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Dow 36000 Revisited
Wall St Journal ^ | 8-1-02 | JAMES K. GLASSMAN and KEVIN A. HASSETT

Posted on 08/01/2002 6:08:37 AM PDT by SJackson

Edited on 04/22/2004 11:46:50 PM PDT by Jim Robinson. [history]

When our book, "Dow 36,000," was published in September 1999, the Dow Jones Industrial Average stood at 10318. The Dow closed yesterday at 8736. What went wrong? Actually, nothing. Despite its flamboyant title, "Dow 36,000" was a book of sober explanation, not of wild prognostication. We calculated that 36000 was the point at which the 30 stocks that comprise the Dow Industrials would be fully valued, and we warned that "it is impossible to predict how long it will take."


(Excerpt) Read more at online.wsj.com ...


TOPICS: Business/Economy; Editorial
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1 posted on 08/01/2002 6:08:37 AM PDT by SJackson
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To: SJackson
" If Americans continue to embrace long-term stock investing, the role of the state as dispenser of retirement benefits will shrink or disappear."

Exactomundo bump!

2 posted on 08/01/2002 6:17:58 AM PDT by BullDog108
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To: SJackson
This is pretty lame, in my opinion. While I certainly agree with the overall theme that stocks will outperform bonds over the long run, the comment about timing the market is just silly.

If you're not worried about your investment for at least 10 years, that's one thing, but if you're already retired and watching your portfolio drop by 40% in a bear market, you're in deep doo-doo.

I cashed out of the market a couple of years ago, and while my returns during this period were meager, I at least had no losses whatsoever since then.

I'm selectively buying back in now in stocks that were especially hammered, and to say that has worked well would be a huge understatement. It is not folly to time the market as long as you have a rational basis for doing so.

Of course, guessing correctly helps, too! ;-)

3 posted on 08/01/2002 6:21:54 AM PDT by Dog Gone
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To: BullDog108
I should be unhappy with this because...
4 posted on 08/01/2002 6:28:25 AM PDT by Eric in the Ozarks
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To: Eric in the Ozarks
As for myself, its too late to get out. So I am looking for anything to justify staying in for the long term (10 - 15 yrs to retirement)..... :^(
5 posted on 08/01/2002 6:31:43 AM PDT by BullDog108
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To: Dog Gone
If you're already retired (60s age and older) and still heavily invested in stocks then you're a pretty stupid investor.

Any clued investor knows that when you are unable to accept more risk (ie portfolio fluxes at old age) you move your assets to more stable investments.
6 posted on 08/01/2002 6:34:18 AM PDT by xrp
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To: xrp
If you're already retired (60s age and older) and still heavily invested in stocks then you're a pretty stupid investor.

The conventional wisdom has been that the retired investor should still have a fairly large position in equities. An often quoted rule of thumb is that the percentage should be 100 minus your age.

But if you had 35% of your nest egg in stocks the last year, you've probably been severely hurt. A retired individual who pays attention to his investments (which, sadly, is a minority), could have shifted assets out of the inflated market and pocketed a fortune.

I'm not convinced that we've hit a bottom in this market yet. I wouldn't be buying an index fund, or even a mutual fund at this point. There are sectors, like the utilities (pipeline and power), that are extremely attractive at these prices. But the overall market can still slip much further.

Glassman would argue that further slippage is irrational and in the long term, the market will be much higher. He may well be right, and I think he is. But the retired investor can't think long term. He has to preserve his capital, and manage its growth in this kind of market today. That involves some timing.

7 posted on 08/01/2002 6:47:31 AM PDT by Dog Gone
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To: SJackson
I think it is misleading for Glassman to compare a balanced portfolio of stocks (S&P 500) against a single, low-return bond category (treasuries) instead of a balanced bond portfolio -- other bond categories have much higher average rates of return (e.g., a study by the same group Glassman gets his figures from showed convertible bonds producing annual rates of return of 8.3%, intermediate corporate bonds 7.26% and the S&P 500 10.5%). Stocks still outperform, but not by nearly as much if a balanced bond portfolio is compared against the S&P.

The more macro problem I have with Glassman is that he assumes the period 1926-2001 will be a good benchmark for future performance. I guess it might be, but I am enough of a pessimist to think that the period where the US went from being one of several more-or-less equal powers to the undisputed economic megapower of the world probably yielded better performance than we will see in the 21st century, where other nations and their companies are likely to catch up some.
8 posted on 08/01/2002 7:10:08 AM PDT by triplejake
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To: Dog Gone
I cashed out of the market a couple of years ago, and while my returns during this period were meager, I at least had no losses whatsoever since then.

You did have losses.

There's an old saying in economics, 'Opportunity cost is opportunity lost'.

I'd suggest you buy back into the market at a steady rate over a set period of time (called dollar cost averaging), getting into low-cost, stable funds, well diversified. Check out Vanguard funds.

You'll be glad you did.

9 posted on 08/01/2002 7:20:14 AM PDT by IncPen
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To: SJackson
LOL

Buy at 2500

:-)

10 posted on 08/01/2002 7:22:01 AM PDT by maestro
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To: IncPen
You'll be glad you did.

