“The Future for Investors” by Jeremy Siegel

1. “The Future for Investors”by Jeremy Siegel Kevin Kranzler Lisa Lajeunesse Ray Ng John Schmidt

2. 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

3. Jeremy Seigel, Ph.D. • Professor of Finance at the Wharton School of the University of Pennsylvania • Received many awards over his career • The Senior Investment Strategy Advisor of Wisdom Tree Investments Inc.

4. Part 1“The Growth Trap”

5. The Growth Trap • Everyone wants to ‘beat the market’ & invest in the next big thing. • However, as Siegel points out, pursuing returns through growth continually disappoints investors.

6. Example

7. What actually happened? • IBM: $1000 initial investment became $961,000. • Standard Oil of NJ: $1000 initial investment became $1,260,000.

8. How is this possible?

9. 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!

10. Looking for the Corporate El Dorado • The Golden company that continually performs better than the markets • Siegel computed the P/E ratio for all 500 firms on the S&P and computed their prices

11. What Siegel Found… • High P/E stocks earn lower returns and low P/E stocks earn high returns, on average

12. 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

14. Sector Growth • Investment strategies based on industry/sector are growing in popularity • Morgan Stanley & Goldman Sachs

17. 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

18. Part 2:“Overvaluing the Very Few”

19. How To Spot a Bubble • 1.) Valuations are critical • 2.) Never Fall in Love with your Stock • 3.) Beware of Large, Little Known Companies • 4.) Avoid Triple Digit P/E Ratios • 5.) Never Sell Short in a Bubble

20. Response to Wall Street Journal Article “Good morning, Mr. Siegel. I hope you’re happy. You cost me $14,000.00 for no reason! What do you have against this mammoth company? Are you jealous because you didn’t get in on the run-up? Did you want to buy in cheaper? You have no business making decisions like this. After all, you’re still a child when it comes to Internet knowledge.

21. Response to Wall Street Journal Article “You’re a preschooler in diapers when it comes to recognizing opportunities. By the way, when was the last time you got laid? You’re a party pooper. Thanks a lot, jerk. I suggest you go to the streetadvisor.com to read about why you’re so wrong idiot. Do you even know how to get a Web site, you child?”

22. Investing in the Newest of the New

23. IPO Relative Returns Figure 6.2 Annualized Returns on Yearly IPO Portfolios Minus Returns on Small Stock Index, Returns Measured Through December 31, 2003

24. Creative Destruction • “Innovative entry by entrepreneurs is the force that sustains economic growth” - wikipedia.com • Investors in IPO’s 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

25. 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

26. Capex Ratio

27. Success Amongst Failure • Wal-Mart’s Strategy for Success • Southwest Airlines low cost structure • Nucor Steel use of new technology

28. 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 company’s competitive advantage

29. Summary • Never forget the fundamentals of investing • Watch out for bubbles • IPO’s are a bad investment for investors, • Individual company analysis is important; look for • Lower Capex Ratios • Low P/E ratios • Winning management

30. Part 3: “Sources of Shareholder value”

31. Correlation between Dividends and Returns • Higher dividend paying companies provide greater returns • Lower dividend paying companies provide less returns • Not just due to extra cash flow

32. Dividends to Capital Gains

33. Purpose of Dividends • Provides credibility • Indicates real earnings • Shows strength in time of economic downturn • Price drops and dividend yield goes up

34. Importance of Bear markets • One reason for the correlation (dividends/returns) • Reinvest (increased) dividends at lower price • Cushions portfolio in decline • Accelerates returns when price goes up

35. Phillip Morris Example • Cigarette company facing lawsuits and fierce competition • Share price fell but dividends rose • Reinvested dividends (’92-’03) increased shares by 100% • 7.15% annually – trailed market • Prices recovered and returns magnified

36. Measuring Earnings to Value a Company • Net Income – sanctioned by FASB/GAAP • Operating Income – reconciles one-time cost/revenues • More accurate - restructuring costs • Manager indiscretion - amortization

37. Red flags to watch out for • Option expenses • Do not legally have to be recorded as expenses • Not accurate portrayal in Income statement • Pension Plan Structure • Serious claim on future earning • High Accruals • Indicate low quality earnings

38. Summary • There is a positive correlation between dividends and returns • There are numerous ways to value a company

39. Part 4:“The Age Wave”

40. Baby Boomers – Baby Bust

41. 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

42. 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+

43. 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

44. Possible Solutions • Increase Immigration • Increase productivity • 400 million people will be required to offset the population wave

45. The Global Solution • Developing countries have opposite population wave than the Developed countries • India and China can support the western countries with goods and services/buy assets • Maintain the standard of living in developing countries

46. The Global Solution [2]

47. The Global Solution [3] • Enable aging nations to enjoy longer retirement • Communications revolution will aid in economic growth – free flow of information • Free trade will become increasingly important • Advance the globalization of the world’s economic system

48. Summary • Baby boomers retirement poise a difficult transition period for investors • Investors must seek a global solution

49. Part 5:“Portfolio Strategies”

50. Global Market Trends • Growth Prospects in China & India • Growth Trap • Example: Brazil vs. China • Emerging Chinese Economy • Home Equity Bias • Correlation of US & World markets