Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies,

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The long-awaited revised edition of the stock trading classic gets you fully up to date on value investing, ESG investing, and other important developments The definitive guide to stock trading, Stocks for the Long Run has been providing the knowledge, insights, and tools that traders need to understand the market for nearly 30 years.  It’s been updated with new chapters and content on: The role of value investingThe impact of ESG―Environmental/Social/Governance―issues on the future of investingThe current interest rate environmentFuture returns investors should expect in the bond and stock marketsThe role of international investingThe long-run risks on equity marketsThe importance of black swan events, such as a pandemic and the financial crisis You’ll also get in-depth discussions on the big questions investors face: Is international Investing dead? What do global changes like climate change mean for markets wo0rldwide? Consult this classic guide to master the stock market’s behavior, past trends, and future forecasts, so you have all the tools you need to develop a powerful long-term portfolio that’s both safe and secure. Cover Title Page Copyright Page Contents Foreword Preface to the Sixth Edition Acknowledgments PART I VERDICT OF HISTORY Chapter 1 The Case for Equity: Historical Facts and Media Fiction “Everybody Ought to Be Rich” Asset Returns Since 1802 Historical Perspectives on Stocks as Investments The Influence of Smith’s Work Irving Fisher’s “Permanently High Plateau” A Radical Shift in Sentiment The Postcrash View of Stock Returns The Great Bull Market of 1982–2000 Warnings of Overvaluation Late Stage of Great Bull Market 1997–2000 To the Top of the Technology Bubble The Bubble Bursts From Tech Bust to Financial Crisis Optimism, Pessimism, and Psychology Chapter 2 Asset Returns Since 1802 Financial Market Data from 1802 to the Present Very Early Stock Market Data Total Asset Returns The Long-Term Returns of Bonds Gold, the Dollar, and Inflation Total Real Returns Real Returns on Fixed-Income Assets The Continuing Decline in Fixed-Income Returns The Equity Risk Premium Worldwide Equity and Bond Returns Real Estate Returns Market-Determined Returns Volatility of Real Estate Returns Summary of Real Estate Returns Conclusion: Stocks for the Long Run Chapter 3 Risk, Return, and Portfolio Allocation: Why Stocks Are Less Risky Than Bonds in the Long Run Measuring Risk and Return Risk and Holding Period Standard Measures of Risk Random Walk Theory Volatility Measured from Historical Data Correlation Between Stock and Bond Returns Risk-Return Trade-Offs Stock-Bond Allocation Fundamental Considerations The 60/40 Retirement Portfolio Conclusion Chapter 4 Global Investing: Disappointment and Promise The Japanese Market Bubble Emerging Markets Bubble The World of Equities 2021 International Stock Returns Diversification in World Markets Should You Hedge Foreign Exchange Risk? Sector Allocation Around the World Conclusion PART II STOCK RETURNS: MEASUREMENT AND VALUATION Chapter 5 Stock Indexes: Proxies for the Market Market Averages The Dow Jones Averages Computation of the Dow Index Long-Term Trends in the Dow Jones Industrial Average When Are Times Really Different? Value-Weighted Indexes Standard & Poor’s Index Nasdaq Index Other Stock Indexes: The Center for Research in Security Prices (CRSP) Return Biases in Stock Indexes Why the Average Stock Is a Loser While the Stock Market Is a Winner Appendix: What Happened to the 1896 Original 12 Dow Industrials? Chapter 6 The S&P 500 Index: More Than One-Half Century of US Corporate History Sector Rotation in the S&P 500 Index The Performance of the S&P 500 Index Versus the Original Stocks Top-Performing Firms Top-Performing Survivor Firms What Happened to “Top Dogs” of the Market? Conclusion Chapter 7 Sources of Shareholder Value: Earnings and Dividends Discounted Cash Flows Sources of Shareholder Value Historical Trends in Earnings and Dividends The Gordon Dividend Growth Model of Stock Valuation Discount Future Dividends, Not Earnings Earnings Concepts Earnings Reporting Methods