layers and
bureaucracy
The business structure should look
to always minimize costs
Define the largest controllable cost
and minimize it, this is a companys
competitive advantage
Summary
Never forget the fundamentals of
investing
Watch out for bubbles
IPOs are a bad investment for
investors,
Individual company analysis is
important; look for
Lower Capex Ratios
Low P/E ratios
Winning management
Part 3:
Sources of
Shareholder value
Purpose of Dividends
Provides credibility
High Accruals
Indicate low quality earnings
Summary
There is a positive
correlation between dividends
and returns
There are numerous ways to
value a company
Part 4:
The Age Wave
Problems
Lower productivity from decreased
workforce
Increased demand from more retirees
Retirees sell their assets during
retirement
Flood of financial assets on market
Drive prices of equities and bonds down
Securities value is determined by
price buyer is willing to pay
More Problems
Retirement age is decreasing
People are living longer
Results in longer non-working
time
Greater pension/planning needs
Fastest age bracket growth is
age 100+
Possible Solutions
Reduce benefits of pension
plans
Decrease the standard of living
Creates generational conflict
Increase Productivity
Offsets the population imbalance
Difficult to
create/predict/depend on
Possible Solutions
Increase Immigration
Increase productivity
400 million people will be
required to offset the
population wave
Summary
Baby boomers retirement poise
a difficult transition period
for investors
Investors must seek a global
solution
Part 5:
Portfolio
Strategies
World Portfolio
Recommended Allocation
60% American-based equity
40% foreign-based equity
Future Strategies
Future is bright for
investors
Growth in emerging markets
Future stock performance
Stocks to purchase
Initially broadest index
possible
D-I-V Directives
D-I-V Directives
Dividends
International
Valuation
Summary
Summary