made a major purchase in the stock of Braniff Airlines on the day before it filed for bankruptcy. Braniff never reemerged from bankruptcy; the company was liquidated and stockholders lost every penny.

The reporter asked the investor, What were you thinking when you invested tens of thousands of dollars into Braniff hours before they went out of business? The investor (and he was a professional) responded with, I bought the stock because I thought it would go up in price.

Whenever I make an investment decision, I wonder if I am going to suffer the fate of the Braniff buyer. Will my purchase be at exactly the wrong time? For these fears, Professor Siegel has a response-relax. So far in U.S. history it has been impossible to buy at the wrong time. In fact, even if you bought on the day before a market crash, stocks have outperformed other investments over the following 30-year period.

The Dow Jones Industrial Average, for example, lost an amazing 89% of its value during the Great Depression.2 To understand this, you have to imagine a modern stock market crash taking the Dow down to about 1,000. So some investors bought stocks in the late 1920s and watched their wealth evaporate. For those who were patient, however, buying stocks on the worst day of a lifetime was still better than buying bonds.

Yes, even the unlucky investor who bought stocks on September 3, 1929-the high water point before the crash-did better than the investor who bought bonds. Professor Siegel calculates the 30-year return on a $100 investment at the 1929 peak as follows: bonds $141, stocks $565. He makes similar calculations for all other market peaks. (Stocks have not yet recouped their losses since the 2000 peak, but we will not know the long-run payoff of late 1990s investments for many more years.)

The history of U.S. investing is clear. Always and everywhere the best course for the patient investor is to buy U.S. stocks.

In The Paper Chase Harvard law professor Charles Kingsfield grills a student about a case. The student is unable to provide any useful analysis. After some verbal flailing, the student blurts out I have a photographic memory. To which Professor Kingsfield responds, That will do you no good at all.

Similarly, the fact that stocks look good when we look at pictures of yesterday does no good at all to those of us who want to make money now and tomorrow. To determine if stocks are a good investment now and in the future, we need to go beyond Stocks for the Long Run and look at more than the past return of stocks.

Why Jeremy Siegel Does Not Play Professional Basketball or Live in East Germany

Better lucky than good, summarizes the feelings of many toward performance. This view suggests that winning is more important than having deserved to win. When it comes to U.S. stocks since 1802, they have indeed won. To decide how much to invest in U.S. stocks today, however, we have to try to divide the past success of U.S. stocks into luck and skill. If U.S. stocks did well because of skill, they are more likely to be good investments now than if their strong performance was simply lucky.

As in many areas of finance, if we are to determine whether U.S. stocks have been lucky or good, we have to confront one of our human shortcomings: our tendency to place too much faith in actual outcomes. One aspect of this problem is called survivorship bias and was illustrated in the documentary Hoop Dreams that chronicles the lives of two talented young basketball players in their quest to play professional basketball.

One message of the movie (and there are many) is that these two young men make their decisions based on overly optimistic expectations about playing in the NBA. They devote their lives to basketball in the hopes that they can become rich and famous. One of the causes of overoptimism is the fact that all of us see only the winners in the competition to become NBA players. This bias toward seeing only the survivors causes us to overestimate the chances of success. It causes many people to devote their lives to a quest that is unlikely to succeed.

Being fooled by survivorship bias is almost unavoidable when we watch professional sports. Our arenas and TV screens are filled with

professional athletes who have made it to the big time. Even on their bad days we know that these professional athletes live exciting lives filled with cash, cars, beautiful women and homes (often chronicled in MTVs show cribs). All of these athletes are the winners in a competitive athletic world that begins before high school. Except for news reports and documentaries, we do not see the players who have worked just as hard and never earned a penny from athletics.

Because we almost always see only those who survive, and therefore win athletic competitions, we tend to overestimate the ease of becoming a professional athlete. In Hoop Dreams the odds of making it from U.S. high school basketball into the NBA is estimated to be 1 in 7,600. The film shows that young basketball players are far too confident of their chances. Consequently, they make life decisions that are different (and presumably worse) than if they acted upon the true odds.

Survivorship bias is present in many areas of life other than professional sports. We generally only see the winners in politics, modeling, acting, and entertainment. The trouble comes when we make decisions based on our overoptimistic estimates of success. Survivorship bias pushes us toward investing time and money in prospects that appear alluring, but would not be exciting if the true odds were known and understood.

As a kid, my friend Jay was fooled by survivorship bias. The credits of every movie that he saw included Completion guaranteed by The Completion Bond Company. This is a form of insurance that pays off if a film isnt completed. When he grew up Jay planned to start his own completion bond company since every movie that he saw had clearly been made and so insuring them seemed like a sure thing.

The survivorship bias argument against stocks for the long run is that U.S. stocks have done well, but many other stock markets have done terribly. Consider an investor in East Germany who patiently invested his or her money into stocks.

Our East German stock investor would have lost every penny when the communists took over East Germany after World War II. For an East German, stocks for the long run would have meant a complete loss.