1. Future for Investors Prof. Jeremy J. Siegel ~ The Wharton School FPA Symposium ~ May 23, 2006

2. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 2 The Verdict of History

3. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 3 January 1802 – December 31, 2005 Total Real Return Indices

4. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 4 Annual Stock Market Returns Real Returns Long- Term 1802-2005 6.8% Major Sub- Periods I 1802-1870 7.0% II 1871-1925 6.6% III 1926-2005 6.7% Post-War Periods 1946-2005 6.8% 1946-1965 10.0% 1966-1981 -0.4% 1981-1999 13.6% 1984-2005 8.1% Updated through December 31, 2005

5. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 5 Annual Bond Market Returns Real Returns Long- Term 1802-2005 3.5% Major Sub- Periods I 1802-1870 4.8% II 1871-1925 3.7% III 1926-2005 2.2% Post-War Periods 1946-2005 1.4% 1946-1965 -1.2% 1966-1981 -4.2% 1981-1999 8.4% 1984-2005 6.0% Updated through December 31, 2005

6. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 6 Projected Equity Returns  Earnings Yield, or 1/P-E ratio, is excellent long-term predictor of real stock returns.  Average P-E ratio in last 130 years = 15; average earnings yield 6.7%.  S&P 500 Estimate of next 12 months operating earnings $85.22 (end 4Q06)  S&P 500 (May 15) = 1287 P-E ratio 15.10, earning yield = 6.62%.  If you take reported earnings, estimate $76.41, for a P-E ratio of 167.84, EY of 5.94%  If you take core earnings estimate $76.44, P-E ratio 17.06; earnings yield 5.86%

7. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 7 Bond Returns and Equity Premium n Ten year at 5.15%, 30-year at 5.26% n If we subtract 2.5% for inflation, we get a real yield of 2.65% and 2.76%. n TIPs yields are 2.46% and 2.39%. n Equity Premium is almost 4% now. n Long-Term Equity Premium = 3%.

8. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 8 The Future for Investors

9. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 9 What Happened to the Original S&P 500 Formulated in 1957?

10. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 10 Change in Sector Weights 1957-2005

11. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 11 Portfolio Performance n The dynamic, updated, S&P500 Index that serves as a benchmark returned 10.85% per year from March 1, 1957 through Dec. 31, 2003 n A portfolio of original companies, where no transactions took place except for reinvestment of dividends, returned 11.40% per year, and did so with lower risk! n Why? New firms overvalued when put in index. New firms Lagged in 9 of ten sectors.

12. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 12 Twenty Top Performing Survivors

13. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 13 Top Twenty on April 10, 2006

14. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 14 Growth Does Not Guarantee Return * Info Tech EX-IBM (16.2%,10.6%)

15. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 15 Single Best performing Stocks n Top Performing Stock From 1925-2005 –Philip Morris, Return 17.49% vs. 10.00% Market. n Top Performing Stock From 1950 –Philip Morris, Return 18.05% vs. 11.38% Market. n Top Performing Stock from original S&P 500 in 1957 –Philip Morris; Return 19.88% vs. 10.73% for S&P 500. n $1,000 put in S&P 500 when it was founded would turn into $145,352 by the end of 2005. n $1,000 put in Philip Morris at the same time would grow to over $7.0 million.

16. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 16 Dividend Yield and Relative Performance

17. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 17 The Aging of the Population The Most Critical Long-term Economic Issue Facing the Developed World The Next Fifty Years

18. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 18 Long Term Demographic Trends Past marked by (1) rising life expectancy and (2) falling Retirement Age But this trend Cannot Continue 1.6 Years 14.4 Years

19. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 19 Age Wave -- US

20. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 20 Age Wave – Japan

21. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 21 Big Questions The Biggest Questions Facing the Developed World Who Will Produce the Goods? Who Will Buy the Assets?

22. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 22 Retirement Age must rise dramatically 14.4 Years 9.2 Years

23. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 23 Productivity Growth and Retirement n C an faster productivity growth help the Aging Problem? n Let us be extraordinarily optimistic and assume future productivity growth averages 3 ½ % per year, 70% above long term average of 2.2%.

24. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 24 3.5% Productivity reduces retirement age 2-3 years

25. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 25 Immigration? n The number of immigrants to the US over the next 45 years needed to keep the retirement age in the mid 60s would be about one-half billion, far in excess of the current population.

26. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 26 But there is Hope n Outside the developed countries, the population of the world is much younger. n Let’s look at India.

27. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 27 Age Wave -- India

28. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 28 Trade Deficits and Aging n Throughout history, the “old” have sold assets to the young in exchange for goods. n Today in US, Florida’s retirees sell assets to and import goods from other 49 states. n In the future the US will sell its assets to the rest of the world. n Success depends on rapid growth in the developing world.

29. World GDP 2000Population 2000 84.8% 15.2% 44.6% 56.4%

30. 23.1% 76.9% Population 2050World GDP 2050 11.8% 88.2%

31. Per Capita Income Relative to US 2000 Per Capita Income Relative to US 2050

32. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 32 Retirement Age with high growth in LDCs

33. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 33 The Global Solution The answer to our question: Who will produce our goods? Who will buy our assets? Is the same: The Developing Countries By the middle of this century Developing Countries will own most of world’s capital.

34. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 34 Stock Market Capitalization 2000 7.7%92.3% 33.0% 67.0% Stock Market Capitalization 2050

35. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 35 New Professors interviewed at Wharton in 2006

36. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 36 Growth and Stock Return in Emerging Markets China

37. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 37 Conclusions n Price and dividend, not sector growth, fundamental to long-term returns n I believe that growth in developing world will offset slowing in aging economies and support future equity prices. n Do not jump into emerging markets without examining valuation. n These returns are far above what can be expected in bonds or even real estate.

38. Copyright Jeremy J. Siegel Stocks for the Long Run and Future For Investors by Jeremy J. Siegel 38 Visit JeremySiegel.com