Historical Earnings Trends: A Comparison Conclusion Chapter 8 Interest Rates and Stock Prices Real Interest Rates and Stocks Determinants of Real Interest Rates Economic Growth Population Growth Aging of Population Productivity Decline in Growth of Per Capita GDP Other Impacts of Slower Economic Growth Time Preference Risk Aversion Hedge Qualities of Bonds Negative Beta Assets The Role of the Monetary Authority Interest Rates and Stock Prices Conclusion Chapter 9 Inflation and Stock Prices Money and Prices Money and Inflation Stocks as Hedges Against Inflation Why Stocks Fail as a Short-Term Inflation Hedge Nonneutral Inflation Supply-Side Effects Taxes Capital Gains Taxes Corporate Tax Distortions Conclusion Chapter 10 Yardsticks to Value the Stock Market An “Evil Omen” Returns Dividend Yield and Buybacks Yardsticks for Valuing the Market P/E Ratio Earnings Yield The CAPE Ratio The Fed Model, Earnings Yields, and Bond Yields Stock Market Value, GDP, and Profit Margins Book Value, Market Value, and Tobin’s Q Profit Margins What Is the Right Valuation of the Market? A Fall in Transaction Costs Other Factors Raising Valuation Ratios The Equity Risk Premium Conclusion PART III MARKET EFFICIENCY AND VALUE VERSUS GROWTH Chapter 11 Which Stocks for the Long Run? Which Stock? Standard Oil and IBM Which Country? GOAT: Greatest of All Time Source of Philip Morris Outperformance Other “Near-Death Experiences” That Turned to Gold It’s What You Know for Sure That Ain’t So Conclusion Chapter 12 Is Value Investing Dead? Value Investing Earnings, Dividends, and Book Value The Dow 10 Strategy Underperformance of Value Stocks Explanations for the Post-2006 Value Downturn Has the Premium Been Arbitraged? Discount Rate Technology Big-Cap Growth Stocks The Future of Value Versus Growth Conclusion Chapter 13 Market Efc fi iency or Noisy Markets? The Efficient Market Hypothesis The Noisy Market Hypothesis Deviations from Market Efficiency Irrationality Versus Liquidity Restrictions on Short-Selling The Market Portfolio Intertemporal Risks Skewed Response to Gains and Losses Conclusion Chapter 14 The “Factor Zoo”: Size, Value, Momentum, and More Major Market Factors Longer-Run View of Size, Valuation, and Momentum Factors Size Factor Unusual Features of Small Stock Premium Small Stocks and Value Stocks International Size and Value Investing Momentum Investment and Share Issuance Profitability Other Quality of Earnings Factors Low Volatility Investing Liquidity Investing International Factor Investing Conclusion PART IV STYLES, TRENDS, AND THE CALENDAR Chapter 15 ESG Investing Profits Versus Value ESG Investing Corporate Earnings and ESG Rating Valuation Enhancement and ESG Status Future Returns for ESG Stocks ESG and Portfolio Selection Past Is Not Always Prologue ESG as Climate Risk Hedges Reflections on the Friedman Doctrine Conclusion Chapter 16 Technical Analysis and Investing with the Trend The Nature of Technical Analysis Fundamentals of Technical Analysis Charles Dow, Technical Analyst The Randomness of Stock Prices Simulations of Random Stock Prices Trending Markets and Price Reversals Moving Averages Testing the Dow Jones Moving-Average Strategy The Dow Industrials and the 200-Day Moving Average Avoiding Major Bear Markets Distribution of Annual Returns Conclusion Chapter 17 Calendar Anomalies Seasonal Anomalies The January Effect Causes of the January Effect The January Effect Has Disappeared Predictive Power of January Monthly Returns The September Effect Reasons for the September Effect Other Seasonal Returns Day-of-the-Week Effects Conclusion: What’s an Investor to Do? PART V THE ECONOMIC ENVIRONMENT FOR STOCKS Chapter 18 Money, Gold, Bitcoin, and the Fed History of the Gold Standard The Establishment of the Federal Reserve The Fall of the Gold Standard Postdevaluation Monetary Policy Post-Gold Monetary Policy The Federal Reserve and Money Creation How the Fed’s Actions Affect Interest Rates Stock Prices and Central Bank Policy Bitcoin: The New Money? Characteristics of Money Assessing the Qualities of Monetary Assets Macroeconomics of Cryptocurrencies Conclusion Chapter 19 Stocks and the Business Cycle Stock Retuns and the Business Cycle Who Calls