Evaluating Hedge Fund Performance

CHAPTER 1

The Market Goes Up Forever?

The Paradox of Long-Term Investing

Jeremy J. Siegel, professor of finance at the Wharton School, started his seminal work Stocks for the Long Run by recounting the investment scheme recommended by John J. Raskob, a senior financial executive at General Motors.¹

FLAWS OF LONG-TERM INVESTING

According to Professor Siegel, Raskob “maintained that by putting just $15 a month into good common stocks, investors could expect their wealth to grow steadily to $80,000 over the next 20 years.”² Unfortunately for Raskob, Siegel remarked, his timing was a bit off. Raskob made his recommendation two months before the crash in 1929 and was blamed by Senator Arthur Robinson of Indiana “for the stock crash by urging common people to buy stock at the market peak.”

A Get-Rich Scheme

So, did Raskob provide “foolhardy advice [that] epitomizes the mania that periodically overruns Wall Street”?³ No, according to Siegel. In fact, Siegel postulates, “After 20 years, his or her stock portfolio would have accumulated to almost $9,000, and after 30 years, over $60,000. Although not as high as Raskob had projected, $60,000 still represents a fantastic 13 percent return on invested capital, far exceeding the returns earned by conservative investors who switched their money to Treasury bonds or bills at the market peak.”⁴

The logic is unassailable and the math is immaculate.

It has become the accepted wisdom for a generation of investors and certainly the progenitors of ...