Wednesday, February 25, 2009

The Wall Street Journal Gets It Wrong

The opinion piece today in The Wall Street Journal, Jeremy J. Siegel, professor of finance at the University of Pennsylvania's Wharton School, inspired me to write the following letter to the editor:

With sleight-of-hand skills rivaling those that encouraged investment in mortgage-backed securities, Jeremy Siegel attempts to convince us that stocks are cheap by lying with math. While I won't attempt to argue with the market about the "real" value of stocks, I will take issue with Mr. Siegel's chicanery.

Mr. Siegel begins his example with percentages, then switches to actual dollar values. That's deceptive, to say the least.

It's clear to any investor that a given percentage loss in a small investment is more than made up for by an equal percentage gain in a much larger investment. Hence the weighted S&P 500 Index.

It's equally clear to any investor that an actual dollar loss in a small investment is precisely offset by an equal dollar gain in a large investment. Using Mr. Siegel's example, although the average investor holds 1,381 times as much stock in Exxon-Mobil as he does does in Jones Apparel, his percentage share of ownership in both companies is the same.

You do the math.

I understand that The Wall Street Journal and Mr. Siegel want the market to go up. So do I. But I could do without the financial sophistry.

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