the Business Cycle? Dating the Business Cycle Stock Returns Around Business Cycle Turning Points Gains Through Timing the Business Cycle How Hard Is It to Predict the Business Cycle? History of the Ability to Predict Recessions Has the Business Cycle Been Conquered? Conclusion Chapter 20 When World Events Impact Financial Markets Largest Market Moves Big Moves and News Events What Causes the Market to Move? Uncertainty and the Market Democrats and Republicans Correlation Does Not Imply Causality Politics and Stock Returns Stocks and War Markets During the World Wars Post-1945 Conflicts Korea and Vietnam The Gulf War I Gulf War II and Afghanistan Conclusion Chapter 21 Stocks, Bonds, and the Flow of Economic Data Economic Data and the Market Principles of Market Reaction Information Content of Data Releases Economic Growth and Stock Prices The Employment Report The Cycle of Announcements Inflation Reports Core Inflation Employment Costs Impact on Financial Markets Central Bank Policy Conclusion PART VI MARKET CRISES AND STOCK VOLATILITY Chapter 22 Market Volatility The Stock Market Crash of October 1987 The Causes of the October 1987 Crash Exchange Rate Policies The Futures Market Circuit Breakers Flash Crash, May 6, 2010 The Nature of Market Volatility Historical Trends of Stock Volatility The Volatility Index The Distribution of Large Daily Changes The Economics of Market Volatility Conclusion Chapter 23 The Great Financial Crisis of 2008–2009 The Week That Rocked World Markets Could the Great Depression Happen Again? Rumblings of Financial Crisis The Great Moderation Subprime Mortgages The Crucial Rating Mistake Regulatory Failure Overleverage by Financial Institutions in Risky Assets The Role of the Federal Reserve in Mitigating the Crisis The Lender of Last Resort Springs to Action Should Lehman Brothers Have Been Saved? Economic and Financial Impact of Great Financial Crisis Impact on Real Output Financial Markets Impact on Earnings The Short-Term Bond Market and LIBOR Conclusion: Reflections on the Crisis Chapter 24 Covid-19 Pandemic Perception Versus Reality Central Bank Monetary Expansion Alternative Financing of the Fiscal Stimulus Missed Forecasts and Understated Inflation Effect of Inflation on Stocks and Bonds Stock Valuations During and After the Pandemic Commodity Prices Real Estate Prices Permanent Changes in the Economy Conclusion PART VII BUILDING WEALTH THROUGH STOCKS Chapter 25 How Psychology Can Thwart Investment Goals The Technology Bubble, 1999–2001 October 1999 March 2000 July 2000 November 2000 August 2001 Behavioral Finance Fads, Social Dynamics, and Stock Bubbles Excessive Trading, Overconfidence, and the Representative Bias Prospect Theory, Loss Aversion, and the Decision to Hold on to Losing Trades Rules for Avoiding Behavioral Traps Myopic Loss Aversion, Portfolio Monitoring, and the Equity Risk Premium Contrarian Investing and Investor Sentiment: Strategies to Enhance Portfolio Returns Chapter 26 Exchange-Traded Funds, Stock Index Futures, and Options Exchange-Traded Funds Stock Index Futures Early Dominance of Futures Markets High-Frequency Traders Basics of the Futures Markets Index Arbitrage Predicting the New York Open with Futures Trading Double and Triple Witching Margin and Leverage Tax Advantages of ETFs and Futures Comparison of ETFs, Futures, and Indexed Mutual Funds Leveraged ETFs Index Options Buying Index Options Selling Index Options Conclusion: The Importance of Indexed Products Chapter 27 Fund Performance, Indexing, and Investor Returns The Performance of Equity Mutual Funds Best-Performing Funds History of Fund Underperformance Finding Skilled Money Managers Reasons for Underperformance of Managed Money A Little Learning Is a Dangerous Thing Profiting from Informed Trading How Costs Affect Returns The Increased Popularity of Passive Investing Downsides of the S&P 500 Index Fundamentally Weighted Versus Capitalization-Weighted Indexation The History of Fundamentally Weighted Indexation Conclusion Chapter 28 Structuring a Portfolio for Long-Term Growth Practical Aspects of Investing Guides to Successful Investing Implementing the Plan and the Role of an Investment Advisor Conclusion Notes Index