You may have to have your great-grandchildren read your statement to you but I guess you'll still be capable of experiencing gladness.

11 posted on 08/01/2002 7:33:53 AM PDT by Stentor
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To: Stentor
You'll be glad you did.

You may have to have your great-grandchildren read your statement to you but I guess you'll still be capable of experiencing gladness.

You make a good point.

But with Social Security returning negative two percent overall, I'll take my chances.

12 posted on 08/01/2002 7:44:27 AM PDT by IncPen
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To: IncPen
There's an old saying in economics, 'Opportunity cost is opportunity lost'.

That's like saying I lost money because I didn't place a bet on the winning horse in the Kentucky Derby.

The fact is that just about everyone who remained in the market doing dollar-cost averaging suffered REAL losses in their portfolios.

13 posted on 08/01/2002 7:48:56 AM PDT by Dog Gone
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To: Dog Gone
That's like saying I lost money because I didn't place a bet on the winning horse in the Kentucky Derby.

I didn't make up the term, it's standard economics. Of course, economists are about as trustworthy as Trial Liars and weathermen.

But the gist of what you say is true: if you sit out, you might not lose, but you surely won't 'win' in the market.

If the stock market were measured in some objective way, for instance "The Immodium Factor", maybe we'd all feel better.

In any case, it beats Nazi Social Security every time.

14 posted on 08/01/2002 7:58:19 AM PDT by IncPen
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To: IncPen
I agree with that, and I also think dollar cost averaging in a flat or bull market will make you quite wealthy. Certainly far more than Social Security ever could.
15 posted on 08/01/2002 8:30:47 AM PDT by Dog Gone
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To: triplejake
Glassman writes: "On Aug. 13, 1982, the Dow closed at 777. Even today, after the second-worst bear market of the
post-World War II era, it has risen 11-fold without counting dividends. "

There are several things to be noted here:

First, Glassman was careful to choose the most favorable time period he could find to show how the Dow has shot up. He does not mention that the Dow had closed a bit above 1,000 early in 1973 -- so on his baseline date of 8/13/82 it was a little more than 25 percent below where it had stood -- nine years earlier. The Dow didn't get back to its old 1973 high until 1983 or 1984. In fact, his baseline comes just before the market started climbing, after being stagnant for more than a decade.

Timing is important when you look at comparisons. In this case, the time involved from when 777 was FIRST reached to where the Dow is now is actually about 10 years more than he indicates, back to sometime in 1970. It's a 32-year stretch to today , not 20.

Also, he assumes that the Dow's level today is at or near the bottom. Who knows, really? If the 1973-74 bear market is repeated, certainly not a given but entirely possible, the Dow still has nearly 3,000 points down to go.

Glassman also neglects to talk about time periods as a real-life factor for individuals who don't live forever. . If someone had bought stocks in 1970, at about 770, the Dow would have gone up to 2000 in 1989. A rise of 160 percent isn't bad, but that would have been over 19 years, and the climb wouldn't have beaten inflation by much. An investment in a single family house would have done much better.

If a person bought in 1970 planning to retire, his portfolio (based on the Dow) would have been dead even in 1982, 12 years later. It would have doubled around 1987, after 17 years. As noted above, it would have been up 160 percent in '89, as momentum began building toward the once-a-generation bubble of the late 90s. Of course, a person around age 65 when it started would then be 84 years old.

This last frenzy was indeed a once-a-generation phenomenon. Market bubbles took place in the late 1920s, the early 1970s and the late 1990s. There might have been another one in the 1950s, but the boom after World War II was unusually solid because of pent-up demand from the war, low levels of debt through most of the boom, a technology revolution and millions of GIs learning new skills through the GI Bill. Notably, price earnings ratios stayed reasonable in that period and people still looked at the fundamentals of a company before buying its stock.

Of course, Glassman et al are right that the market will hit 36,000 -- and a cup of coffee will cost $50 at some point. There's an old story from Wall Street, about a guy who discovers cryogenics and has a wonderful idea. He puts everything he has into a portfolio of solid stocks, leaves it with a broker with instructions to sell and pay the proceeds to anyone who supplies a secret code number, and then has himself frozen. Decades later, he is thawed, wakes up, goes to the brokerage office and gives the secret number. They had him a cashier's check for $20 million. Excited, he goes around the corner to a bar and orders a Martini. When the check comes, it's for $10,000.
16 posted on 08/01/2002 9:10:19 AM PDT by Scribe35
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To: Scribe35
Nice post.
17 posted on 08/01/2002 10:40:24 AM PDT by Dog Gone
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To: BullDog108
"As for myself, its too late to get out."

Not so -- unless you firmly believe the bottom is in place.

18 posted on 08/01/2002 11:16:23 AM PDT by Tauzero
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To: IncPen
Dollar cost averaging in a bear market only accelerates your losses.
19 posted on 08/01/2002 11:17:24 AM PDT by Tauzero
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To: Scribe35; Dukie; arete; headsonpikes; TigerLikesRooster; rohry; razorback-bert; Lazamataz
Excellent post, number 16.
20 posted on 08/01/2002 11:21:25 AM PDT by Tauzero
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