The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [275]
9 For more information, see www.vanguard.com, www.fidelity.com, www. schwab.com, and www.troweprice.com.
10 For an accessible online summary of bond investing, see www.aaii.com/ promo/20021118/bonds.shtml.
11 In general, variable annuities are not attractive for investors under the age of 50 who expect to be in a high tax bracket during retirement or who have not already contributed the maximum to their existing 401(k) or IRA accounts. Fixed annuities (with the notable exception of those from TIAA-CREF) can change their “guaranteed” rates and smack you with nasty surrender fees. For thorough and objective analysis of annuities, see two superb articles by Walter Updegrave: “Income for Life,” Money, July, 2002, pp. 89–96, and “Annuity Buyer’s Guide,” Money, November, 2002, pp. 104–110.
12 For more on the role of dividends in a portfolio, see Chapter 19.
* At the beginning of 1949, the average annual return produced by stocks over the previous 20 years was 3.1%, versus 3.9% for long-term Treasury bonds—meaning that $10,000 invested in stocks would have grown to $18,415 over that period, while the same amount in bonds would have turned into $21,494. Naturally enough, 1949 turned out to be a fabulous time to buy stocks: Over the next decade, the Standard & Poor’s 500-stock index gained an average of 20.1% per year, one of the best long-term returns in the history of the U.S. stock market.
† Graham’s earlier comments on this subject appear on pp. 19–20. Just imagine what he would have thought about the stock market of the late 1990s, in which each new record-setting high was considered further “proof” that stocks were the riskless way to wealth!
* The Dow Jones Industrial Average closed at a then-record high of 381.17 on September 3, 1929. It did not close above that level until November 23, 1954—more than a quarter of a century later—when it hit 382.74. (When you say you intend to own stocks “for the long run,” do you realize just how long the long run can be—or that many investors who bought in 1929 were no longer even alive by 1954?) However, for patient investors who reinvested their income, stock returns were positive over this otherwise dismal period, simply because dividend yields averaged more than 5.6% per year. According to professors Elroy Dimson, Paul Marsh, and Mike Staunton of London Business School, if you had invested $1 in U.S. stocks in 1900 and spent all your dividends, your stock portfolio would have grown to $198 by 2000. But if you had reinvested all your dividends, your stock portfolio would have been worth $16,797! Far from being an afterthought, dividends are the greatest force in stock investing.
† Why do the “high prices” of stocks affect their dividend yields? A stock’s yield is the ratio of its cash dividend to the price of one share of common stock. If a company pays a $2 annual dividend when its stock price is $100 per share, its yield is 2%. But if the stock price doubles while the dividend stays constant, the dividend yield will drop to 1%. In 1959, when the trend Graham spotted in 1957 became noticeable to everyone, most Wall Street pundits declared that it could not possibly last. Never before had stocks yielded less than bonds; after all, since stocks are riskier than bonds, why would anyone buy them at all unless they pay extra dividend income to compensate for their greater risk? The experts argued that bonds would outyield stocks for a few months at most, and then things would revert to “normal.” More than four decades later, the relationship has never been normal again; the yield on stocks has (so far) continuously stayed below the yield on bonds.
* See pp. 56–57 and 88–89.
† For another view of diversification, see the sidebar in the commentary on Chapter 14