... [s]ome indexes, such as the Standard & Poor’s (S&P) 500 Stock Index,
have become so popular that entry to the index carries with it a price
premium that may reduce future returns.”
Further research has supported this contention. The chapter on the
history of the S&P 500 Index shows that the new firms added to the
index have generally had lower returns than the original firms that were
chosen in 1957. In this edition, I introduce the “noisy market hypothe-
sis,” an alternative to the efficient market hypothesis that explains why
value stocks outperform growth stocks. In Chapter 20, I describe “fun-
damentally weighted” indexes as an efficient alternative to capitaliza-
tion-weighted indexes for capturing the value premium.
Any analysis of the stock market today must be international in
scope, and in this edition I have greatly expanded the material on inter-
national markets. I detail the role of the developing economies in miti-
gating the aging crisis that will soon envelop the United States, Europe,
and Japan as the ranks of retirees swell. I believe that Asia and other de-
veloping countries will, by the middle of this century, play a dominant
role in the world’s economy and capital markets. I conclude that Ameri-
cans face a crucial choice—allow the influx of foreign capital or face poor
financial returns and a far more difficult retirement period.
All this makes investing in international equities not only impor-
tant but critical to developing a comprehensive investment strategy. The
chapter on global economics shows that despite the increased short-
term correlation between country returns, global diversification is still
an essential part of today’s investment strategy. Without doubt, the por-
tion of the world’s equity capital that is located outside the United States
will grow rapidly in the coming years.
The fourth edition also reevaluates the findings reported in the pre-
vious editions. Such topics as calendar anomalies (for example, the Jan-
uary Effect), the impact of Fed interest rate changes on the stock market,
and the importance of investor sentiment in predicting future market re-
turns are given a new look. I determine whether there have been any
systematic changes in the response to these factors since the first edition
ofStocks for the Long Runwas published in 1994.
There are some surprising results: some of the calendar anomalies
hold up very well while others disappear altogether. For example, Fed
rate cuts, although having a powerful immediate impact on stock prices,
do not have as predictable an intermediate-term impact as they once
had. Other topics examined include the “Gordon model” of stock valua-
tion and economic growth, the increasing advantage of exchange-traded
funds over mutual funds, momentum investing, and why many “bears”
xviii PREFACE