rather invest through mutual funds. My mutual funds would focus on companies of all sizes and include some that buy international stocks, answered Gayla.

Gayla was a great student, and her answer was textbook. In fact, her answer is nearly identical to that given by finance guru Professor Jeremy Siegel of the Wharton School of the University of Pennsylvania. Professor Siegels book Stocks for the Long Run is a comprehensive analysis of investing. This book has played an important role in changing the way that Americans invest.

We will review the main statistical findings of Stocks for the Long Run, but before we do, lets pose the same question to Professor Siegel. If you had $1 million, what would you do with it? In the last chapter of his book, Professor Siegel provides his answer.1 In the 1998 edition Professor Siegel told investors: 1. Stocks should constitute the overwhelming proportion of all long-term financial portfolios. . . 2. Invest the largest percentage-the core holding of your stock portfolio-in highly diversified mutual funds with very low expense ratios... 3. Place up to one-quarter of your stocks in mid- and small-sized stock funds... 4. Allocate about one-quarter of your stock portfolio to international equities.

The 20-year old college student gave the same answer as Professor Siegel. Buy stocks, diversify, and keep expenses low. This is the main message to investors from many sources.

Conventional wisdom says that if you want to be rich, stocks are the best investment. In fact, this message has become so ubiquitous that it is almost a mantra: Stocks are the best investment. Stocks are the best investment. Stocks are the best investment.

Gayla came through with flying colors and gave the exact same answer as professionals who make their living advising others on what to do. How did Peter Borish respond to this answer? He asked, Do you drive your car by looking in the rearview mirror?

When it comes to stocks, Peters question is fundamental. U.S. stocks have had an undeniably bright past. Unfortunately, we are not able to go back in time and buy stocks in 1982 or even 1802 (the beginning of Professor Siegels analysis). What is relevant to us is not the past, but the

future. To understand the prospects for stocks, we have to dissect the past and see if the sources of past success are likely to continue into the future.

The Big Pile of Stock Market Cash Visible in the Rearview Mirror

It is not a coincidence that Gayla gave the same answer as Stocks for the Long Run. Professor Siegel has played a major role in promoting stock ownership. So much so that it is worth summarizing his main findings. This section uses the analysis of the second edition of Stocks for the Long Run, which was published in 1998. This is important for understanding the cycle of irrationality. This 1998 edition was the one that existed at the height of the technology bubble. From 1802 through the publication of the second edition there was one key to making good investments. It was: To make money as an investor, the correct strategy throughout U.S. history was to buy U.S. stocks.

Professor Siegels work shows the following.

1. Over the course of history in the United States, stocks provided the best return.

2. For investors with a suitably long-run view, stocks were the best investment in every period.

3. While buying stocks when they were low (after a crash) would obviously have been the best strategy, even buying stocks when they were high (even right before a crash) was a fine strategy.

Lets look at each of these extraordinary facts (and they are facts) in detail. Table 8.1 shows that U.S. stocks have left other investments in the dust.

A $1,000 investment in stocks in 1802 would have been worth over $7 billion by 1997! This calculation assumes that all proceeds from owning the stocks including dividends were used to purchase more stocks. Thus, stocks were by far the best choice for the 1802 investor.

In contrast, from 1802 to 1997 gold did not even keep pace with

TABLE 8.1 For 200 Years, U.S. Stocks Have Been Great Investments

Investment of $1000 in 1802 1997 value

U.S. Consumer Price Index $13,370

Gold $11,170

U.S. Government Bonds $10,744,000

U.S. Stocks $7,470,000,000

Source: Stocks for the Long Run, Second edition, p 6

inflation. The investor who exchanged 10 loaves of bread for gold in 1802 would have been able to buy fewer than 10 loaves of bread with that same gold in 1997. Those who invested in U.S. government bonds could feel smart compared to the gold bugs. Overall, however, the stock investor would have been rewarded with close to 1,000 times more wealth in 1997 than the bond investor.

If you had a time machine and could travel back to 1802, your course of action would be clear. Buy stocks. This is Professor Siegels first point-stocks have been the best investment. His second finding addresses the following questions: What if your time machine dropped you off at some other point in time other than 1802? Should you, for example, have bought U.S. stocks in 1861, 1914, or 1929?

The answer is that at almost every time in U.S. history the correct answer is stocks. Obviously, U.S. stocks have declined in many individual years so some multiyear period is required for a fair comparison. Professor Siegel does the calculation for 30-year time periods. This can be thought of as an appropriate time frame for a person saving for retirement who begins investing relatively early in his or her career.

The stunning finding: In every 30-year time period, except for 1831 to 1861, stocks performed better than bonds. Stocks were the right decision in every 30-year time period for more than a century. Amazing!

Professor Siegels third point addresses the issue of timing (bad timing, to be specific). Years ago, I remember a somewhat cruel TV interview of one investor with extremely bad timing. The unlucky chap had